A financial services provider that provides computer software systems approaches you. The company

started off as a small private company and has grown strongly over the past fifteen years and listed on

the Australian Stock Exchange. The company has businesses in many offshore locations, all of which are

well-developed capital markets. In some parts of the world, the company has near-monopoly markets.

As part of its strategy, the company uses acquisitions rather than growth to continue to expand the

business. While the business is software based, it relies on continued activity in the financial markets.

The company has had the same management over the past fifteen years and the senior management

team are shareholders in the company.

The company is rated BBB and its bonds are trading at 3.3 per cent above the comparable government

bond rate (5%). These rates are for a 1-year period.Page 2 of 5

The condensed financial accounts are as follows:

$M

Total current assets

66.3

Total fixed assets

1,005.4

Total assets

1,071.7

Total current liabilities

197.3

Total noncurrent liabilities

243.7

Total liabilities

441.0

Shareholders equity

546.7

Retained earnings

84.0

Total Equity

630.7

Total liabilities and equity

1,071.7

Earnings before interest and tax are $151,608,000 on sales of $742,613,000. The firm is requesting a

loan of $150 million to assist further acquisitions.

Ratio industry averages:

1.

Current ratio = 3

2.

Inventory turnover ratio = 6

3.

Net profit to sales ratio = 0.15

4.

Debt to Equity ratio = 0.4

Questions:

1.

Carry out a credit analysis on an expert basis.

Character

Capital

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Cash (capacity) (the 4 above cited ratios)

Collateral

Conditions

2.

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):

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b. Calculate the risk premium if you assume that the recovery rate in the event of default is 20

per cent:

..

..

c. Suppose that the company requested a loan for two years. Government bond rate for 2

years is 6% and company bond rate for 2 years is 9.5%. Calculate the cumulative probability

of default. (use the geometric method to calculate the forward interest rates)

..

d. If the lending institution fixes the maximum acceptable cumulative probability of default as

2%, is it risky to grant the loan to the company?

..

3.

Using Altman Z score, what is the indication of credit risk?