Term Loan & Working Capital - Case Study 25 Marks

Mr.G.Gangadhar an enterprising young man of Dhavaleswaram town is presently engaged in helping his father in
pursuing their occupation- Agriculture looking after sugar cane fields.
Mr.Anatha Ramulu —his father, is a disciplined crop loan borrower of our branch located there. He is a respectable
gentleman of the town.
Mr.Gangadhar has completed B.Sc., Chemistry with good academic record. He has approached the bank with a
proposal to provide him a term loan & working capital assistance for setting up of a mini mineral water unit of a
capacity of 750,000 lts. Per annum.

Upon interviewing he has furnished the following:

The habits of the people are changing fast. People have been preferring to buy drinking water wherever they are
whenever they need it. People have become health-conscious and looking for the needed and the best without much
bothering for the expenditure. Moreover to carry water on person every time is inconvenient, labourious, heavy,
additional luggage and may not be sufficient when required. He has stressed that by providing good quality
drinking water at an affordable price made to win the confidence of the public. Once the confidence of the public is
won, there is a tremendous market for the product since every person is a consumer for him. On the other hand, the
day-temperatures are raising year after year globally making more demand for the safe drinking water. The sun is
beating down the backs of the people irrespective of the seasons. He proposes to sell his product with the trade name
“ GODAVARI”.

He has pooled up Rs.3.00 lacs to start the venture. He has requested his friend and his classmate Mr.Bhagiradhi to
join him as a partner by contributing Rs.3.00 lacs. But Mr.Bhagiradhi preferred to provide him funds to the extent of
Rs.1.50 lacs as loan @ 12% p.a. than joining as a partner. With the amount of Rs.4.50 lacs on hand, he proposes to
acquire the machinery costing Rs.8.00 lacs and to install by incurring Rs.1.00 lac as preliminary expenses. DIC has
provided him space, shed, water, power etc., @ Rs.2000/- per month for infrastructure.

He has requested to provide a Term loan of Rs.5.00 lacs @ 15% p.a. and working capital of Rs.5.50 lacs @ 12% p.a.
to produce and sell 300,000 lts. operating at 40% capacity initially and to meet the local requirements of
Rajahmundry town only.
His marketing strategy comprises of :
To meet the requirements of Rajahmundry town and its surroundings.
To sell with the brand name of “GODAVARI”.
To price it at Rs.6/- per lt. to the dealer with a maximum price of Rs.7/-for the consumer.
To offer commission @ Rs.0.30 per lt. bottle to encourage the dealers so that they engage boys for personal
selling. This is planned to popularise the brand in the market initially and once it is stabilised to withdraw
gradually by reducing rate of commission. It may be continued depending on the success and necessity and
also depending on the profitability.

He proposes to sell @ Rs6/- per unit of one litre bottle.

The expected ratios of the cost to selling price are:
Raw Material constitutes 50%, Direct Wages constitutes 10% and other overheads 20%.
The raw material ordinarily remains in stores for 1 month, in process for ½ month. Finished goods remain in the go-
down for 1 month.
Credit allowed by creditors is ½ month and credit given to debtors is 2 months.
It is anticipated to hold cash on hand or in Bank minimum of Rs 60000/-.
Both production and sales are in regular cycle once production commences.
It takes to erect the machinery and to have a trial-run in about 3 months and to attain the
Break-even within the three months of commercial production. Thus in all it takes to operate at 40% capacity in 6
months time.
TASK :
1. Prepare a Observation Report in the enclosed proforma = 5 Marks
2. Arrive at Term Loan (Cost of Project and Means of Finance) = 5 Marks
3. Arrive at Working Capital Eligibility = 5 Marks
4. Workout the following ratios
a. Owners Contribution
b. Debt Equity Ratio
c. Total Debt Equity Ratio = 5 Marks
d. Break Even Point
e. Debt Service Coverage Ratio
5. VIVA = 5 Marks
 Project details with Observations
Details furnished by the applicant Observations
Activity
Market
Capacity
Initial Operating Capacity
Lead time operating at
40% capacity
Infrastructure facilities
Capital pooled
Loans from friend
T.L. Proposed
Fixed Assets
Preliminary expenses

Working capital requested

Operating Cycle
RM
WIP .
FG
Receivables
Minimum cash required
Sundry Creditors
Cost ratios
RM
Direct Wages
Overheads
Break up of overhead
Power
Transport
Commission
Salary
Drawings
Rent
Insurance
Maintenance

Selling price
Dealer price
Commission