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CASE 1 . 1 MIDI CAPITAL CANADA, COMMERCIAL TRANSPORTATION FINANCING DIVISIONIt was early morning on April 1 5 2 0 1 6 , when Steve
CASE MIDI CAPITAL CANADA, COMMERCIAL TRANSPORTATION FINANCING DIVISIONIt was early morning on April when Steve Brant, assistant account manager for the Commercial Transportation Financing Division of Midi Capital Canada in Toronto, Ontario, Canada, finished reading the morning copy of The Financial Post and began reviewing a loan request for $ submitted by an existing client Simon Carriers Ltd Simon Carriers, a trucking company, requested the $ loan to purchase two new Freightliner transport trucks, four new foot trailers and four new mobile satellite systems that would be used to track the location of the transport trucks. Brant had to make a decision on the loan request and forward a report to the senior account manager for approval that afternoon.MIDI CAPITALMidi Capital comprised of diversified businesses, including operations in North America, Latin America, Europe and the AsiaPacific region, its head office was located in Stanford Connecticut. Midi Diversified, Midi Capitals parent company, was a publicly traded corporation with net earnings of over US$ billion. Midi Capital was a major competitor in every industry it competed in achieving record net earnings of US$ billion in It expected each of its divisions to generate a after taxprofit, and if a division fell below the goal of per cent, they would have to justify why profit targets had not been met.COMMERCIAL TRANSPORTATION FINANCINGCommercial Transportation Financing CTF was one of Midi Capitals divisions. The majority of CTFs business was loaning money to medium and largesized transportation and construction companies. Loans from $ to $ million were provided to purchase assets such as transport trucks, trailers, paving equipment and heavy machinery.CTF was under tremendous pressure to generate profits. The selling strategy at CTF was Find, Win, Keep Find new business, Win new business and Keep new and existing clients. As of April less than one percent of CTFs portfolio of over accounts had been lost to bad debt. Account managers for the Southern Ontario Region were expected to generate $ million in new loans each year, without exposing Midi Capital to unreasonable levels of risk.Several requirements had to be met before CTF would approve a loan. First, CTF did not deal with any company that had been in business for less than three years. Second, the company applying for the loan had to generate enough cash flow to cover the monthly interest payments on the new loan. Third, the companys debt to equity ratio could be greater than : when including the new loan. Fourth, CTF would not finance more thanpercent of the value of any asset, thereby requiring the company to have enough cash to pay for at least percent of the assets it wanted to purchase. Lastly, CTF considered the character of the business owners, general economic conditions, and any company assets that could be pledged as collateral as additional factors in the loan request.THE TRANSPORTATION INDUSTRY IN SOUTHERN ONTARIOThe trucking industry had been very profitable from to until a major recession in During the recession, there was less manufacturing, resulting in fewer goods being shipped by trucking companies. Many trucking companies went bankrupt and those that survived the recession had to lower prices to stay competitive. The industry recovered during a manufacturing boom in the mid s and the amount of freight shipped between Windsor and Toronto was at its highest level ever; however, the transportation industry in Southern Ontario was very competitive with thousands of trucking companies competing for business. By the mid s the transportation industry had experienced strong growth, but prices and profits remained low with trucking companies typically generating after tax net incomes of less than percent of revenues.With prices low, trucking companies relied on higher volumes of business to generate profits. One way to increase sales volume was to purchase more trucks and trailers and hire additional drivers. For every truck and trailer, a trucking company would typically generate $ to $ in annual sales. However, the high cost of purchasing new trucks and equipment required large loans to finance the purchase of new assets. Because so many trucking companies borrowed money to expand, it was important to maximize the amount of time a truck was on the road to generate sales, to cover not only operating expenses but also to cover the loan payments.NEW LEGISLATIONIt was mandatory that all vehicles trucks and trailers used by the trucking companies meet the safety standards set by the Ministry of Transportation of Ontario MTO These standards were enforced on major highways at weight scale stations where all trucks were required to stop for inspections. Effective February new legislation gave the MTO the right to impound any vehicle truck or trailer deemed to have a major defectIf a critical defect was found during an inspection, the MTO impounded the vehicle for days and the vehicle could not be operated until the equipment had been repaired to meet safety standards. If the same or additional critical defects were found during any subsequent inspection, the MTO impounded the vehicle for days. In addition to impounding the vehicles the MTO also charged fines ranging from $ to $ for equipment that did not pass inspection. Despite the risk of impoundment, thousands of trucks have failed safety inspections annually and the MTO has impounded thousands of trucks from the inception of the programSIMON CARRIERS LTDBackgroundWilliam Simon