Running Head: CANADA WIDE SAVINGS, LOAN AND TRUST COMPANY

Canada Wide Savings, Loan and Trust Company

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 Table of Contents

Executive Summary.........................................................................................................................2

Problem Diagnosis...........................................................................................................................3

Case Analysis...................................................................................................................................4

Risks Associated with Loan Application.....................................................................................4

Positive Factors Affecting the Decision.......................................................................................7

Loan Analysis (Return on Loan Investment)...............................................................................9

Internal Rate of Return for Canada Wide Savings on Loan......................................................10

Analysis based on Beacon Score...............................................................................................11

Recommendation for Granting the Loan (Terms and Conditions)................................................11

Appendices....................................................................................................................................13

Exhibit 1: Loan Terms...............................................................................................................13

Exhibit 2: Loan Analysis............................................................................................................14

Exhibit 3: Loan IRRs.................................................................................................................14

References......................................................................................................................................16
 Canada Wide Savings, Loan and Trust

Company

Executive Summary

Adam Williams, who is the chief executive officer of Canada Wide Savings, a Canadian

financial institution is looking forward to decide about the investment in a $ 3 million loan

proposal for Carling, Geoffrion and Seymour which is an Ottawa based firm. A $ $2 got $ $1

loan has been stated with interest only and no margin call condition. The analysis that we have

performed shows that there are many risks and positive factors associated with this loan

application such as the credit risks attached to the borrower, currency risk of the Canadian

dollars and the market risk of the planned investment program and the positive factors are the

quoted rates, insurance against default, excellent prior experience with the firm and healthy

competition. Moreover, the returns on investment and IRR for this loan with 3-year maturity

period and quarterly interest terms is high. This is a good and feasible investment for Canada

Wide, therefore, they should grant this loan request under the above terms and conditions.
 Problem Diagnosis

The chief executive officer of Canada Wide Savings, Adam Williams, needs to make a

final decision about whether to grant the $ $3 million loan to Chris Seymour, the owners of

Carling, Geoffrion and Seymour, which is an Ottawa based firm. The firm is a mutual fund

investor and this financial institution makes loans for every $ $2 for $ $1 that has been invested

by the firms in the mutual funds to the qualified investors (Shaw, 2012).

The main problem or the central issue in this case is that whether the risks associated with the

loan application justify the loan itself and should Canada Wide Savings make this investment. If

the loan is granted to the firm, then those funds would be invested into three different mutual

funds in different proportion as follows:

Global equities, which will include North America, Asia and Europe (34%).

Standard and Poor’s 500 – US Stocks (33%).

Canadian Bond Fund (33%).

We would be highlighting all the positive and negative factors associated with this loan

application. We would also be performing the analysis of the loan application based on the

details of the loan, the prevailing interest rates of the loan, different payment terms and finally,

the return to Canada Wide Savings for investing in this loan.

 Case Analysis

We first begin our analysis by identifying the risks associated with the loan application.

These are discussed as follows:

Risks Associated with Loan Application

There are a number of risks that are associated with the loan application and these are

discussed as follows:

Lowest Interest Rates

The debt markets in Canada were offering some of the lowest interest rates on loan in

2012. For instance, the yield on 3-5 years’ loan in 2012 is 1.2% as compared to 3.89% in 2007.

This shows a decline in the interest rates and a lower interest rate of T-bills means that the debt

has become cheaper and this might impact negatively on the investments of Canada Wide

Savings and this is a risk for the loan application as Canada Wide Savings’ owners might not

approve this high risk loan.

Underdeveloped Market

The market for the investment loan in Canada is less developed as a public market and

there were only a few mutual fund companies that arranged the loans to finance the mutual fund

holdings. Carling, Geoffrion and Seymour firm would also be investing in different mutual
funds, therefore, the rates and the terms will have to be decided as they were not publicly

advertised and this is a risk posed by this loan application and a wrong decision can affect the

returns of Canada Wide Savings in the long term.

Currency Risk of Loan

As stated earlier, the loan funds would be used by Carling, Geoffrion and Seymour to

invest in three different mutual funds that are as follows:

Global equities which will include North America, Asia and Europe (34%).

Standard and Poor’s 500 – US Stocks (33%).

Canadian Bond Fund (33%).

We can clearly see that managers of Carling, Geoffrion and Seymour are looking forward to

enter the global mutual fund markets for investment and this means that the firms would be

exposed to currency risk due to the exchange rate movements between Canada and the foreign

markets. An adverse change in the exchange rates could impact the position of Carling,

Geoffrion and Seymour and they might default on the interest payments of the loan and since this

is an only interest only, loan therefore, the risks are even higher.

Risky Terms of Loan

 Some of the terms or conditions of the loan application are quite risky, for instance, there

would be no repayment of the principle by the managers of Carling, Geoffrion and Seymour and

there was also the condition of not imposing a margin call requirement. Furthermore, the interest

rate is based on floating rate in the market plus 0.25%. These All these conditions increased the

risks associated with the loan application.

