Part 2: Problem Solving A financial services provider that provides computer software systems approaches you. The company started off as a small private company and has grown strongly over the past teen years and listed on the Australian Stock Exchange. The company has businesses in many offshore locations, all of which are well developed capital markets in some parts of the world, the company has near-monopoly markets As part of its strategy, the company uses acquisitions rather than growth to continue to expand the business. While the business is software based, it relies on continued activity in the financial markets. The company has had the same management over the past fifteen years and the senior management team are shareholders in the company. The company is rated 88 and its bonds are trading at 33 per cent above the comparable government bond rate (5%). These rates are for a 1-year period. Your bank's experience is that the recovery rate in the event of default, the recovery rate is 50 percent The condensed financial accounts are as follows: 663 7262 Total current assets Total noncurrent assets Total assets Total current liabilities Total noncurrent liabilities Totale Shareholders' equity Retained earnings Total Equity 243.7 4410 546.7 840 Earning before interest and tax are $151.608.000 on sales of $742.613,000. The firms requesting a loan of $150 million to assist further acquisitions Ratio industry averages - Current ration 3 - inventory turnover ratio 6 Net profitto sales ratio 0.15 - Debt to Equity ratio 0.4 Questions 1. Carry out a credit analysis on an expert basis Page 25 2. Carry out a credit analysis on a market premium basis A. Calculate the probability of repayment and probability of defuit Asumingalan maturing in 1 year: B. Calculate the risk premium C. Suppose that the company requested a loan for two years. Government bond rate for 2 years is 6% and company bond rate for 2 years is 9.5. Calculate the cumulative probability of default Pos 3. Using Altman 2 score, what is the indication of credit risk? 4. Having carried out the above analysis, carefully outline the benefits and disadvantages of lending to this company. What would be your final decision? Part 2: Problem Solving A financial services provider that provides computer software systems approaches you. The company started off as a small private company and has grown strongly over the past teen years and listed on the Australian Stock Exchange. The company has businesses in many offshore locations, all of which are well developed capital markets in some parts of the world, the company has near-monopoly markets As part of its strategy, the company uses acquisitions rather than growth to continue to expand the business. While the business is software based, it relies on continued activity in the financial markets. The company has had the same management over the past fifteen years and the senior management team are shareholders in the company. The company is rated 88 and its bonds are trading at 33 per cent above the comparable government bond rate (5%). These rates are for a 1-year period. Your bank's experience is that the recovery rate in the event of default, the recovery rate is 50 percent The condensed financial accounts are as follows: 663 7262 Total current assets Total noncurrent assets Total assets Total current liabilities Total noncurrent liabilities Totale Shareholders' equity Retained earnings Total Equity 243.7 4410 546.7 840 Earning before interest and tax are $151.608.000 on sales of $742.613,000. The firms requesting a loan of $150 million to assist further acquisitions Ratio industry averages - Current ration 3 - inventory turnover ratio 6 Net profitto sales ratio 0.15 - Debt to Equity ratio 0.4 Questions 1. Carry out a credit analysis on an expert basis Page 25 2. Carry out a credit analysis on a market premium basis A. Calculate the probability of repayment and probability of defuit Asumingalan maturing in 1 year: B. Calculate the risk premium C. Suppose that the company requested a loan for two years. Government bond rate for 2 years is 6% and company bond rate for 2 years is 9.5. Calculate the cumulative probability of default Pos 3. Using Altman 2 score, what is the indication of credit risk? 4. Having carried out the above analysis, carefully outline the benefits and disadvantages of lending to this company. What would be your final decision
