Question $1(20)$

Read the case study below and answer the questions that follow:

ABC Wholesalers $($Pty$)$ Ltd

Statement of financial position as at $28$ February $2024$

Assets

Non$-$current assets

Plant and equipment R $2850000$

Vehicles R $1730000$

R $4580000$

Current assets

Inventory R $2700000$

Accounts receivable R $2350000$

Cash R $1050000$

R $6100000$

TOTAL ASSETS R $10680000$

Equity

Share capital R $10000$

$$ Milpark Education Business Credit BCRE$01-6$ Assignment September $2024$

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Retained income R $3250000$

TOTAL EQUITY R $3260000$

Liabilities

Non$-$current liabilities

Shareholders loans R $2100000$

Instalment sales transactions R $2220000$

R $4320000$

Current liabilities

Creditors R $3100000$

TOTAL LIABILITIES R $7420000$

TOTAL EQUITY AND LIABILITIES R $10680000$

ABC Wholesalers $($Pty$)$ Ltd

Statement of comprehensive income for the year ended $28$ February $2024$

Sales revenue R $48500000$

Cost of sales R $41250000$

Gross profit R $7250000$

Operating expenses R $6225000$

Operating profit R $1025000$

Interest paid R $272000$

Net profit before tax R $753000$

Tax R $210840$

Net profit after tax R $542160$

Other information relating to the statement of comprehensive income:

$$ The operating expenses include depreciation of R$920000.$

$$ The operating expenses include rental paid of R$645000.$

The capital repayments on the instalment sales transactions amounted to

R$435310$ during the previous year.

No interest is payable on the shareholders loans.

The customer, ABC Wholesalers $($Pty$)$ Ltd$,$ requires loan finance of $85\%$ of the

cost price of R$6000000$ to acquire a warehouse to be used as the premises

from which they run their wholesale business. Presently, they are renting

premises, but the customer believes that it is doing well enough to afford

repaying their own property.

$$ Milpark Education Business Credit BCRE$01-6$ Assignment September $2024$

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According to your bank$$s risk model, should the loan facility be approved, you

will be able to offer the client the finance at a rate of prime $($currently $11\mathrm{.}75\%)$

$+0\mathrm{.}75\%$; i$.$e$.12\mathrm{.}50\%.$

The annual repayments on the loan will be R$895824.$

Required:

$1\mathrm{.}1$ Recommend a credit product that the client should use to finance the

acquisition of the property. $(1)$

$1\mathrm{.}2$ Indicate the product that you will issue if the transferring attorney calls

for formal proof that the balance of the purchase price will be paid when

transfer of the property takes place. $(1)$

$1\mathrm{.}3$ Calculate the following financial ratios to confirm that the funding request

falls within the target market criteria used by your bank for the finance

of commercial properties:

Note: show all your calculations. Round off your answers to $2$ decimal

places.

$1\mathrm{.}3\mathrm{.}1$ The interest cover ratio after the completion of the funding of

the property $(4)$

$1\mathrm{.}3\mathrm{.}2$ The debt service cover ratio after the completion of the funding

of the property

Remember: the company will no longer be paying the rental

payments so you can add that back to the cash flow available to

service the debt. $(6)$

$1\mathrm{.}3\mathrm{.}3$ The leverage ratio $($IBD$/$EBITDA$)$ after the completion of the

funding of the property.

Remember: once again, you should add back rental paid to the

EBITDA to determine the future cash flow of the business. $(3)$

$1\mathrm{.}4$ Assume the bank$$s target market criteria states that the Interest Cover

ratio $($ICR$)$ should be $2\mathrm{.}5$ times and the Debt Service Cover ratio $($DSCR$)$

$1\mathrm{.}5$ times.

$$ Milpark Education Business Credit BCRE$01-6$ Assignment September $2024$

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$1\mathrm{.}4\mathrm{.}1$ Compare the ratios that you calculated in $1\mathrm{.}3\mathrm{.}1$ and $1\mathrm{.}3\mathrm{.}2$ above

and indicate whether they are acceptable or not. $(2)$

$1\mathrm{.}4\mathrm{.}2$ Based on the calculation of the ICR and the DSCR alone,

recommend whether to grant the loan facility or not. Justify your

answer. $(2)$

$1\mathrm{.}6$ Describe the meaning of the leverage ratio that you calculated in $1\mathrm{.}3\mathrm{.}1$

above.