Subject code: FIN 2600

Date: April 6, 2017

Room: 2A220
Professor: Dave Jaye
Team name: Go for it
Major: FB1301 FB1302

Team leader:
Nico Tu 5201335055 涂宇翔 FB1302
Members:
Eric Li 5201335059 李彪 FB1302
Wendy Zhang 5201335007 张琳 FB1301
Miranda Wang 5201335013 王心怡 FB1301
Tracy Ge 5201335029 葛宇 FB1301

Problems and Projects

17-1. From the descriptions below please identify what type of business loan is
involved.
a. A temporary credit supports construction of homes, apartments, office
buildings, and other permanent structures.
b. A loan is made to an automobile dealer to support the shipment of new cars.
c. Credit extended on the basis of a business’s accounts receivable.
d. The term of an inventory loan is being set to match the length of time needed
to generate cash to repay the loan.
e. Credit extended up to one year to purchase raw materials and cover a seasonal
need for cash.
f. A securities dealer requires credit to add new government bonds to his securities
portfolio.
g. Credit granted for more than a year to support purchases of plant and equipment.
h. A group of investors wishes to take over a firm using mainly debt financing.
i. A business firm receives a three-year line of credit against which it can
borrow, repay, and borrow again if necessary during the loan’s term.
j. Credit extended to support the construction of a toll road.

Based upon the descriptions given in the text the type of business loan being
discussed is:
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Answer:
A. Interim construction financing.
B. Retailer financing or floor planning loan.
C. Asset-based financing or factoring.
D. Self-liquidating inventory loan.
E.Working capital loan.
F. Security capital loan.
G. Term loan.
H. Acquisition loan or leveraged buyout.
I. Revolving credit line.
J. Project loan.
(李彪, Eric Li, 5201335059, checked by Nico Tu, 5201335055, on April 6, 2017) Commented [DJ1]: Good job 100%

17-2. As a new credit trainee for Evergreen National Bank, you have been asked to
evaluate the financial position of Hamilton Steel Castings, which has asked for
renewal of and an increase in its six-month credit line. Hamilton now requests a $7
million credit line, and you must draft your first credit opinion for a senior credit
analyst. Unfortunately, Hamilton just changed management, and its financial report
for the last six months was not only late but also garbled. As best as you can tell, its

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sales, assets, operating expenses, and liabilities for the six-month period just
concluded display the following patterns:

Millions of Dollars January February March April May June

Net sales $48.1 $47.3 $45.2 $43.0 $43.9 $39.7
Cost of goods sold 27.8 28.1 27.4 26.9 27.3 26.6
Selling, administrative,
and other expenses 19.2 18.9 17.6 16.5 16.7 15.3
Depreciation 3.1 3.0 3.0 2.9 3.0 2.8
Interest cost on
borrowed funds 2.0 2.2 2.3 2.3 2.5 2.7
Expected tax obligation 1.3 1.0 0.7 0.9 0.7 0.4
Total assets 24.5 24.3 23.8 23.7 23.2 22.9
Current assets 6.4 6.1 5.5 5.4 5.0 4.8
Net fixed assets 17.2 17.4 17.5 17.6 18.0 18.0
Current liabilities 4.7 5.2 5.6 5.9 5.8 6.4
Total liabilities 15.9 16.1 16.4 16.5 17.1 17.2

Hamilton has a 16-year relationship with the bank and has routinely received and paid
off a credit line of $4 million to $5 million. The department’s senior analyst tells you
to prepare because you will be asked for your opinion of this loan request (though you
have been led to believe the loan will be approved anyway, because Hamilton’s
president serves on Evergreen’s board of directors).
What will you recommend if asked? Is there any reason to question the latest
data supplied by this customer? If this loan request is granted, what do you think the
customer will do with the funds? Commented [DJ2]: You didn’t answer this question. Your
score is 85%
Answer:
According to the information given by the topic, we can clearly see that the
Hamilton management staff due to lack of sufficient experience, resulting in a lot of
problems. The most direct is the decline in sales. Because of the decline in income,
the company has to rely more on liabilities, rising current liabilities, the position of
banks is no longer so safe, we should be more careful to consider the relationship with
Hamilton. We should collect more information, such as the financial statements of the
past few years, development plans in the next few years and the economic situation of
the companies with cooperative relationships. After these information, we can better
evaluate Hamilton.
(李彪, Eric Li, 5201335059, checked by Nico Tu, 5201335055, on April 6, 2017)

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17-3. From the data given in the following table, please construct as many of the
financial ratios discussed in this chapter as you can and then indicate what dimension
of a business firm’s performance each ratio represents.