Beacon Score

A beacon score is a critical variable for all the lenders to assess the credit situation of the

borrower. This score indicated the riskiness of the borrower associated with the loans. This

would be discussed later but for now, this is also a major risk factor for this loan as the beacon

score for Carling, Geoffrion and Seymour is below or approximately average.

Annual rates of return

The annual rates of return for the various indices that capture the investment strategy of

Mitryk loan proposal are shown in exhibit 5 in the case. This shows that the performance of the

equity markets in 2011 has not been good. The returns seem to be higher for a three-year period

but negative for 1 and 5-year investment periods. These poor returns can have a negative impact

on the interest payments by Carling, Geoffrion and Seymour as they would be using the

dividends from the two equity funds and interest on the bond fund to cover the interest on the

loan.
Mortgage Payable

Carling, Geoffrion and Seymour’s liabilities in exhibit 5 show that it has outstanding

mortgage payable of C$ $750,000 with a 25-year amortization rate with the a major Canadian

bank. This can have an impact on the interest payments for Canada Wide if the cash flows

decline for Carling, Geoffrion and Seymour in the coming years. The firm might not have funds

to pay interest on both of these loans.

Positive Factors Affecting the Decision

There are also a number of positive factors associated with the loan application and these

are discussed below:

High Competition

The competition within the Canadian loan market is strong and Canada Wide competed

with a number of different mutual fund companies. The market for the mortgage loans in Canada

is deep and there are significance resources in terms of the funds and many talented players in

the market. High competition means if a company gets an opportunity for loan investment then it

is a positive factor for the company and a high competition also means that there are high

chances for the approval of the loan application.

Quoted Rates
 The rates of the mortgages are readily available with different terms of maturity and

floating and fixed rates that are also mentioned. Canada Wide has also posted its terms of

mortgages and mortgage rates on its websites. This would mean that there is transparency in the

mortgage loan market.

Insurance against Default

Insurance is provided by the Canada Mortgage and Housing Corporation, which is a

federal government owned organization and also from the private sector insurers. This means

that if Carling, Geoffrion and Seymour defaults on the loan, then Canada Wide would be insured

for its loss. For this particular loan application, the investments that Mitryk had obtained with the

loan funds together with his own current holdings would be used as the a collateral for the $ $3

million loan, if granted.

Previous Experience with Carling, Geoffrion and Seymour

The loan proposal request in exhibit 4 shows that the contact person for the loan is Chris

Seymour and the previous experience with Carling, Geoffrion and Seymour is excellent.

Secondly, the assets of Carling, Geoffrion and Seymour are C$ $2.54 million and its liabilities

are less at C$ $1.065 million. These are the positive factors associated with this loan proposal.
Loan Analysis (Return on Loan Investment)

We have performed the analysis of the loan proposal by generating the mortgage loan

amortization schedule and then computing the returns of the loan for Canada Wide under

different set of terms for the loan. These are analyzed as follows:

Loan Analysis 1 (3 years’ maturity, Monthly Interest Payments)

For the first analysis, we have taken the loan amount as given in the case, that which is $

$3 million and the annual interest rate is taken to be 3.25% (3%+0.25%). The loan period for this

analysis is taken as 3 years and we assume that interest would be paid monthly in each year for

the three-year periods. We have not assumed the time for maturity as 1 year of 5 years because

the annual returns are negative for these years as specified in exhibit 5 of the case.

The scheduled payment would be equal to the interest payment, only which is only C$

$97,500 as shown in exhibit 1 in the appendices. Based on the loan amortization schedule the

total interest earned by Canada Wide under these terms would be C$ $136668.14. Based on the

loan investment of $ $3,000,000, the return on investment for the three-year period would be

4.56% as shown in exhibit 2 in the appendices.

Loan Analysis 2 (3 years’ maturity, Quarterly Interest Payments)

 For the second analysis, we have taken the loan amount as given in the case, that which is

$ $3 million and the annual interest rate is taken to be 3.25% (3%+0.25%). The loan period for

this analysis is taken as 3 years and we assume that interest would be paid quarterly in each year

for the three-year period. We have not assumed the time for maturity as 1 year of 5 years because

the annual returns are negative for these years as specified in exhibit 5 of the case.

The scheduled payment would be equal to the interest payment only, which is C$

$97,500 as shown in exhibit 1 in the appendices. Based on the loan amortization schedule the

total interest earned by Canada Wide under these terms would be C$ $466288.05, 6288.05.

Based on the loan investment of $ $3,000,000, the return on investment for the three-year period

would be 15.54% as shown in exhibit 2 in the appendices.

