QUESTION 1 (15 marks)

Z and Z Company Limited (ZZC) is an established corporate customer of your bank. The company operated several credit facilities over the past ten years without default. There were times when payments were marginally late due to delay in collections. However, all loans were repaid within the loan period and the bank is comfortable with the customers credit history.

ZZs core business is retailing of a range of personal and household items. The company is expanding its operations in the Caricom region and has requested additional credit from your bank to assist with acquisition of property and working capital. The amount requested is TT$20 million to be repaid over 10 years.

The financial statements of ZZC Ltd for the year ended December 31, 2018, follow:

Income Statement

Z and Z Company Ltd

For the year ended December 31, 2018

(000)

Sales revenue

$ 160,000

Less: Cost of goods sold

90,000

Gross profits

$ 70,000

Less: Operating expenses

Selling expense

$ 16,000

General and administrative expenses

13,000

Lease expense

1,000

Depreciation expense

10,000

Total operating expense

$ 40,000

Operating profits

$ 30,000

Less: Interest expense

6,100

Net profits before taxes

$ 23,900

Less: Taxes

5,900

Net profits after taxes

$ 18,000

Balance Sheet

Z and Z Company Ltd

December 31, 2018

(000)

Assets

Cash

$ 5,500

Short term investments

1,000

Accounts receivable

20,000

Inventories construction materials

45,500

Total current assets

$ 72,000

Land

$ 26,000

Buildings and equipments

90,000

Less: Accumulated depreciation

38,000

Net fixed assets

$ 78,000

Total assets

$ 150,000

Liabilities and stockholders equity

Accounts payable

$ 22,000

Notes payable

47,000

Total current liabilities

$ 69,000

Long-term debt

$ 22,950

Common stock

$ 31,500

Retained earnings

$ 26,550

Total liabilities and stockholders equity

$ 150,000

Selected ratios for ZZC and the industry are shown below.

Ratio

Industry average

ZZC Actual 2017

Current ratio

1.60

Asset turnover

1.1

Average collection period

57 days

Debt ratio

65%

Times interest earned ratio

3.8

Net profit margin

3.5%

Return on total assets

4.0%

Return on equity

8%

AAnalyze ZZCs financial condition (Liquidity, Asset efficiency, Debt management, Profitability) as it relates to the credit request. Comment on the overall financial position of the firm. (6 marks)

BIdentify two risks associated with this loan and recommend two strategies to manage these risks. (4 marks)

CList two additional documents you would require for processing this credit?

(2 marks)

D Based on the financial statements, would you grant the credit? Justify giving three reasons. (3 marks)