Business Assets Annual Revenue and Expense Items

Cash account $60Net sales $600
Accounts receivable 155Cost of goods sold 445
Inventories 128Wages and salaries 52
Fixed assets 286Interest expense 28
Miscellaneous assets 96Overhead expenses 29
725Depreciation expenses 12
Liabilities and Equity Selling, administrative, 28
and other expenses
Short-term debt: 108 Before-tax net income 6
Accounts payable 117* Taxes owed 1
Notes payable 325* After-tax net income 5
Long-term debt (bonds) 15
Equity capital 160
725
*Annual principal payments on bonds and notes payable total $55. The firm’s
marginal tax rate is 35 percent.
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Answer:
Expense control ratios
Wages and salaries =52 =0.08666
Net sales 600

Overhead expenses =29 = 0.04833

Net sales 600

Depreciation expenses =12= 0.02

Net sales 600

Interest expenses = 28 =0.0466

Net sales 600

Cost of goods sold =445= 0.7416

Net sales 600

Taxes = 1 =0.00166
Net sales 600

Selling, administrative,
and other expenses =28 =0.0466
Net sales 600

Operating Efficiency Measures

Inventory turnover ratio= Annual cost of goods sold =445= 3.476

Average inventory 128

Net sales = 600 = 0.8275

Total assets 725

Net sales =600 = 2.0979

Fixed assets 286

Net sales = 600 =3.8709

Account receivable 155

Average Receivable collection period = Accounts receivable =155 = 93.373days

(Net sales/360) (600/360)
Coverage Measures
Interest coverage= income before interest and taxes = 34= 1.214
Interest payments 28
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Coverage of interest and principal payments=income before interest and taxes
Interest payment+ principal repayments
1-Firm’s marginal tax
= 34 = 53.3%
28+ 55/ (1-35%)
Marketability of product or service measures
GPM= Net sales – Cost of goods sold= 600-445 = 0.2583
Net sales 600

NPM= Net Income after taxes = 5 = 0.00833

Net sales 600

Profitability Measures
Before-tax net income/Total Assets= 6 =0.008275
725
After-tax net income/Total Assets=5 =0.00689
725
Before- net income/Net worth=6 =0.0375
160
After-tax net income/Net worth=5=0.03125
160
Before-tax net income/Net sales=6 =0.01
600
After-tax net income/Net sales=5 =0.00833
600
Liquidity Measures
Current ratio=current assets/current liabilities=343/225=1.524
Acid-test ratio= current assets-inventories/current liabilities= (343-128)/225=0.955
Net liquid assets= current assets-current liabilities=343-128-225=-10
Working capital= current assets-current liabilities=343-225=118

Leverage ratio
Total liabilities/total assets=565/725=0.779
Total liabilities/net sales=565/600=0.9416
Capitalization ratio=Long-term debt/long-term debt+ net worth
=325/ (324+160) =0.6701
（张 琳, Wendy Zhang, 5201335007, checked by Nico Tu, 5201335055, on April 6, Commented [DJ3]: Excellent 100%
2017）

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17-4. Grape Corporation has placed a term loan request with its lender and
submitted the following balance sheet entries for the year just concluded and the pro
forma balance sheet expected by the end of the current year. Construct a pro forma
Statement of Cash Flows for the current year using the consecutive balance sheets and
some additional needed information. The forecast net income for the current year is
$210 million with $50 million being paid out in dividends. The depreciation expense
for the year will be $100 million and planned expansions will require the acquisition
of $300 million in fixed assets at the end of the current year. As you examine the pro
forma Statement of Cash Flows, do you detect any changes that might be of concern
either to the lender’s credit analyst, loan officer, or both?

