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. Your banks experience is that the recovery rate in the event of default, the recovery rate is 50 per cent.
The condensed financial accounts are as follows:
Cash
Accounts receivables Inventory
Total noncurrent assets Total assets
Total current liabilities Total noncurrent liabilities Total liabilities Shareholders equity Retained earnings
Total Equity
$M 10.1 10 40.2 659.9 726.2 197.3 243.7 441.0 546.7 84.0 648.7
Net profit is $15,608,000 on sales of $742,613,000 and Cost of goods sold equal $642,700,000. The number of shares is 1,000,000 and the share price is equal to $200. The firm is requesting a loan of $150 million to assist further acquisitions.
Ratio industry averages:
- Current ratio = 3
- Inventory turnover ratio = 6
- Net profit to sales ratio = 0.15 - Debt to Equity ratio = 0.4
a. Carry out a credit analysis on an expert basis.
b. Carry out a credit analysis on a market-premium basis
i. Calculate the probability of repayment and probability of default (Assuming a loan maturing in 1 year):
ii. Carry out a credit analysis on a market-premium basis
iii. 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.
c. Using Altman Z score, what is the indication of credit risk?
d. Using Altman Z score, what is the indication of credit risk?
