LARGE CORP LENDING TENETS

1. Introduction – relationship , request and risk

2. internal environment – management (academic qualification, work experience, ages

65+, shareholding structure, organogram, corporate governance conflicts) and
resources (either mentioned or check balance sheet **non-current or fixed asset)

3. external environment – PESTLE analysis Political, economic, social, technological,

legal, ecological ? Success or risk factors.

4. financial ratios =COLD

5. proposition = amount, margin, purpose
6. projection = assumptions, income statement, balance sheet, cash flow
7. repayment
8. insurance / security
9. monitoring / other conditions
10. summary/decision

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APPRAISAL FOR NUTAKOR HAULAGE LTD.
INTRODUCTION (Relationship, Request and Risk) 1 mark
1. Nutakor Haulage Ltd has operated with the bank for the past 10 years; hence we can see a
case of loyalty.
2. They have approached us with a request to finance the purchase of 20 trucks, as a
precondition for the execution of a contract.
3. This appears to be a risky proposition since Nutakor Haulage has not shown a good
commitment to managing their receivables. Hence the bank would want to proceed with
caution.
4. The bank will be willing the assist Nutakor Haulage Ltd once the appraisal goes in their
favor.

INTERNAL ENVIRONMENT (management and resources) 2 marks

1. Hope Nutakor hold the Chairman and CEO roles. This is bad for good corpoate
governance practices.
2. The company can boast of an office building, garages for trucks, a large compound, 60
drivers and 5 clecks. These are some resources the company has.
3. All the management members appear to have requisite work experience for their
respective positions.
4. Edison Bonful and Edward Nartey appear not to have requisite academic qualification for
their respect roles. However, they make up for this with their extensive work experience.
5. Mr Nutakor and Mrs Nutakor appear to have requisite academic qualification for their
roles.
 6. Management appears to be generally youthful. Hence, we expect them to translate that
into energy in the running of the company.

EXTERNAL ENVIRONMENT (PESTLE) 2 marks

1. Ghana has recently had a successful elections. The political climate in the country is
favorable. However there might be an appointment of a new minister that can take
decisions that would adversely impact Nutakor Haulage Ltd
2. Nutakor Haulage is buying the trucks in USD, hence exposing them to exchange rate risk
3. The bank would be concerned about the operating license of TBM since the project
revenue will be paid from their coffers and the government of the day is clamping down
on illegal mining.

4. Risk Factors bad roads, inadequate street lights, rehabilitation of railway lines inducing
competition, insecurity on roads,

5. Success factors for haulage business includes good roads, installation of trackers on
trucks, installing of street lights, and adequate security on roads.

FINANCIAL RATIOS (COLD) -5 Marks

A. CAPITAL RATIOS ( GEARING /DEBT TO EQUITY RATIO AND INCOME

SURPLUS)
1. Gearing Ratio (either see it as this or as Debt Equity Ratio)
If the ratio is going up it is likely because of increased borrowings (overdraft or
loans)
If the ratio is going down it is likely because of reduced borrowings (OD or loans)
Gearing ratio saw a consistent increasing trend over the 3 year period. This is because of the
increasing overdrafts.

2. Income Surplus
Check the profit retained or income surplus portion if it is going upwards. That
would mean that management members have believe in the existence of the
company
Income Surplus has consistently seen an upward trend over the 3 year period. This shows that
management and shareholders alike have interest and believe in the company and their
operations.

B . OPERATING EFFICIENCY & PROFITABILITY RATIOS

1. Sales Growth
Check the problem in the case study for which the customer has come to the bank.
Mostly it would be as a result of an issue stated CATEGORICALLY in the case
study.
Sales growth fell from to within the last two years from 60% down to 44%. This is largely
because the failure of some cocoa businesses and the ageing effects of the trucks.
Profitability Ratios (Gross Margin and Net Margin)
1. Gross Margin (has an inverse relationship with Cost of Sales)
If gross margin is going downward it usually means that cost of sale increased by
more in proportion.

If gross margin is going upward it usually means that cost of sale decreased by more
in proportion.
Gross Margin saw a downward trend over the 3 year period. This is because the cost of
sales or direct costs, increase by more, in proportion to the sales.
Net Margin saw a fluctuating trend. Initially increasing marginally and falling in the last
year. This is a representation of falling sales growth coupled with increasing direct and
indirect costs, and depreciation.

Liquidity Ratios
1. Receivable Days
Receivable saw an upward trend because of the inability to convert receivables from the cocoa
famer to cash. The situation even further worsens as a result of the collapse of some of the cocoa
business.

2. Payable Days
Payable days consistently saw a downward trend.
Could this be as a result of inability to negotiate better payment terms?
Or as a result of receiving discounts from paying early?

The receivable days is 146 days but the payable days is 46 days. This leaves a 100 days
funding gap.
This means that NHL receive long and pay short. Hence the bank would advise them to
watch the trend.

1. Current Ratio

2. Quick Ratio

Debt Service Ratio

Interest Cover

PROPOSITION

Amount

Justification
Purpose

O/D Requirement

Cost of Sales =
No. of days in a year = 365 days
Daily O/D requirement = /365
= GHS
Cash Cycle – Days it takes you to recoup your cash after invested into business – without cash
Inventory Days = days
Add: Receivable Days = days
days
Less: Payable Days = () days
= days
O/D request = Daily O/D Requirement * Cash Cycle
= GHS * days
= GHS

Assumption: A projected sales growth of %

Therefore projected O/D request = * GHS
= GHS
= GHS
(It is advisable to work the O/D in round figures) please don’t write this note in exam. It’s
for your own understanding during revision

MARGIN
1. A margin of % will be advised. With a base rate of % and a risk margin of %, the interest
rate will be (27+3 = 30%).
2. Processing fee of 1%
3. Facility fee of 0.5%

PROJECTION

ASSUMPTION USING THE PERCENTAGE OF SALES METHOD

1. 2016 Sales Growth will be
2. Gross Margin will be
3. Overhead to Sales will be
4. Inventory to Sales will be
5. Receivable to Sales will be
6.
7. Payable to Sales will be

Projected Income Statement for Year Ending 2016

 GHS GHS
Sales
Cost Of Sales

Gross Profit

Overheads
Depreciation

Operating Loss

Depreciation
Depreciation for 2015 = GHS
Therefore depreciation for 2016 = Dep for 2015 + Adjustment for 2016
Value of Asset
Depreciation =
No . of years useful life
GHS
= ❑
= GHS
Depreciation for 2016 = GHS + GHS
= GHS

Projected Balance sheet as at Dec 2016

Item 2016 (GHS) 2015 (GHS) Change (GHS) Trend

Inventory
Receivables
Payables

Current Asset increases (minus) Current Liability increases (add)

Current Asset decreases (add) Current Liability decreases (minus)

Projected Cash Flow Statement For 2016

GHS GHS
Operating Loss
Add Depreciation
Cash flow before working capital changes

Changes in Working
Increase in Inventory
Increase in Receivable
 Increase in Payable
Net Cash Flow

Comment
1. Cash available to service loan is GHS
2. The amount will not be sufficient to service the loan annual payable of