Grape Corporation
(all amounts in millions of dollars
Assets Assets Liabilities Liabilities
at the Projected and Equity and Equity
End of for the at the End of Projected
the End of the the Most for the End
Most Current Recent Year of the
Recent Year Current
Year Year
Cash $ 532 $ 600 Accounts $ 970 $1,069
payable

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 Accounts 1,210 Notes payable 2,733 2,930
receivable

。
1,018
Inventories 894 973 Taxes payable 327 216
Net fixed 2,740 2,940 Long-term 872 1,072
assets debt
obligations
Other 66 87 Common stock 85 85
assets
Undivided 263 473
profits
Total assets $5,250 $5,810 Total liabilities $5,250 $5,810
and equity
capital

Answer:
Increase in accounts receivable:
$1210 - $1018 = $192

Increase in inventories:
$973 - $894 = $79

Increase in other assets:

$87 –$66 = $21

Increase in accounts payable:

$1069 –$970 = $99

Decrease in tax payable:

$216 –$327 = $-111

Increase in notes payable:

$2930 –$2733 = $197

Increase in long-term debt:

$1072 –$872 = $200

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 Cash flow statements of Grape Corporation（unit：million）

Cash Flows from Operations

Net income $210
Add:
Depreciation $100
Less:
Increase in accounts receivable ($192)
Increase in inventories ($79)

Increase in other assets ($21)

Add:
Increase in accounts payable $99
Less:
Decrease in tax payable ($111)
Net cash flow from operations $6

Cash Flows from Investment Activities

Acquisition of fixed assets ($300)
Net cash flow from investment activities ($300)

Cash Flows from Financing Activities

Increase in notes payable $197
Add:
Increase in long-term debt $200
Less:
Dividends paid ($50)
Net Cash Flows from Financing Activities $347

Increase in Cash ($6 - $300 + $347 = $53) $53

Analysis:
By examine the Cash flow statements of Grape Corporation, the company’s
operation should be concerned by the lender’s credit analyst, loan officer.
Firstly, the company got few profits from the company’s operation, only $6
million, because of the amount of money in accounts receivable.

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 Secondly, the company did not get any profits from the company’s Investment
Activities.
Thirdly, the company although the company got reasonable profits from the
company’s Financing Activities, nevertheless most of the profits was came from notes
payable and long-term debt.
（涂宇翔, Nico Tu, 5201335055, checked by Nico Tu, 5201335055, on April 6, 2017） Commented [DJ4]: Bravo! 100%

17-5 Blue Jay Corporation is a new business client for First Commerce National
Bank and has asked for a one-year, $10 million loan at an annual interest rate of 6
percent. The company plans to keep a 2.75 percent, $3 million CD with the bank for
the loan’s duration. The loan officer in charge of the case recommends at least a 4
percent annual before-tax rate of return over all costs. Using customer profitability
analysis (CPA), the loan committee hopes to estimate the following revenues and
expenses which it will project using the amount of the loan requested as a base for the
calculations:

Estimated Revenues Estimated Expenses

Interest income from loan? Interest to be paid on customer’s $3 million deposit?
Loan commitment fee (0.75%)? Expected cost of additional funds needed to support
the loan (4%)?
Cash management fees (3%)? (on an Labor costs and other operating expenses associated
annual average of $15 million) with monitoring the customer’s loan (2%)?
Cost of processing the loan (1.5%)?

a. Should this loan be approved on the basis of the suggested terms?

b. What adjustments could be made to improve this loan’s projected return?
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c. How might competition from other prospective lenders impact the adjustments you
have recommended?

