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Wolf Metal Production Company

Autor:   •  February 12, 2018  •  3,038 Words (13 Pages)  •  353 Views

Page 1 of 13

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The debt ratio is below 1, which means the assets are still able to cover the liabilities. However, the debt to equity ratio is not ideal, since the ratios are more than 1 and its performance is dropping, which means the firm is having higher leverage.

As observed, the debt ratios are increasing, which means either their liabilities are increasing or their assets are falling. However, for WMP’s case, it is their liabilities which are growing more rapidly than their total assets as seen from the year-on-year comparison.

The weakness observed in WMP’s financial data is its excessive holding of inventory as well as incurring low gross profit margin, affecting its profitability. Although the firm is generating profit, the management of the operating expenditures (i.e. cost of goods) should be reviewed and improved. High inventory levels bring about heavier holding costs, hence affecting profitability.

1.4 Should she prepare a loan package for the bank officer’s loan committee to recommend a loan? If so, what terms and conditions should be put on it?

As discussed earlier, we have seen WMP’s financial ratios analysis and looked into the areas of strengths, weaknesses and trends. Despite being profitable, the business is facing liquidity problems as it bears too much of short-term debts. WMP had taken a loan of $250,000 at the start of 2014 and found itself in need of cash again after a quarter.

At current level, WMP’s uses of leverages are quite high as evident by the Debt and Debt-to-Equity ratios. It would be recommended that conditions be set for WMP to either reduce its leverage level or increase the size of its balance sheet by injecting more capital. Conditions should be made in the loan agreement that WMP settle part of other liabilities before loan is given and also no other debt to be taken up during the loan period.

In additional, the use of his personal assets as collateral will reduce the moral hazard problem. In Mr Wolff’s case, his personal assets can be used since he is the sole proprietor of WMP. In addition, the loan agreement could specify for the Mr Wolff to assign the proceeds of his ordinary life insurance to the bank. This will together reduce moral hazard and serve as a return for the bank in the case of default.

The loan agreement could be given at 5-years maturity with floating interest rate – prime plus premium, as the bank is lending to WMP for the first time, despite the fact that most of the reviews and assessments are favourable. WMP will need to lower their operating expenses which include having lower, but sufficient inventory, as well as settle part of its short-term obligations.

PART 2

2.1 The importance of corporate longevity in lending institutions’ perspective

Lending institutions, such as banks, considering loans usually favour companies with corporate longevity (says Ron Grace). Apparently, it is much easier and less risky for lenders to analyze base on longer track record such as credit history, built reputation, industry experience, etc.

Besides that, most business loans are secured against an asset. For a corporation, the asset may be office equipment, machinery, or the real estate a business owns and operates in. Thus, collateral is generally required. Most companies that operate for a long time have large fixed asset base, it is therefore an advantage for both loan lenders and borrowers.

While many companies are best characterized by "here today and gone tomorrow”, achieving a degree of longevity doesn’t happen by accident. According to Ian David, long-lasting organizations are those willing to adapt to meet market demand overtime such as changes over multiple products and innovation cycles. Hence, companies with good industry experience often enhance lenders’ confidence. In lenders’ view, there must be positive reasons to account for companies with impressive life span, and companies with staying power tend to be market-success stories (says James Collins).

Therefore, companies with corporate longevity first give lending institutions a good impression and secured instinct. It plays an important part in lenders’ decisions. After all, survival is the ultimate performance measure. Especially with institutions which wish to play safe to prioritize security over their assets. In the Wolff production company it show the same characteristic of “here today and gone tomorrow” because the firm pervious borrow from East Hills State Bank (EHSB), and run in shortage of cash again in such a short time frame. This shows that the Wolff Metal Products Company (WMP) poor cash flow management. This give lending institutions which is Cheyenne National Bank of New Mexico (CNB) a poor impression that the company would success in the long run as endless loaning is needed. On the other hand, the WMP does have the success element which is the ability to generate profit. Mr.Wolff’’s skill and ability to understand the market shows one of the important characteristic in leadership. In the CNB perspective Mr. Wolff should be giving the bank more secured measure example would be collateral on his fully paid up life insurance policy.

2.2 The side effects of companies with corporate longevity

However, there is an argument that since lending institutions’ most concern is whether companies are able to repay their debt, corporate longevity doesn’t give that a promise. An instance example is IBM Corp, has sustained over many decades, and almost went bankrupt in the early 1990s.

A good question raised is if companies with corporate longevity are doing well, why can’t they finance their needs or investments by themselves? Why do they need to borrow since they have been sustaining well? In fact, lending institutions need to put more effort to investigate on what the loan is being used for. We notice from the following aspect that the WMP unable to refinance themselves. WMP suppliers took more than usual note repayable, is would cause a negative cash effects on WMP eventually they had to write off unpaid as bad debt, which decrease their profits margin. Which also mean WMP have to wait to collect cash to pay off its own bills. A good suggesting to archive stable cash inflow though long term is to giving reasonable discount to prepay suppliers and late payment fees or interest on late payment suppliers. This would help the WMP to archive stable profit in the long term, which shows the lender the company could pay off its loan. Monitoring and screening

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