Course Financial Risk Management
Assignment Credit Risk Exercise 4.1
Title Credit analysis and rating for working capital finance
Due Date 20 February 2016
Description You are a commercial credit analyst at a bank. You receive the following request for working capital finance from Company A, a distributor of commercial kitchen equipment.
Amount: $500,000
Purpose: Finance purchase of inventory in preparation for expansion of sales territory
Term: 1 year

Instructions Study Company A?s financial summary, then answer the following questions.
Give brief reasons for each of your answers.
1. Is the amount and term of Company A?s financing request reasonable?
2. What is the primary source of repayment of the proposed working capital finance?
3. What credit rating is appropriate for Company A?
Responses Is the amount and term of Company A?s financing request reasonable?

What is the primary source of repayment of the proposed working capital finance?

What credit rating is appropriate for Company A?

Instructor Attachments A. Company A?s financial summary
B. Credit rating table
Student Attachments (not required)

CUSTOMER A – FINANCIAL SUMMARY $ – Year to December 31
Income statement 2014 2013 2012
Sales 3,000,000 2,000,000 700,000
Cost of sales 2,100,000 1,600,000 595,000
Gross profit 900,000 400,000 105,000
Operating expenses 500,000 300,000 100,000
Interest expense 20,000 15,000 5,000
Non-cash income/expense 100,000 80,000 25,000
Net profit before tax 280,000 5,000 -25,000
Tax 56,000 1,000 0
Net income 224,000 4,000 -25,000
Balance Sheet
Assets
Cash & bank accounts 200,000 150,000 200,000
Account receivables 300,000 180,000 60,000
Inventory 1,500,000 1,000,000 350,000
Current assets 2,000,000 1,330,000 610,000
Fixed assets 1,500,000 1,000,000 300,000
Total assets 3,500,000 2,330,000 910,000
Liabilities & Equity
Accounts payable 400,000 200,000 50,000
Short term debt 1,000,000 750,000 300,000
Current liabilities 1,400,000 950,000 350,000
Long term debt 0 0 0
Shareholder equity 2,100,000 1,380,000 560,000
Total equity & liabilities 3,500,000 2,330,000 910,000
Cash flow
Net income 224,000 4,000 -25,000
Change in current assets -670,000 -720,000 –
Change in current liabilities – short term debt 200,000 150,000 –
Non-cash income/expense 100,000 80,000 25,000
Operating Cash Flow -146,000 -486,000 –
Capital expenditures -644,000 -564,000 –
Fixed asset sales 0 0 0
New equity 590,000 550,000 0
Total cash flow -200,000 -500,000 –
Change in debt 250,000 450,000 –
Change in cash 50,000 -50,000 –
Ratios
Profitability
Gross Profit % Sales 30.0% 20.0% 15.0%
Net Income % Sales 7.5% 0.2% -3.6%
Liquidity
Current Assets/Current Liabilities 1.4 1.4 1.7
Leverage
Total Debt/Shareholder Equity 0.5 0.5 0.5
Debt coverage
Operating Cash Flow/Total Debt -0.1 -0.6 –
Operating Cash Flow/Interest Expense -7.3 -32.4 –

CREDIT RATING TABLE
Rating Definition
1 Leading position in its chosen markets, long and unblemished business performance record, strong and stable financial ratios, no foreseeable change which could cause its financial profile to deteriorate, easy access to debt markets, negligible risk of non-payment of financial obligations when due
2 Well-positioned in its chosen markets, established business performance record, healthy financial ratios, no apparent vulnerability which could cause its financial profile to deteriorate, comfortable access to debt markets, very low risk of non-payment of financial obligations when due
3 Viable competitor in its chosen markets, short or fluctuating business performance record, most financial ratios at or above acceptable levels, some vulnerabilities which could cause its financial profile to deteriorate, reasonable access to debt markets subject to thorough financial disclosure and due diligence, low risk of non-payment of financial obligations when due
4 Weak competitor in its chosen markets, uneven business performance record, several financial ratios below acceptable levels, significant vulnerability to deterioration in its financial profile, limited access to debt markets and only then with thorough financial disclosure and due diligence, moderate risk of non-payment of financial obligations when due
5 Struggling commercially in its chosen markets, prolonged sub-standard business performance record, most financial ratios below acceptable levels, significant and immediate vulnerabilities to deterioration in its financial profile, very iimited access to debt markets and only then on onerous terms and conditions, high risk of non-payment of financial obligations when due
6 Marginalized in its chosen markets, prolonged loss-making business performance record, financial ratios far below acceptable levels, high risk of further deterioration in financial profile, little or no access to debt markets, already delinquent in some of its financial obligations