Internal Rate of Return for Canada Wide Savings on Loan

After this, we have also computed the internal rates of return for both the loans that are

based on different terms (Bruce, 2003). The detailed computations could be seen in the excel

spreadsheet and part computations for the IRR are shown in exhibit 3 in the appendices. Based

on an investment of $ $3 million, 3 years’ maturity and monthly interest receipts, the IRR for

Canada Wide would be 3.33%. On the other hand, based on an investment of $ $3 million, 3

years’ maturity and quarterly interest receipts, the IRR for Canada Wide would be 7.72%. These

are also shown in exhibit 3 in the appendices.

Analysis based on Beacon Score

The beacon score as previously stated is an important variable that shows the credit

situation of the borrower and also shows the riskiness associated with the borrower. The higher is

this score, the less is the riskiness (Equifax, 2015). This score ranges between 300 to 900 where

700 is the average. 750 is the absolute maximum and 620 is the absolute minimum beacon score.

Canada Wide has its own assessment of the Beacon scores, which is as follows:

<650 = Fair to Poor

650-700 = Average

701-740 = Good

741-790 = Very Good

791+ = Excellent

If we analyze the Beacon Score for Carling, Geoffrion and Seymour then its beacon score is

685 as stated in exhibit 4 loan proposal of the firm. This indicates that the creditworthiness of

Carling, Geoffrion and Seymour firm is average and its riskiness is also average. It is almost

close to a good score.

Recommendation for Granting the Loan (Terms and Conditions)

Based on the detailed analysis of the loan proposed, there are significant risks associated

with the loan application such as the credit risks attached to the borrower, currency risk of the

Canadian dollars and the market risk of the planned investment program. However, there are also
many positive factors associated with the loan application, which make this investment attractive

such as quoted rates, insurance against default, excellent prior experience with the firm and

healthy competition within the Canadian loan market.

Furthermore, the returns are also higher for Canada Wide for this loan investment and

given the current interest rates, it would yield higher IRRs for the financial institution. If we

finalize the terms of the loan, then Canada Wide should grant this loan for a maturity period of 3

years, with interest only option but interest should be paid quarterly (cumulative). Limit on

margin calls should be agreed and the loan should be granted only at the rate of Prime of 3% plus

25 basis points.
 Appendices
Exhibit 1: Loan Terms

Monthly Interest loan

Enter Values Loan Summary

$ $
$3,000,000. 97,500.0
Loan Amount 00 Scheduled Payment 0
Scheduled Number of
Annual Interest Rate 3.25 % Payments 36
Actual Number of
Loan Period in Years 3 Payments 60
Number of Payments $
Per Year 12 Total Early Payments -
$136,66
Start Date of Loan 1/1/2012 Total Interest 8.14
Optional Extra $
Payments -

Lender
Name: Canada Wide Savings

Quarterly Interest loan

Enter Values Loan Summary

$ $
$3,000,000. 97,500.0
Loan Amount 00 Scheduled Payment 0
Scheduled Number of
Annual Interest Rate 3.25 % Payments 12
Actual Number of
Loan Period in Years 3 Payments 60
Number of Payments $
Per Year 4 Total Early Payments -
$466,28
Start Date of Loan 1/1/2012 Total Interest 8.05
 Optional Extra $
Payments -

Lender
Name: Canada Wide Savings

Exhibit 2: Loan Analysis

Loan Analysis (Monthly Return)

Scheduled Payment 97500
Scheduled Number of Payments 36
Actual Number of Payments 60
Total Interest 136668.1405
Investment by Canada Wide Savings 3000000
Return on Investment over 3 years 4.56%

Loan Analysis (Quarterly Return)

Scheduled Payment 97500
Scheduled Number of Payments 97500
Actual Number of Payments 97500
Total Interest $466,288.05
Investment by Canada Wide Savings 3000000
Return on Investment over 3 years 15.54%

Exhibit 3: Loan IRRs

Loan (Monthly Interest) Loan (Quarterly Interest)

IR 3.33 IR 7.72
Investment -3000000 R % Investment -3000000 R %
Interest $ Interest $
Receipts 1 8,125.00 Receipts 1 24,375.00
$ $
2 16,007.94 2 48,155.86
$ $
3 23,648.17 3 71,337.75
$ $
4 31,045.03 4 93,915.81
5 $ 5 $
38,197.86 $115,885.1
 2
$
$ $137,240.7
6 45,106.00 6 5
$
$ $157,977.7
7 51,768.79 7 1
$
$ $178,090.9
8 58,185.56 8 7
$
$ $197,575.4
9 64,355.65 9 5
$
1 $ 1 $216,426.0
0 70,278.38 0 7
$
1 $ 1 $234,637.6
1 75,953.09 1 5
$
1 $ 1 $252,205.0
2 81,379.11 2 2
$
1 $ 1 $269,122.9
3 86,555.76 3 4
$
1 $ 1 $285,386.1
4 91,482.37 4 2
 References

Bruce. (2003). Investment Performance Measurement. New York: Wiley.

Equifax. (2015). Company Profile. equifax.co.uk.

Shaw, D. (2012). Canada Wide Savings, Loan and Trust Company. Ivey.