Business Decision Making 1

Mid Term: Case Study

TALICH FABRICATING INC

0636734

Nipissing University

ADMN-2167-FA801-2020: BUSINESS DECISION MAKING

Glen Brophey

October 29, 2020

Business Decision Making 2

Situation

Dominion of Canada Bank 's downtown branch manager, Ted Heath, is charged with deciding to

increase the line of credit to a metal furniture company called Talich Manufacturing Inc

(hereinafter known as TFI). Expanding the plant is important in order to meet the production

demands. In order to see where TFI will be in the future and whether they will have the money

needed to repay the loan, Heath must look at past history and make forecasts and estimates. He

may grant them the full loan, a partial loan, or consider the loan risky and refuse it. He has the

choice. But Heath had recently received a memo only to accept proposals offering the highest

return and the lowest risk. It will be in the interest of Heath to grant the loan to TFI. Since there

is only one rival, the business has expanded very dramatically and the future promises even

more. TFI has been successful in the past and has always paid their debts and loans and TFI will

certainly be able to continue this trend if the growth and expectation targets succeed as expected

While TFI has been effective in the past, there is no telling what the future holds. Heath may

overestimate the forecasts of TFI severely and become too optimistic in their ability to pay back.

He must realize that because of poor returns, the two best rivals left the market.

Objective

I am Ted Heath; I got a proposal to extend the credit line for Talich Fabricating Inc. and make a

choice I consider acceptable on Monday as its Friday afternoon already.

Current Situation

Ratio Analysis

TFI's financial statements and ratios should certainly be examined when evaluating the extension

of the line of credit and whether they should be granted at all. In determining a solution to the
Business Decision Making 3

problem, the 1992-1995 ratios are useful. TFI 's debt to total equity helps to measure the

financial leverage of a corporation, which is estimated to be 2.5:1 for the year 1996. This is high,

but they should be able to make the requisite payments for the loan, based on their earnings from

cash flows. TFI's current ratio is 1.3:1. This means they have cash to pay off their loans, but it's

not very high, so they should be careful about how much they spend. The acid test ratio shows

some doubt as it is 0.97:1 but TFI should have no issue with the expanded line of credit in being

able to make its money back and pay off the loan and other liabilities. The high stability ratios of

the organization provide reason to believe that they will certainly be able to manage an

expansion and pay off a loan. The current and acid test ratios also indicate that they can manage

to pay off the loan in a timely manner. In determining the reliability of TFI in terms of

repayment, efficiency is critical. TFI does not have a problem with their performance, provided

the 1996 ratios. The age of receivables is between 60 days to 120 days. The anticipated growth

increase and the estimated financial statements suggest that the status of TFI and its ratios would

not suffer from any kind of borrowing, and that they will have no trouble paying off a loan, as

reported.

4 C's of Credit

Business Condition

While TFI has proven that whatever is thrown at them can be tackled. In the early 90's,

they survived the recession and now the industry is doing just fine. Due to its low overhead,

quality goods, company credibility, and networks already established by Mr. Talich through his

years in the industry, TFI was able to succeed during these years. Two major manufacturers also

declared their exit from the market in 1995, a year that promised to be challenging for TFI, but

TFI persisted. There should be more efficiency if TFI is able to secure the loan and expand their

plant. There's no argument why they can't pay off all of their loans. If TFI is able to secure the
Business Decision Making 4

loan and expand their plant -there should be more productivity. there is no reason they wouldn't

be able to pay off all of their loans

Character

Again, the history of TFI and recent growth have shown that they are a reputable and successful

business. They're making enough money to pay off their loans and debts and keep afloat. Mr.

Talich began TFI as small company but has evolved and expanded since then, integrating with

other businesses and has even more potential to develop with the loan. The company has gone

through good and bad and has always grown. It would be a huge aid during this crisis if the loan is

given, and they will be given the opportunity to prove this and will certainly prevail again

Capacity to Repay

The anticipated growth increase and the estimated financial statements suggest that the status of

TFI and its ratios would not suffer from any kind of leveraging, and that they will have no

trouble paying off a loan, as reported. They have a current ratio of 1.3:1and 0.97:1 is their acid

test ratio. Although these are comparable to the average of the sector, there are no noticeable red

flags that indicate that TFI will be unable to make loan payments. They do have additional loans,

but as there is only one competitor left, there is a major opportunity for growth. TFI has also

been prompt in its other past loan payments, demonstrating that they are liable and can handle it.

Collateral

- We can use Pioneer Co. Ltd as a collateral.

- They have TPI but it is already pledged as mortgage.

Alternatives

Option 1: loan to TFI could be denied

Pros:
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- Bank can saves money, less risk

- Doesn't have to worry about bad debts considering the memo

Cons:

- Could upset TFI and lose them as a customer

- Big risk as TFI has shown to be profitable and is expected to continue as such

Option 2 : loan to TFI could be granted in full

Pros:

- Gives TFI best opportunity to flourish and keeping the trust and support

- History shows that TFI should be able to pay off loan

- Opportunity for growth and profitability as there is only 1 competitor left

Cons:

- Even with loan, they won’t be able to survive as 2 of its competitors have already left the

market because of poor returns.

- It then would be almost impossible to generate the required revenue to stay afloat, let alone pay

off the loan

Option 3 : loan to TFI could be granted but only at installments or at specific periods

Pros:

- Gives TFI a better opportunity as withdrawal limit is there which helps to spend wisely , but

not the greatest.

- Reduces amount of total bad debt if loan were to fall through

Cons:

- Will most likely need full loan for expansion

- This approach may guarantee a failure from the start

Business Decision Making 6

Recommendation

The application to raise the line of credit of TFI should be taken seriously. They have an

outstanding history and track record, and as there is only one rival left in the market, the future

can only get better and look brighter from here. TFI has proven that it is responsible and capable

of paying out previous loans in a timely and complete manner. It was small when the business

began and has since expanded and flourished and survived all sorts of challenges, including the early

90's recession. They have strong ties and quality products and a trusted line of customers. If they are

able to expand the factory, there will be further turnover. The ratios of TFI indicate they have the

capacity to pay their debts and turn over receivables much better than the average of the industry.

Although there is the risk that TFI would not be able to succeed as expected and then almost

certainly not be able to repay the loan and lose a lot of business, not approving a loan would not even

give them the opportunity and could upset them enough to quit. A partial loan would therefore most

likely not provide them to meet with the expansion plan and is likely to fail from the beginning. It is

in the best interest of the Bank and Heath to offer the full loan to TFI. It is too much to miss out on

the reward that can be earned from the success and development of the company and paying off the

loan with ease.

Action Plan

Meet Mr. Talich on Monday to discuss the loan clauses and formalities.
Business Decision Making 7

Talich Fabricating Inc.

Projected Income Statement
For the Years Ending September 30
($000s)
1996
(increase by
1997
25%) & price
(increase by 20%)
increase of 5 %
  ($11991)
Sales 14989 17987
Cost of Goods Sold (78%) 11691 14029
Gross Profit 3298 3957
Operating Expenses  
Selling Expenses (constant) 525 630
Administrative Expenses 674 809
General Expenses 645 773
Management Bonus  
Depreciation 263 236
Total 2106 2448
   
Net Operating Profit 1191 1509
Interest 101 101
   
Net profit before tax 1090 1408
Income tax (42%) 458 591
Net Earnings 632 816
   
Initial Retained Earnings 1544 2176
Ending Retained Earnings 2176 2993

Toolin Depreciated
  g at 30%  
Year 1 295 88.5  
Year 2 206.5 61.95  
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