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LENDING CASE STUDY COMPLETION GUIDELINES – SEAGULL PTY LTD

The best way
to complete the case study successful is
to understand what is exactly required from you and how to go about to address
the requirements in a logical sequence.

This case
study mimics a real business loan application received by a bank. In order to
determine whether the loan application should be approved or not will require
the following from you:

Step 1

Read
chapters 8, 10 and 11 of the text book.

Step 2

Read the
case study information provided to you as well as the extract from the credit
policy of Remagen Bank.

Step 3

Write a
short introduction indicating the needs of the business (less than half a page).

Step 4

Calculate
the monthly repayments that the mortgage bond of $320,000 will require based on
the information contained in chapters 6.

Step 5

Refer to the
credit proposal structure contained in chapter 11 of the textbook and use the
structure as reference to construct your own credit proposal. You will note
that the structure provided in the textbook is very complete and addresses
plenty aspects. Since it is a generic structure, there may be aspects contained
in the structure that is not really relevant to the specific case study that
you are working on – the structure intends to cover all possible things that
bankers should consider when assessing credit applications from businesses.
Although a credit proposal should contain all important relevant information,
you do not have to include information about aspects that are not really
relevant or important for the business to which the credit proposal applies.

Start with
the background part of the credit proposal. Use the information provided in the
case study and other important public information that you may possess about
the business/industry/macro environment to
write the information up to provide the reader a good understanding of:
·
The business profile
·
Owners/shareholders of the business
·
The business management
·
The ability of the business to
survive
·
The business premises
·
The existing financial relationships
of the business
·
Credit records of the business
·
Borrowing powers applicable to the
business
This
background part should be maximum three pages.

Step 6

Use the
standard income statement structure that bankers apply (page 229 in chapter 10)
as well as the extract from the credit policy of Remagen Bank to restructure the Income Statement and balance sheet of the
business.

In the case
of private companies always check whether the balance sheet of the business
contains any shareholder or director loans. If yes, remember that shareholder or director
loans are always debt provided to the business and can be withdrawn from the
business by them. If there are shareholder or director loans then scrutinize
the notes to the financial statements to determine whether such loans have been
ceded to any specific creditor or been subordinated to the loans of all other
creditors or just specific ones. This is a very important issue. If the loans
have been subordinated to the loans of all
creditors or specifically to loans from your
bank (not only other banks or creditors), then the shareholder or director
loans can be regarded as equity – otherwise it should be regarded as debt. If
the shareholder or director loans have been ceded to your bank, then it can
also be regarded as equity. If ceded to any other creditor, then it remains
debt.

You must
ensure that the shareholder or director loans are reflected as debt in the
balance sheet if not ceded or subordinated to all creditors or specifically to
your bank. On the other hand when subordination applies to all creditors or
specifically to your bank, then you should regard it as part of equity. In the
case of the shareholder or director loans ceded to your bank, you should also
regard it as equity. The reason why the shareholder or director loans are
regarded as equity by banks is such cases is because the shareholder and
director loans that are subordinated or ceded cannot be withdrawn legitimately
by the shareholders or directors of the company until such time that all
creditors to whom it is subordinated/ceded has been repaid in full. The
shareholder or director loans will therefore remain part of the business
capital similar to equity until the debt to the relevant creditors has been
repaid.

In essence –
make changes to the balance sheet based on the aforementioned information
regarding subordinated or ceded shareholder or director loans.

The
restructured income statement and balance sheet should be included in the
credit proposal.

Income statement for the year ended on 28 February 20XX

20XX

20XX-1

Turnover/Sales

Less
cost of sales:

Opening
stock

Purchases

closing
stock

Gross
profit

Less
expenses

Operating
profit

Other
income

Other
expenses

Net
income before interest and tax

Interest

Net
profit before tax

Tax

Net
profit after tax

Balance sheet as at 28 February 20XX

20XX

20XX-1

20XX

20XX-1

Assets

Equity

Current assets

Current liabilities

Step 7

Calculate
and interpret the ratios (on pages 248 to 251 in chapter 10 of the text book and
also contained in the credit policy extract of Remagen Bank) based on the new income statement format that
you used and changes you made to the balance sheet because of ceded or
subordinated shareholder or director loans.

Depict the
ratio calculations in table format.

RATIOS

Figure

Figure

Ratio

Ratio

20XX-1

20XX

20XX -1

20XX

ROA

Income
before interest and tax/

x 100/

Total
Assets

1

ROE

Income
before tax/

x 100/

Equity

1

Financial

ROE/

leverage

ROA

GP%

GP/

x 100/

Turnover

1

Operating

Operating
income/

x 100/

margin

Turnover

1

NIBT

Net
income before tax/

x 100/

Turnover

1

NIAT

Net
income after tax/

x 100/

Turnover

1

Turnover
of

fixed
assets

Turnover/

Fixed
assets

Turnover
of

current
assets

Turnover/

Current
assets

Debtors
payment

Trade
debtors/

x 360/

period

Credit
sales

1

Creditors
payment

Trade
creditors/

x 360/

period

Credit
purchases

1

Stock
turnover

Stock/

x 360/

days

Cost
of sales

1

Current
ratio

Current
assets/

Current
liabilities

Acid
test

Current
assets – stock/

Current
liabilities

Solvency
ratio

Debt/

x 100/

Total
assets

1

Interest
Coverage

Operating
Profit/

Interest
Paid

Capitalisation
Ratio

Long
Tern Debt/

Long
Term Debt + Equity

Long
Term Debt to

Long
Term Debt/

Net
Working Capital

Cur
Assets-Cur Liabilities

Step 8

After
writing up and interpreting the background and historical financial position of
the business – construct a “Strengths, Weaknesses, Opportunities, Threats
(SWOT)” matrix in which you list a maximum of five strengths, five weaknesses,
five opportunities and five threats. The SWOT therefore serves as a summary of
the background and historical financial position. Please note that this should
be done by just stating each one in a single sentence, since the reason for
each of the SWOT statements is already reflected in the background and
historical financial position sections where information was provided more
comprehensively.

SWOT ANALYSIS

Strengths

Weaknesses

Opportunities

Threats

Step 9

Construct
the budgeted cash flow for the business based on the information provided in
the case study and by using the cash flow budget template provided. Please note
that the template contains specific formulas for cells to do automatic
calculations to assist you.

Your cash
flow budget is be correct if it shows a closing overdraft balance of +$313,655.63 in February.

Step 10

Assess the
realism of the budgeted cash flow figures by comparing it to previous year
financial statement figures and ratios like debtors, creditors etc. and also
the SWOT analysis information.

Adjust three
figures in the budgeted cash flow to make it more realistic. Indicate which
figures you changed by footnote at the bottom of the cash flow with very brief
reasons.

Comment
about the future repayment ability of the business.

Step 11

List
all loans of the business to your bank including the new loans applied for
as well as existing and new collateral offered to your bank/ required by
your bank in the following format:

Existing loan
type

Outstanding amount
of loan

$

$

New loan type

$

$

Total loans

$

Existing
collateral type

Nominal value of
collateral

Value assigned
to collateral based on Remagen Bank credit policy

Reason for
assigned collateral value (refer to the characteristics of good collateral)

$

$

New collateral
type

$

$

Total collateral

$

Step 12

Discuss the
suitability of the transaction (only one or two paragraphs).

Step 13

Discuss the
profitability of the transaction from the bank’s point of view (only one or two
paragraphs).

Step 14

Provide a
recommendation (maximum half a page) whether the transaction should be approved
or not