Answer：
Estimated revenues:
Interest income from loan $10,000,000 × 6.00% $600,000
Loan commitment fee $10,000,000 × 0.75% $75,000
Cash management fee $15,000,000 × 3.00% $450,000
Total revenues $1,125,000

Estimated expenses:
Interest on deposit $3,000,000 × 2.75% $82,500
Expected cost of additional funds $10,000,000 × 4.00% $400,000
Labor costs and other operating costs $10,000,000 × 2.00% $200,000
Costs of processing the loan $10,000,000 × 1.50% $150,000
Total expenses $832,500

Net amount of the bank’s reserves expected to be drawn

Average amount of credit committed to customer $10,000,000
Less: Average customer deposit balances $3,000,000
Net amount of loanable reserves supplied to customer $7,000,000

a.The loan should be approved because the income is greater than the cost.
($1,125,000-$832,500>0)

b.There are two ways to increase the rate of return on loans, the first is to raise the
fees, and the second is the lender to reduce the cost of loans.

c. If the customer can get the same service from other lenders, I recommend that you
reduce the fees charged or charge a lower interest rate. So we can have an advantage
when we face a competitor.
（葛宇, Tracy Ge, 5201335029, checked by Tracy Ge, 5201335029, on April 7, Commented [DJ5]: Bravo! 100%
2017）

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17-6. As a loan officer for Allium National Bank, you have been responsible for
the bank’s relationship with USF Corporation, a major producer of remote-control
devices for activating television sets, DVDs, and other audio-video equipment. USF
has just filed a request for renewal of its $10 million line of credit, which will cover
approximately six months. USF also regularly uses several other services sold by the
bank. Applying customer profitability analysis (CPA) and using the most recent year
as a guide, you estimate that the expected revenues from this commercial loan
customer and the expected costs of serving this customer will consist of the following:

Expected Revenues Expected Costs

Interest income from the requested loan —? Interest paid on customer —?
(assuming annualized loan rate of 4%) deposits (2.50%)
Loan commitment fee (1%) 100,000 Cost of other funds raised 180,000
Deposit management fees 4,500 Account activity costs 5,000
Wire transfer fees 3,500 Wire transfer costs 1,300
Fees for agency services 4,500 Loan processing costs 12,400
Recordkeeping costs 4,500

The bank’s credit analysts have estimated the customer probably will keep an average
deposit balance of $2,125,000 for the period the line is active. What is the expected
net rate of return from this proposed loan renewal if the customer actually draws
down the full amount of the requested line for six months? What decision should the
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bank make under the foregoing assumptions? If you decide to turn down this request,
under what assumptions regarding revenues, expenses, and customer deposit balances
would you be willing to make this loan?

The expected revenues and costs from continuing the present relationship between
Allium National Bank and USF Corporation were given in this problem and the
reader is asked to estimate the expected net rate of return if the bank renews its loan to
USF.

The total of expected revenues and expected costs is:

Expected revenues Expected Costs

312,500 229,762.5

Answer:
Interest income from the requested loan=（10,000,000*4%）/360*(6*30)
=200,000

Interest paid on customer deposits =（2,125,000*2.5%）/360*(6*30）

=26,562.5

Expected revenues = Interest income from the requested loan+Loan commitment fee
+Deposit management fees+Wire transfer fees+Fees for agency services
= 200,000+100,000+4,500+3,500+4,500
=312,500

Expected Costs = Interest paid on customer deposits + Cost of other funds raised
+Account activity costs + Wire transfer costs +Loan processing costs +
Recordkeeping costs
=26,562.5+180,000+5,000+1,300+12,400+4,500
=229,762.5

Net Amount of the Bank’s Reserves Expected to Be Drawn upon by This

Customer This Year
Average Amount of Credit committed to customer $ 10,000,000
Less: Average Customer deposit Balances (net of required reserves) - 2,125,000

Net amount of loanable reserves supplied to customer $7,875,000

Before-tax rate of return over costs from the entire lender-customer relationship
= (Revenues expected-Costs expected)/Net amount of loanable reserves supplied to
customer
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= (312,500-229,762.5)/7,875,000
=0.0105=1.05%

Because the expected net rate of return from this proposed loan renewal only
1.05%. So the bank will turn down this request.
If have the greater regarding revenues and the less expenses, I am willing to
make this loan.

(王心怡, Miranda Wang, 5201335013, checked by Nico Tu, 5201335055, on April 6, Commented [DJ6]: Excellent. 100%
2017)

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