and his wife Mary founded Simon Carriers LtdSCL in Waterloo Ontario, in the late s The company began as a onetruck operation hauling freight for a larger trucking company that contracted work to independent truck drivers. William was the driver and mechanic while Mary managed the accounting records. The Simons survived the economic recession of the early s and continued to operate their business as a onetruck operation until late when they began searching for exclusive hauling contracts.In March of SCL signed an exclusive twoyear contract with a small auto parts manufacturer that supplied the Ford Motor Co assembly plant in Oakville, Ontario. Ford required its suppliers to make deliveries according to justintime inventory schedules, which meant that SCL would haul multiple trailers loads several days a week.To accommodate the new contract SCL borrowed $ from Nippissing Credit on April to finance the purchase of three new transport trucks and three new trailers. The company also hired three new drivers to drive the new trucks. As of December SCL still owed $ on the loan from Nippissing Credit. SCL paid $ on this loan each month.The trucking volume generated by the contract continued to increase. In October SCL sought financing to purchase two new trailers. A loan for $ was arranged through Midi Capital on October the current balance still owing on the Midi Capital loan was $ CSL paid $ on this loan each month. The trucking companys financial statements, ratios and sources and uses of cash are shown in Exhibits through THE NEW CONTRACTIn March the auto parts manufacturer signed a new supplier contract effective May with Ford. The new contract reflected a percent increase in trucking volume. SCLs twoyear contract with the auto parts manufacturer expired on March andhad not been renewed. In an effort to reduce its own costs, and because the trucking volume would increase by per cent, the auto parts manufacturer was allowing several trucking companies including SCL to bid for the new trucking contract. If SCL hoped to win the new trucking contract, it would need to expand its fleet to accommodate the higher trucking volume and to outbid competing trucking companies.PROJECTED REQUIREMENTS FOR THE NEW CONTRACTTo expand its fleet, SCL required approximately $ Since SCL was required to pay at least percent of the cost in cash $ it requested a $ loan to purchase two new freightliner transport trucks, four new foot trailers and four new mobile satellite systems. In projecting its income statements for SCL estimated revenues to be percent to per cent higher than Salaries and wages were expected to increase by $ to hire two new drivers and general and administration expenses were expected to increase by $ due to the larger fleet. Additionally, bank charges and interest on the new loan would be $ Depreciation on the new assets would be $ Legal and accounting fees and rent and utilities were expected to remain unchanged from amounts. The operating expenses for were expected to remain at the same proportion of sales as they had been in No other purchases of new assets were expected for The companys income tax rate was approximately percent.In projecting its balance sheets, SCL estimated the value of the new loans to be $ less the monthly payments made between May and December, SCL anticipated no changes to the age of receivables or the age of the payables. The company also had a line of credit of up to $ that it had never used. It planned to use $ from this line of credit to make the cash payment required by Midi Capital percent of the new assets The Simons had used $ in personal assets to secure the bank line of credit. None of the assets on SCLs current balance sheet were pledged as collateral. The main question for Brant was whether SCL would show a cash surplus on its projected balance sheet. A cash surplus would indicate that SCL would be capable of making the required loan payments, whereas a deficit would indicate that SCL would be incapable of paying back the loan. Since profits remained low across the industry, the Simons believed that continued growth would ensure their profitability. If SCL lost this contract, the Simons knew it would be difficult to find enough work to keep their fleet working at percent capacity William and Mary had worked hard to grow their business and had never been late with a loan payment, despite having trailers impounded on two occasions. Mary commented: We have been through good times and bad and weve expanded before. I feel that this is the right thing to do We cant afford to stay small.BRANTS DECISIONThe new loan would bring the total of SCLs with Midi Capital to $ Brantsreport would have to be reviewed by his senior manager since the total loan amount exceeded his account managers credit limit of $ Brant had been with the company for eight months and it was important he made a wellthoughtout plan thatfollowed CTFs minimum lending requirements. His report was due in a few hours.Exhibit Statements of Earnings Unaudited and RatiosFor the years ending December Sales Sales SalesRevenue $ $ $Cost of Sales Gross Margin $ $ $Operating Expenses Salaries & Wages $ $ $ General & Admin Telephone & Fax Legal & Accounting Travel & Auto Rent & Utilities Bank Charges & Int Bad Debts Deprecation Expense Advert & Promotion Meals & entertainment Total Operating Exp. $ $ $ Net Earnings Pretax Provision for Taxes Net earnings after Tax Statements of Retained Earnings UnauditedFor the Years Ending December Beginning retained earnings $ $ $ Add: Net earnings after Taxes Ending Retained earnings $ $ $ Source: Midi Capital Transportation Financial Division Exhibit Balance Sheet UnauditedAs of December ASSETSCurrent AssetsCash $ $ $ Accounts receivable Other receivables
