-BLC wants to increase its borrowing from SNB to 247000 in spring of 1991

-max loan amount of SNB is 250000

-BLC had been able to stay within that limit because they heavily rely on trade credit

-Now SNB wants BLC to secure loan with its real property

-BLC checks with NNB which can give an loan of maximum amount 465000

Investigation by Credit department of NNB

-1988 butler bought stark’s interest for 105000 with a note to be paid off in 1989

-major portion of 105000 raised from a loan of 70000 which is secured by land and buildings,carried
a interest of 11% and was repayable in quarterly installments at the rate of 7000 a year over the next
10 years

-Quantity discounts and credit terms of net 30 days on open account were usually offered to
customers

-About 55% of the total sales were made in the six months from April through September

-in early 1991 number of employees are 10 i.e. 5 of whom worked in the yard and 5 of whom
assisted in the office and in sales. Total =11

- Butler gives credit on time.

Butler held jointly with his wife

-the house had cost 72000 to build in 1979 and was mortgaged for 38000.

-He also held 70000 life insurance policy, payable to his wife. She owned independently a half
interest in a house worth about 55000 otherwise they had no sizeable personal investments.

Bank findings

-expected sales in 1991 is 3.6 million with prices to rise

- noted that there are rapid increase in BLC’s accounts and notes payable in the recent past.

-terms of purchase

Within 10 days---2% discount

Ratio Analysis:

Debt Equity ratio

Concept :

 It describes lender’s contribution for each dollar of owner’s contribution

 It estimates stability

 Standard Value is 2:1

 If it is less than this, it is favourable because:

1) High safety margin for lenders

2) Less interest payments

3) Scope for more loans

4) No trading on Equity

LEVERAGE RATIOS

 Debt equity ratio

It has been increasing over the years which suggests increased dependency on external funds and
high financial risk . Moreover , it indicates rapid growth in company as well which arises greater
need of external funds

 Debt Ratio

It has been increasing over the years which increased extent of debt financing in business

Hence, majority of the company’s assets are being financed by external funds

Current Ratio

 Concept :

 Indicates availability of Current Assets for each unit of Current Liability

 It estimates short term Liquidity of the Company

 It also estimates margin of safety for creditors – a high ratio means less risk for creditors
  A ratio of less than 1 is a cause of concern

Quick Ratio

 Considers only cash as quick assets for meeting short term liability

CURRENT RATIO

 It has been decreasing over the years, which suggests that it has more current claims than
current assets.

 In fact a satisfactory ratio of 2:1 was never achieved in any of the years

 It points to narrow margin of safety for creditors

Day Recievables

 The ratio indicates whether debtors are being allowed excessive credits

 A higher credit may suggest general problems with debt collection or the financial position
of major customers

 Days Receivables is increasing which indicates poor collection policy

 Ideal Days Receivables allowed was 30 but we are getting 43 for 1990 which necessitates
better credit collection policy

PROFITABILITY RATIO

 Net profit margin

It has been low over the years, with merely 1.8% in 1988 and shows a decrease over the years
accounting to mere 1.6%

This suggests poor capacity of the company to withstand adverse economic conditions and
comparitively low operating efficiency of the firm