Critically evaluate this loan request and recommend whether you would lend for this project and the relevant conditions of the loan. Your answer must indicate the relevant facts of the case; the appropriate concerns with this loan proposal and provide the relevant recommendations.
Bazzas Constructions (BC) is a local speculative housing company. It started in JohnVille about 10 years ago. When you transferred to JohnVille as a newly appointed credit analyst for JohnBank, you and your partner both admired the quality and pricing of BCs houses. BC has its banking relationships with two of the other main banks operating in JohnVille. At times you have spoken to the owner of BC with a view to transferring BCs banking to JohnBank. Each time the owner said they were too busy to consider this possibility due to the housing boom of the time.
Due to recently increasing interest rates, your bank currently charges an interest rate of 12% per annum, compounded monthly for speculative housing loans. This increased interest rate has recently seen the housing sector slowing.
This morning, the owner of BC has reached out to you. BC currently has three developments partially completed. BC has been offered the assets of a local speculative builder. The other builder needs a cash injection and is selling a two-hectare property with planning permission in place to construct ten townhouses.
BCs accountant sends you the financial details below and some details for the development of the new site. You are asked to indicate the terms and conditions on which you would be willing to finance this development project. You are told that council approvals and all required permits are all completed and that BC expects the project to be completed in about sixteen (16 months).
Required:
Critically evaluate the above request and recommend whether you would lend for this project and the relevant conditions of the loan. Your answer must indicate the relevant facts of the case; the appropriate concerns with this loan proposal and provide the relevant recommendations.
\begin{tabular}{|l|r|r|r|} \hline Fixed Assets & \multicolumn{1}{|c|}{2021} & \multicolumn{1}{c|}{2022} & \multicolumn{1}{c|}{2023} \\ \hline Fixed Assets and Leasehold & 587,000 & 625,000 & 750,000 \\ \hline & & & \\ \hline & 587,000 & 625,000 & 750,000 \\ \hline Long Term Liabilities & & & \\ \hline Mortgage Loan & 450,000 & 450,000 & 475,000 \\ \hline & 450,000 & 450,000 & 475,000 \\ \hline & 876,400 & 625,637 & 662,736 \\ \hline Net Assets & & & \\ \hline & & & 250,000 \\ \hline Financed by: & 250,000 & 250,000 & 375,637 \\ \hline Issued Share Capital & 120,000 & 316,700 & 37,099 \\ \hline Accumulated Reserves & 196,700 & 58,937 & 662,736 \\ \hline Profit and Loss Account & 876,400 & 625,637 & \\ \hline Total Capital & & & \\ \hline \end{tabular} \begin{tabular}{|l|r|r|r|} \hline Profit&LossAccountSummary & \multicolumn{1}{|c|}{2021} & \multicolumn{1}{c|}{2022} & \multicolumn{1}{c|}{2023} \\ \hline Sales & 3,568,000 & 3,057,000 & 2,917,000 \\ \hline CostofGoodsSold(includinglabor) & 3,239,300 & 2,808,313 & 2,670,851 \\ \hline Sponsorships & 35,000 & 55,000 & 55,000 \\ \hline Interest & 97,000 & 134,750 & 154,050 \\ \hline Gross Profit & 293,700 & 193,687 & 191,149 \\ \hline Net Profit & 196,700 & 58,937 & 37,099 \\ \hline \end{tabular} \begin{tabular}{|l|r|r|r|} \hline Ratios and other information & \multicolumn{2}{|r|}{2021} & 2023 \\ \hline Current Ratio 1 to & 1.42 & 1.21 & 1.14 \\ \hline Acid Test 1 to & 0.29 & 0.23 & 0.17 \\ \hline Credit Given (days) & 12.99 & 25.67 & 34.41 \\ \hline Credit Taken (days) & 111.06 & 138.43 & 191.90 \\ \hline Stock Turnover (days) & 203.27 & 251.69 & 336.22 \\ \hline Gross margin & 8.2% & 6.3% & 6.6% \\ \hline Net margin & 5.5% & 1.9% & 1.3% \\ \hline Interest Cover (times) & 3.03 & 1.44 & 1.24 \\ \hline Net Gearing \% per \$1 of equity & 228% & 386% & 451% \\ \hline Net working assets to sales \% & 21% & 15% & 13% \\ \hline Retained Profits to sales & 5.5% & 1.9% & 1.3% \\ \hline \end{tabular} \begin{tabular}{|l|r|r|r|} \hline Fixed Assets & \multicolumn{1}{|c|}{2021} & \multicolumn{1}{c|}{2022} & \multicolumn{1}{c|}{2023} \\ \hline Fixed Assets and Leasehold & 587,000 & 625,000 & 750,000 \\ \hline & & & \\ \hline & 587,000 & 625,000 & 750,000 \\ \hline Long Term Liabilities & & & \\ \hline Mortgage Loan & 450,000 & 450,000 & 475,000 \\ \hline & 450,000 & 450,000 & 475,000 \\ \hline & 876,400 & 625,637 & 662,736 \\ \hline Net Assets & & & \\ \hline & & & 250,000 \\ \hline Financed by: & 250,000 & 250,000 & 375,637 \\ \hline Issued Share Capital & 120,000 & 316,700 & 37,099 \\ \hline Accumulated Reserves & 196,700 & 58,937 & 662,736 \\ \hline Profit and Loss Account & 876,400 & 625,637 & \\ \hline Total Capital & & & \\ \hline \end{tabular} \begin{tabular}{|l|r|r|r|} \hline Profit&LossAccountSummary & \multicolumn{1}{|c|}{2021} & \multicolumn{1}{c|}{2022} & \multicolumn{1}{c|}{2023} \\ \hline Sales & 3,568,000 & 3,057,000 & 2,917,000 \\ \hline CostofGoodsSold(includinglabor) & 3,239,300 & 2,808,313 & 2,670,851 \\ \hline Sponsorships & 35,000 & 55,000 & 55,000 \\ \hline Interest & 97,000 & 134,750 & 154,050 \\ \hline Gross Profit & 293,700 & 193,687 & 191,149 \\ \hline Net Profit & 196,700 & 58,937 & 37,099 \\ \hline \end{tabular} \begin{tabular}{|l|r|r|r|} \hline Ratios and other information & \multicolumn{2}{|r|}{2021} & 2023 \\ \hline Current Ratio 1 to & 1.42 & 1.21 & 1.14 \\ \hline Acid Test 1 to & 0.29 & 0.23 & 0.17 \\ \hline Credit Given (days) & 12.99 & 25.67 & 34.41 \\ \hline Credit Taken (days) & 111.06 & 138.43 & 191.90 \\ \hline Stock Turnover (days) & 203.27 & 251.69 & 336.22 \\ \hline Gross margin & 8.2% & 6.3% & 6.6% \\ \hline Net margin & 5.5% & 1.9% & 1.3% \\ \hline Interest Cover (times) & 3.03 & 1.44 & 1.24 \\ \hline Net Gearing \% per \$1 of equity & 228% & 386% & 451% \\ \hline Net working assets to sales \% & 21% & 15% & 13% \\ \hline Retained Profits to sales & 5.5% & 1.9% & 1.3% \\ \hline \end{tabular}