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CASE MIDI CAPITAL CANADA, COMMERCIAL TRANSPORTATION FINANCING DIVISIONIt was early morning on April when Steve Brant, assistant account manager for the Commercial Transportation Financing Division of Midi Capital Canada in Toronto, Ontario, Canada, finished reading the morning copy of The Financial Post and began reviewing a loan request for $ submitted by an existing client Simon Carriers Ltd Simon Carriers, a trucking company, requested the $ loan to purchase two new Freightliner transport trucks, four new foot trailers and four new mobile satellite systems that would be used to track the location of the transport trucks. Brant had to make a decision on the loan request and forward a report to the senior account manager for approval that afternoon.MIDI CAPITALMidi Capital comprised of diversified businesses, including operations in North America, Latin America, Europe and the AsiaPacific region, its head office was located in Stanford Connecticut. Midi Diversified, Midi Capitals parent company, was a publicly traded corporation with net earnings of over US$ billion. Midi Capital was a major competitor in every industry it competed in achieving record net earnings of US$ billion in It expected each of its divisions to generate a after taxprofit, and if a division fell below the goal of per cent, they would have to justify why profit targets had not been met.COMMERCIAL TRANSPORTATION FINANCINGCommercial Transportation Financing CTF was one of Midi Capitals divisions. The majority of CTFs business was loaning money to medium and largesized transportation and construction companies. Loans from $ to $ million were provided to purchase assets such as transport trucks, trailers, paving equipment and heavy machinery.CTF was under tremendous pressure to generate profits. The selling strategy at CTF was Find, Win, Keep Find new business, Win new business and Keep new and existing clients. As of April less than one percent of CTFs portfolio of over accounts had been lost to bad debt. Account managers for the Southern Ontario Region were expected to generate $ million in new loans each year, without exposing Midi Capital to unreasonable levels of risk.Several requirements had to be met before CTF would approve a loan. First, CTF did not deal with any company that had been in business for less than three years. Second, the company applying for the loan had to generate enough cash flow to cover the monthly interest payments on the new loan. Third, the companys debt to equity ratio could be greater than : when including the new loan. Fourth, CTF would not finance more thanpercent of the value of any asset, thereby requiring the company to have enough cash to pay for at least percent of the assets it wanted to purchase. Lastly, CTF considered the character of the business owners, general economic conditions, and any company assets that could be pledged as collateral as additional factors in the loan request.THE TRANSPORTATION INDUSTRY IN SOUTHERN ONTARIOThe trucking industry had been very profitable from to until a major recession in During the recession, there was less manufacturing, resulting in fewer goods being shipped by trucking companies. Many trucking companies went bankrupt and those that survived the recession had to lower prices to stay competitive. The industry recovered during a manufacturing boom in the mid s and the amount of freight shipped between Windsor and Toronto was at its highest level ever; however, the transportation industry in Southern Ontario was very competitive with thousands of trucking companies competing for business. By the mid s the transportation industry had experienced strong growth, but prices and profits remained low with trucking companies typically generating after tax net incomes of less than percent of revenues.With prices low, trucking companies relied on higher volumes of business to generate profits. One way to increase sales volume was to purchase more trucks and trailers and hire additional drivers. For every truck and trailer, a trucking company would typically generate $ to $ in annual sales. However, the high cost of purchasing new trucks and equipment required large loans to finance the purchase of new assets. Because so many trucking companies borrowed money to expand, it was important to maximize the amount of time a truck was on the road to generate sales, to cover not only operating expenses but also to cover the loan payments.NEW LEGISLATIONIt was mandatory that all vehicles trucks and trailers used by the trucking companies meet the safety standards set by the Ministry of Transportation of Ontario MTO These standards were enforced on major highways at weight scale stations where all trucks were required to stop for inspections. Effective February new legislation gave the MTO the right to impound any vehicle truck or trailer deemed to have a major defectIf a critical defect was found during an inspection, the MTO impounded the vehicle for days and the vehicle could not be operated until the equipment had been repaired to meet safety standards. If the same or additional critical defects were found during any subsequent inspection, the MTO impounded the vehicle for days. In addition to impounding the vehicles the MTO also charged fines ranging from $ to $ for equipment that did not pass inspection. Despite the risk of impoundment, thousands of trucks have failed safety inspections annually and the MTO has impounded thousands of trucks from the inception of the programSIMON CARRIERS LTDBackgroundWilliam Simon and his wife Mary founded Simon Carriers LtdSCL in Waterloo Ontario, in the late s The company