Course Financial Risk Management
Assignment Credit Risk Exercise 4.2
Title Credit analysis and rating for trade credit
Due Date 20 February 2016
Description You are a credit analyst at Company A. You receive the following request for trade credit from Company B, a regional chain of restaurants.
Amount: $200,000
Purpose: Supplier credit for the purchase of kitchen equipment to be installed in a small chain of restaurants which Company B recently acquired.
Term: 6 months

Instructions Study Company B?s financial summary, then answer the following questions.
Give brief reasons for each of your answers.
4. Is the amount and term of Company B?s financing request reasonable?
5. What is the primary source of repayment of the proposed trade credit?
6. What credit rating is appropriate for Company B?
Responses Is the amount and term of Company B?s financing request reasonable?

What is the primary source of repayment of the proposed trade credit?

What credit rating is appropriate for Company B?

Instructor Attachments A. Company B?s financial summary
B. Credit rating table
Student Attachments (not required)

COMPANY B – FINANCIAL SUMMARY $ – Year to December 31
Income statement 2014 2013 2012
Sales 35,000,000 25,000,000 20,000,000
Cost of sales 17,500,000 11,250,000 11,000,000
Gross profit 17,500,000 13,750,000 9,000,000
Operating expenses 1,500,000 1,250,000 900,000
Interest expense 10,200,000 8,000,000 5,000,000
Non-cash income/expense 3,500,000 3,000,000 2,300,000
Net profit before tax 2,300,000 1,500,000 800,000
Tax 345,000 300,000 160,000
Net income 1,955,000 1,200,000 640,000
Balance Sheet
Assets
Cash & bank accounts 400,000 350,000 200,000
Account receivables 125,000 75,000 60,000
Inventory 5,000,000 3,750,000 3,000,000
Current assets 5,525,000 4,175,000 3,260,000
Fixed assets 35,000,000 30,000,000 23,000,000
Total assets 40,525,000 34,175,000 26,260,000
Liabilities & Equity
Accounts payable 2,000,000 1,500,000 1,000,000
Short term debt 1,500,000 2,500,000 1,000,000
Current liabilities 3,500,000 4,000,000 2,000,000
Long term debt 16,500,000 12,500,000 8,000,000
Shareholder equity 20,525,000 17,675,000 16,260,000
Total equity & liabilities 40,525,000 34,175,000 26,260,000
Cash flow
Net income 1,955,000 1,200,000 640,000
Change in current assets -1,350,000 -915,000 –
Change in current liabilities – short term debt 500,000 500,000 –
Non-cash income/expense 3,500,000 3,000,000 2,300,000
Operating Cash Flow 4,605,000 3,785,000 –
Capital expenditures -7,555,000 -6,495,000 –
Fixed asset sales 0 0 0
New equity 0 1,360,000 0
Total cash flow -2,950,000 -1,350,000 –
Change in debt 3,000,000 1,500,000 –
Change in cash 50,000 150,000 –
Ratios
Profitability
Gross Profit % Sales 50.0% 55.0% 45.0%
Net Income % Sales 5.6% 4.8% 3.2%
Liquidity
Current Assets/Current Liabilities 1.6 1.0 1.6
Leverage
Total Debt/Shareholder Equity 0.9 0.8 0.6
Debt coverage
Operating Cash Flow/Total Debt 0.3 0.3 –
Operating Cash Flow/Interest Expense 0.5 0.5 –

