MONASH

BUSINESS
SCHOOL

Week 3 Corporate and Small

Business Lending

Copycat
 Structure of your response to case studies in tutorials

In your tutorials you will be asked to reply to case studies. You are required to employ the
following structure
Facts of the case:
A couple of lines introducing the customer

Key Ratios and Variables: one to two lines each. Up or down and trends.
Sales; Gross Margin; Net Margin; Gearing Ratio; Interest Cover.
Concerns
Record only your concerns about the customer. This will help you to structure your reply

Decision
Commit yourself and say yes you are willing to lend subject to certain criteria. State what
these criteria are.

Finally go over CAMPARI and check whether you adequately covered all the salient points.
If not include such info in the relevant section.

MONASH
2 BUSINESS
SCHOOL
Reminder: CAMPARI
 Character
 Ability
 Margin
 Purpose
 Amount
 Repayment
 Insurance (Security)

 CAMPARI is a useful safety net when you start off,

but we want you to extend beyond this.

MONASH
3 BUSINESS
SCHOOL
Facts of the case:

 Copycat Inc is in the video duplication business. The

company wishes to borrow 500k to buy more efficient
machinery. The banks current exposure is an overdraft of
125k, Copycat has an existing strong relationship with a
finance company.

MONASH
4 BUSINESS
SCHOOL
 Key Numbers
 Sales
– Increased by 33.6% in Year C to 2,526k, projected to increase by
63.3% to 4,125k
 Gross Margin
– Decreased from 23.5% in Year B to 17.8% in Year C, forecast to be
25.8% in Year D.
 Net Margin
– Decreased from 17.7% in Year B to 7.3% in Year C, forecast to
increase slightly to 7.5% in Year D.
 Gearing
– 257 in Year B dropping slightly to 229 in Year C, forecast to decline
sharply to 113 in Year D.
 Interest Cover
– Dropped from 7.6 in Year B to 3.8 in Year C, forecast to decline further
to 2.0 in Year D.
MONASH
5 BUSINESS
SCHOOL
 Some Positives

 The industry is in a high growth phase, but as a

result it is very competitive.
 Management bought Copycat through some tough
times from Year A to Year B.
 A newly appointed experienced accountant.

MONASH
6 BUSINESS
SCHOOL
 Concerns.

 The balance sheet details indicate that the finance company

has a medium term loan with CC, with security over the
current machines plus directors guarantees and mortgages
over the directors houses.
– The bank currently has lower security than the finance company (a
debenture and unsupported directors guarantees).
 You have concerns about CC’s operation of its overdraft
(exceeding its agreed balance) and provision of management
information.
 Ambitious plans for rapid growth in a competitive market.
 The industry is experiencing rapid technological changes.
– CC will need to continually update its technology (capital expenditures
will exceed depreciation).

MONASH
7 BUSINESS
SCHOOL
 Concerns: The financials
 The key to this project being a success will be increases in
gross profit margin.
– The firm also needs to control operating costs to ensure net margin
does not fall.
– Thus the project will need ongoing monitoring for any shortfalls in
profits.
 We would like to see some more details about the profit and
loss.
 Liquidity ratios look acceptable due to the currently solid cash
flow of the business.
 The written case answer indicates the machinery will be
adequate security, but the industry is experiencing rapid
technological change.
 Debtors are a key asset for our debenture cover.
MONASH
8 BUSINESS
SCHOOL
 Decision
 This proposal is marginal and will ongoing and careful
monitoring for it to be a success.
 Monitoring the firms profit and loss and operating
costs will be important.
 Provide the loan under the following conditions:
 A chattel mortgage over the new machines.
 A Business plan for the future of the business.
 Ongoing provision of a detailed Profit and Loss
statement.
 We will need financials of the directors and directors
insurance. (Directors guarantees and registered mortgages over the directors property
have already been provided to the finance company).
MONASH
9 BUSINESS
SCHOOL
Decision: conditions (2)

 Ongoing monitoring of overdraft usage and

values of the new machines.
 Examine the current debtors, get a debtors age
schedule, monitor the debtors schedule.

MONASH
10 BUSINESS
SCHOOL