began as a onetruck operation hauling freight for a larger trucking company that contracted work to independent truck drivers. William was the driver and mechanic while Mary managed the accounting records. The Simons survived the economic recession of the early s and continued to operate their business as a onetruck operation until late when they began searching for exclusive hauling contracts.In March of SCL signed an exclusive twoyear contract with a small auto parts manufacturer that supplied the Ford Motor Co assembly plant in Oakville, Ontario. Ford required its suppliers to make deliveries according to justintime inventory schedules, which meant that SCL would haul multiple trailers loads several days a week.To accommodate the new contract SCL borrowed $ from Nippissing Credit on April to finance the purchase of three new transport trucks and three new trailers. The company also hired three new drivers to drive the new trucks. As of December SCL still owed $ on the loan from Nippissing Credit. SCL paid $ on this loan each month.The trucking volume generated by the contract continued to increase. In October SCL sought financing to purchase two new trailers. A loan for $ was arranged through Midi Capital on October the current balance still owing on the Midi Capital loan was $ CSL paid $ on this loan each month. The trucking companys financial statements, ratios and sources and uses of cash are shown in Exhibits through THE NEW CONTRACTIn March the auto parts manufacturer signed a new supplier contract effective May with Ford. The new contract reflected a percent increase in trucking volume. SCLs twoyear contract with the auto parts manufacturer expired on March andhad not been renewed. In an effort to reduce its own costs, and because the trucking volume would increase by per cent, the auto parts manufacturer was allowing several trucking companies including SCL to bid for the new trucking contract. If SCL hoped to win the new trucking contract, it would need to expand its fleet to accommodate the higher trucking volume and to outbid competing trucking companies.PROJECTED REQUIREMENTS FOR THE NEW CONTRACTTo expand its fleet, SCL required approximately $ Since SCL was required to pay at least percent of the cost in cash $ it requested a $ loan to purchase two new freightliner transport trucks, four new foot trailers and four new mobile satellite systems. In projecting its income statements for SCL estimated revenues to be percent to per cent higher than Salaries and wages were expected to increase by $ to hire two new drivers and general and administration expenses were expected to increase by $ due to the larger fleet. Additionally, bank charges and interest on the new loan would be $ Depreciation on the new assets would be $ Legal and accounting fees and rent and utilities were expected to remain unchanged from amounts. The operating expenses for were expected to remain at the same proportion of sales as they had been in No other purchases of new assets were expected for The companys income tax rate was approximately percent.In projecting its balance sheets, SCL estimated the value of the new loans to be $ less the monthly payments made between May and December, SCL anticipated no changes to the age of receivables or the age of the payables. The company also had a line of credit of up to $ that it had never used. It planned to use $ from this line of credit to make the cash payment required by Midi Capital percent of the new assets The Simons had used $ in personal assets to secure the bank line of credit. None of the assets on SCLs current balance sheet were pledged as collateral. The main question for Brant was whether SCL would show a cash surplus on its projected balance sheet. A cash surplus would indicate that SCL would be capable of making the required loan payments, whereas a deficit would indicate that SCL would be incapable of paying back the loan. Since profits remained low across the industry, the Simons believed that continued growth would ensure their profitability. If SCL lost this contract, the Simons knew it would be difficult to find enough work to keep their fleet working at percent capacity William and Mary had worked hard to grow their business and had never been late with a loan payment, despite having trailers impounded on two occasions. Mary commented: We have been through good times and bad and weve expanded before. I feel that this is the right thing to do We cant afford to stay small.BRANTS DECISIONThe new loan would bring the total of SCLs with Midi Capital to $ Brantsreport would have to be reviewed by his senior manager since the total loan amount exceeded his account managers credit limit of $ Brant had been with the company for eight months and it was important he made a wellthoughtout plan thatfollowed CTFs minimum lending requirements. His report was due in a few hours.Exhibit Statements of Earnings Unaudited and RatiosFor the years ending December Sales Sales SalesRevenue $ $ $Cost of Sales Gross Margin $ $ $Operating Expenses Salaries & Wages $ $ $ General & Admin Telephone & Fax Legal & Accounting Travel & Auto Rent & Utilities Bank Charges & Int Bad Debts Deprecation Expense Advert & Promotion Meals & entertainment Total Operating Exp. $ $ $ Net Earnings Pretax Provision for Taxes Net earnings after Tax Statements of Retained Earnings UnauditedFor the Years Ending December Beginning retained earnings $ $ $ Add: Net earnings after Taxes Ending Retained earnings $ $ $ Source: Midi Capital Transportation Financial Division Exhibit Balance Sheet UnauditedAs of December ASSETSCurrent AssetsCash $ $ $ Accounts receivable Other receivables
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