CREDIT RATING TABLE
Rating Definition
1 Leading position in its chosen markets, long and unblemished business performance record, strong and stable financial ratios, no foreseeable change which could cause its financial profile to deteriorate, easy access to debt markets, negligible risk of non-payment of financial obligations when due
2 Well-positioned in its chosen markets, established business performance record, healthy financial ratios, no apparent vulnerability which could cause its financial profile to deteriorate, comfortable access to debt markets, very low risk of non-payment of financial obligations when due
3 Viable competitor in its chosen markets, short or fluctuating business performance record, most financial ratios at or above acceptable levels, some vulnerabilities which could cause its financial profile to deteriorate, reasonable access to debt markets subject to thorough financial disclosure and due diligence, low risk of non-payment of financial obligations when due
4 Weak competitor in its chosen markets, uneven business performance record, several financial ratios below acceptable levels, significant vulnerability to deterioration in its financial profile, limited access to debt markets and only then with thorough financial disclosure and due diligence, moderate risk of non-payment of financial obligations when due
5 Struggling commercially in its chosen markets, prolonged sub-standard business performance record, most financial ratios below acceptable levels, significant and immediate vulnerabilities to deterioration in its financial profile, very iimited access to debt markets and only then on onerous terms and conditions, high risk of non-payment of financial obligations when due
6 Marginalized in its chosen markets, prolonged loss-making business performance record, financial ratios far below acceptable levels, high risk of further deterioration in financial profile, little or no access to debt markets, already delinquent in some of its financial obligations

Course Financial Risk Management
Assignment Credit Risk Exercise 4.3
Title Credit analysis and rating for fixed asset finance
Due Date 20 February 2016
Description You are a commercial credit analyst at a bank. You receive the following request for fixed asset finance from Company C, a commercial transportation company.
Amount: $5,000,000
Purpose: Finance purchase of new long distance road transport tractors and trailers to replace ageing fleet
Term: 60 monthly instalments

Instructions Study Company C?s financial summary, then answer the following questions.
Give brief reasons for each of your answers.
7. Is the amount and term of Company C?s financing request reasonable?
8. What is the primary source of repayment of the proposed fixed asset finance?
9. What credit rating is appropriate for Company C?
Responses Is the amount and term of Company C?s financing request reasonable?

What is the primary source of repayment of the proposed fixed asset finance?

What credit rating is appropriate for Company C?

Instructor Attachments C. Company C?s financial summary
D. Credit rating table
Student Attachments (not required)

COMPANY C – FINANCIAL SUMMARY $ – Year to December 31
Income statement 2014 2013 2012
Sales 12,000,000 13,000,000 14,000,000
Cost of sales 4,500,000 4,030,000 3,850,000
Gross profit 7,500,000 8,970,000 10,150,000
Operating expenses 800,000 700,000 600,000
Interest expense 4,560,000 5,505,000 6,420,000
Non-cash income/expense 2,210,000 2,700,000 3,000,000
Net profit before tax -70,000 65,000 130,000
Tax -10,500 13,000 26,000
Net income -59,500 52,000 104,000
Balance Sheet
Assets
Cash & bank accounts 350,000 400,000 500,000
Account receivables 3,000,000 3,250,000 3,500,000
Inventory 2,200,000 2,100,000 2,000,000
Current assets 5,550,000 5,750,000 6,000,000
Fixed assets 17,000,000 18,000,000 20,000,000
Total assets 22,550,000 23,750,000 26,000,000
Liabilities & Equity
Accounts payable 600,000 1,200,000 2,200,000
Short term debt 4,400,000 2,750,000 3,000,000
Current liabilities 5,000,000 3,950,000 5,200,000
Long term debt 5,400,000 7,800,000 9,200,000
Shareholder equity 12,150,000 12,000,000 11,600,000
Total equity & liabilities 22,550,000 23,750,000 26,000,000
Cash flow
Net income -59,500 52,000 104,000
Change in current assets 200,000 250,000 –
Change in current liabilities – short term debt -600,000 -1,000,000 –
Non-cash income/expense 2,210,000 2,700,000 3,000,000
Operating Cash Flow 1,750,500 2,002,000 –
Capital expenditures -1,169,500 -516,000 2,000,000
Fixed asset sales 0 0
New equity 0 0 0
Total cash flow 581,000 1,486,000 –
Change in debt -750,000 -1,650,000 –
Change in cash -50,000 -100,000 –
Ratios
Profitability
Gross Profit % Sales 62.5% 69.0% 72.5%
Net Income % Sales -0.5% 0.4% 0.7%
Liquidity
Current Assets/Current Liabilities 1.1 1.5 1.2
Leverage
Total Debt/Shareholder Equity 0.8 0.9 1.1
Debt coverage
Operating Cash Flow/Total Debt 0.2 0.2 –
Operating Cash Flow/Interest Expense 0.4 0.4 –

