You are a lending officer working with a financial institution in Dubai. The CFO of a company, which manufactures custom car parts in Jebel Ali Industrial area, submits to you a loan application. The company, which started as a local car shop in Sharjah, has evolved into a regional product provider. The company is rated AAB and its bonds are trading at 6 per cent (the comparable government bond rate is equal to 4%). These rates are for a 1-year period. Your bank's experience is that the recovery rate in the event of default is 50 per cent. The condensed financial accounts are as follows: SM Total current assets 77.1 Total noncurrent assets 744.9 Total assets 1002 Total current liabilities 202.1 Total noncurrent liabilities 288.9 Total liabilities 512.0 Shareholder's equity 611.0 Retained earnings 99.0 Total Equity 710.0 The Earnings before interest and tax are equal to AED 212,008,000 on sales of AED 818,111,000. The number of shares on issue is equal to 555,000,000 shares the share price being AED 2.07. The firm is requesting a loan of AED 90,000,000 to finance its working capital. Questions: 1- Carry out a credit analysis on a market-premium basis A. Calculate the probability of repayment and probability of default (Assuming a loan 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 5% and company bond rate for 2 years is 8%. Calculate the cumulative probability of default. You are a lending officer working with a financial institution in Dubai. The CFO of a company, which manufactures custom car parts in Jebel Ali Industrial area, submits to you a loan application. The company, which started as a local car shop in Sharjah, has evolved into a regional product provider. The company is rated AAB and its bonds are trading at 6 per cent (the comparable government bond rate is equal to 4%). These rates are for a 1-year period. Your bank's experience is that the recovery rate in the event of default is 50 per cent. The condensed financial accounts are as follows: SM Total current assets 77.1 Total noncurrent assets 744.9 Total assets 1002 Total current liabilities 202.1 Total noncurrent liabilities 288.9 Total liabilities 512.0 Shareholder's equity 611.0 Retained earnings 99.0 Total Equity 710.0 The Earnings before interest and tax are equal to AED 212,008,000 on sales of AED 818,111,000. The number of shares on issue is equal to 555,000,000 shares the share price being AED 2.07. The firm is requesting a loan of AED 90,000,000 to finance its working capital. Questions: 1- Carry out a credit analysis on a market-premium basis A. Calculate the probability of repayment and probability of default (Assuming a loan 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 5% and company bond rate for 2 years is 8%. Calculate the cumulative probability of default
