As a lending officer for Monash Regional Bank you are diligent in making sure that you keep up to date on what is happening in in local economy. You note that the next loan file you are reviewing is from a local hardware store, Harold's Hardware, which is seeking a term loan. You recall that of late the local newspapers have had quite a few advertisements from some major national hardware chains.

The loan file you are reviewing has been sent to you by a newly appointed loan officer who is seeking your input before making any commitments. You decide that this is a good time to use this particular case as a teaching tool for the new lender.

Harold's Hardware has been operating in the region for six years, all the time as a customer of Monash Regional Bank. In the past the business has been quite profitable and Harold's store and Harold have become local identities, sponsoring the local football and netball clubs.

Harold's Hardware has an overdraft of $235,000 and Harold took out a term loan six years ago to acquire as freehold his current premises. Generally, the term loan has been well managed but recently Harold has exceeded his overdraft limit a few times.

Harold's loan is coming up for review and Harold has sent in financial accounts for the past three years as well as a one-year forecast (provided below). He has accompanied this information with a request to increase his overdraft to $260,000 and increase his mortgage loan to $625,000. Harold explained that the opportunity has come up to acquire the neighbouring small shop (which has been vacant for some time) at the bargain price of $180,000. The neighbouring shop will need some renovations and shop fitting work to integrate it into Harold's exiting shop. The increased overdraft limit is explained by increased cost of goods combined with the need to have more inventory on hand in a larger shop.

Critically evaluate the above request and recommend whether you would lend the requested amount. Your answer must indicate the relevant facts of the case; the appropriate concerns with this loan proposal and provide the relevant recommendations.

Harold's Hardware Balance Sheets S 5 5 5 As at end of Year 2021 2022 2023 2024 forecast Current Assets Cash 62,500 58,000 56,000 61,000 Debtors 55,000 65,000 Stock 750,000 800,000 Total Current Assets 766, 500 861,000 926,000 Current Liabilities Creditors 95,000 115,000 122,000 115,000 Bank Overdraft 225,000 245,000 255,000 Current Tax 35,000 25,000 22,000 Total Current Liabilities 375,000 392,000 392,000 Net Current Assets 466,500 454,000 469,000 534,000 Fixed Assets 2021 2022 2023 2024 forecast Fixed Assets and premises 1,250,000 1,300,000 1,350,000 1,600,000 1,250,000 1,300,000 1,350,000 1,500,000 Long Term Liabilities Mort-a_e Loan 465,000 430,000 635,000 Net Assets 1,266,500 1,289,000 1,389,000 1,49 9,000 Financed by: 2021 2022 2023 2024 forecast Issued Share Capital 25,000 25,000 25,000 25,000 Accumulated Reserves 20,000 1,241,500 1,264,000 1,364,000 Profit and Loss Account 1,221,500 22,500 100,000 110,000 Total Capital 1,266,500 1,289,000 1,389,000 1,499,000 Total Assets 2,016,500 2,129,000 2,211,000 2,526,000 Ratios and other information 2021 2022 2023 2024 forecast Current Ratio 1 to 2.56 2.21 2.20 2.36 Acid Test 1 to 0.36 0.29 0.28 0.32 Credit Given (days) 4.93 5.95 5.97 6.14 Credit Taken (days) 18.59 14.41 14.42 11.84 Stock Turnover (days) 73.91 84.07 81.43 75.57 Gross margin 41.4% 5.4% 7.3% 7.5% Net margin 39.2% 2.6% 4.9% 4.7% Interest Cover (times) 18.51 1.97 3.08 2.67 Net Gearing % per $1 of equity 57% 62% 57% 67% Net working assets to sales % 14% 15% 14% 14% Retained Profits to sales 37.5% 0.7% 3.0% 2.8%