CREDIT RATING TABLE
Rating Definition
1 Leading position in its chosen markets, long and unblemished business performance record, strong and stable financial ratios, no foreseeable change which could cause its financial profile to deteriorate, easy access to debt markets, negligible risk of non-payment of financial obligations when due
2 Well-positioned in its chosen markets, established business performance record, healthy financial ratios, no apparent vulnerability which could cause its financial profile to deteriorate, comfortable access to debt markets, very low risk of non-payment of financial obligations when due
3 Viable competitor in its chosen markets, short or fluctuating business performance record, most financial ratios at or above acceptable levels, some vulnerabilities which could cause its financial profile to deteriorate, reasonable access to debt markets subject to thorough financial disclosure and due diligence, low risk of non-payment of financial obligations when due
4 Weak competitor in its chosen markets, uneven business performance record, several financial ratios below acceptable levels, significant vulnerability to deterioration in its financial profile, limited access to debt markets and only then with thorough financial disclosure and due diligence, moderate risk of non-payment of financial obligations when due
5 Struggling commercially in its chosen markets, prolonged sub-standard business performance record, most financial ratios below acceptable levels, significant and immediate vulnerabilities to deterioration in its financial profile, very iimited access to debt markets and only then on onerous terms and conditions, high risk of non-payment of financial obligations when due
6 Marginalized in its chosen markets, prolonged loss-making business performance record, financial ratios far below acceptable levels, high risk of further deterioration in financial profile, little or no access to debt markets, already delinquent in some of its financial obligations

Course Financial Risk Management
Assignment Credit Risk Exercise 4.4
Title Credit analysis and rating for bridge finance
Due Date 20 February 2016
Description You are a commercial credit analyst at a bank. You receive the following request for bridge finance from Company D, a national chain of retail pharmacies.
Amount: $10,000,000
Purpose: Finance acquisition of 80% of shares of a Company E, a chain of local pharmacies.
Term: 1 year

Instructions Study Company D?s financial summary, then answer the following questions.
Give brief reasons for each of your answers.
10. Is the amount and term of Company D?s financing request reasonable?
11. What is the primary source of repayment of the proposed bridge finance?
12. What credit rating is appropriate for Company D?
Responses Is the amount and term of Company D?s financing request reasonable?

What is the primary source of repayment of the proposed fixed asset finance?

What credit rating is appropriate for Company D?

Instructor Attachments E. Company D?s financial summary
F. Highlights of Company E?s financial statements
G. Credit rating table
Student Attachments (not required)

COMPANY D – FINANCIAL SUMMARY $ – Year to December 31
Income statement 2014 2013 2012
Sales 200,000,000 180,000,000 162,000,000
Cost of sales 60,000,000 55,800,000 51,840,000
Gross profit 140,000,000 124,200,000 110,160,000
Operating expenses 120,000,000 108,000,000 97,200,000
Interest expense 450,000 420,000 393,000
Non-cash income/expense 6,500,000 5,850,000 5,265,000
Net profit before tax 13,050,000 9,930,000 7,302,000
Tax 1,957,500 1,986,000 1,460,400
Net income 11,092,500 7,944,000 5,841,600
Balance Sheet
Assets
Cash & bank accounts 750,000 675,000 607,500
Account receivables 4,000,000 3,600,000 3,240,000
Inventory 10,000,000 9,300,000 8,640,000
Current assets 14,750,000 13,575,000 12,487,500
Fixed assets 65,000,000 58,500,000 52,650,000
Total assets 79,750,000 72,075,000 65,137,500
Liabilities & Equity
Accounts payable 8,000,000 7,200,000 6,480,000
Short term debt 1,000,000 900,000 810,000
Current liabilities 9,000,000 8,100,000 7,290,000
Long term debt 250,000 250,000 250,000
Shareholder equity 70,500,000 63,725,000 57,352,500
Total equity & liabilities 79,750,000 72,075,000 64,892,500
Cash flow
Net income 11,092,500 7,944,000 5,841,600
Change in current assets -1,175,000 -1,087,500 –
Change in current liabilities – short term debt 800,000 720,000 –
Non-cash income/expense 6,500,000 5,850,000 5,265,000
Operating Cash Flow 17,217,500 13,426,500 –
Capital expenditures -16,249,500 -12,718,800 -11,446,920
Fixed asset sales 0 0
New equity 0 0 0
Total cash flow 968,000 707,700 –
Dividends paid 993,000 730,200 0
Change in debt 100,000 90,000 –
Change in cash 75,000 67,500 –
Ratios
Profitability
Gross Profit % Sales 70.0% 69.0% 68.0%
Net Income % Sales 5.5% 4.4% 3.6%
Liquidity
Current Assets/Current Liabilities 1.6 1.7 1.7
Leverage
Total Debt/Shareholder Equity 0.0 0.0 0.0
Debt coverage
Operating Cash Flow/Total Debt 13.8 11.7 –
Operating Cash Flow/Interest Expense 38.3 32.0 –

COMPANY E – FINANCIAL HIGHLIGHTS
$ – Year to 31 December 2014
Income statement
Sales 20,000,000
Net income 8,000,000
Balance Sheet
Cash and liquid investments 1,000,000
Other current assets 1,000,000
Retail pharmacy stores 7,500,000
Other real estate 1,000,000
Total assets 10,500,000
Bank debt 20,000
Other current liabilities 1,000,000
Shareholder equity 9,480,000
Total equity and liabilities 10,500,000

CREDIT RATING TABLE
Rating Definition
1 Leading position in its chosen markets, long and unblemished business performance record, strong and stable financial ratios, no foreseeable change which could cause its financial profile to deteriorate, easy access to debt markets, negligible risk of non-payment of financial obligations when due
2 Well-positioned in its chosen markets, established business performance record, healthy financial ratios, no apparent vulnerability which could cause its financial profile to deteriorate, comfortable access to debt markets, very low risk of non-payment of financial obligations when due
3 Viable competitor in its chosen markets, short or fluctuating business performance record, most financial ratios at or above acceptable levels, some vulnerabilities which could cause its financial profile to deteriorate, reasonable access to debt markets subject to thorough financial disclosure and due diligence, low risk of non-payment of financial obligations when due
4 Weak competitor in its chosen markets, uneven business performance record, several financial ratios below acceptable levels, significant vulnerability to deterioration in its financial profile, limited access to debt markets and only then with thorough financial disclosure and due diligence, moderate risk of non-payment of financial obligations when due
5 Struggling commercially in its chosen markets, prolonged sub-standard business performance record, most financial ratios below acceptable levels, significant and immediate vulnerabilities to deterioration in its financial profile, very iimited access to debt markets and only then on onerous terms and conditions, high risk of non-payment of financial obligations when due
6 Marginalized in its chosen markets, prolonged loss-making business performance record, financial ratios far below acceptable levels, high risk of further deterioration in financial profile, little or no access to debt markets, already delinquent in some of its financial obligations

 

"Get 20% OFF on a Similar Assignment!! Place Your Order and Use this Coupon Code: SUPER20"

buy custom essays