For this assignment you will take on the role of Brad (or Brandy) Banker who works as a credit analysis for Big Bucks Lending. Your job is to evaluate Wacky Wines loan request. As a relatively new credit analyst, you will not get to make the final determination on the loan. Instead you will present your results and recommendation to the credit committee of Big Bucks Lending in a memo.
The members of the Committee are extremely well versed in finance. Hence, do not dedicate a great deal of space to explaining simple finance concepts. The members are looking for advanced analysis with evidence of critical thinking. The members always appreciate well written memos that make appropriate use of correct grammar and spelling. They are also very busy evaluating several loan proposals therefore memos written in a concise manner are better received. In order to complete the analysis of the loan request use the information below and the two sets of provided pro forma financial statements (expected and worst cases). Your memo should clearly state your recommendation regarding the loan with a supporting analysis. You must justify your decision using both qualitative and quantitative analyses. If you have just one page of analysis, I will not read it. You will earn a zero.
More specifically, please evaluate the loan request using the 5 C’s of Credit. You must explicitly address each of the C’s in your memo. Please use the ratios (liquidity, solvency, profitability, repayment capacity, efficiency, etc.) that we discussed in class to support your analysis. A competent analysis will include a discussion of the company’s past performance in terms of the financial ratios as well as also assess projected cash flow/ratios under various scenarios (expected and worst cases). In other words, you are expected to calculate relevant ratios for the historic data (years 2012, 2013, 2014 and 2015) as well as for projected years (2016, 2017 and 2018) for both the expected and worst case scenarios. Note: You are asked to calculate a certain number of each type of ratio, however, do not use two ratios that convey the same information (e.g., asset turnover and capital intensity; or debt-equity ratio and equity multiplier) as these count as just one ratio.
In addition, you are expected to conduct Du Pont analysis of ROE for all years (historic and projected) for all cases (expected and worst). Recall, that Du Pont analysis is useful for identifying the drivers of ROE and hence you must show all three parts of the analysis (profit margin, asset turnover, and the equity multiplier).
Banks often request that potential borrowers submit additional information to support their loan application. Discuss additional factors/information that you would like Dr. Frenz and Mr. Wolf to supply to assist the Committee in making a final determination about the project’s credit worthiness.
The course website will only allow you to submit one document in Microsoft word format. Thus, you will need to embed your excel tables and graphs in your word document before uploading your write-up to the course website.
Wacky Wines opened in 2009 as a boutique wine retailer specializing in hard to find premium wines from around the world. Wacky Wines is unlike other wine retailers in that it employs several level 3 sommeliers who are available to assist costumers whenever the store is open. In addition, Wacky Wines offers an innovative interactive wine of the month club. When members enroll, they complete a survey that indicates their wine preferences. Each month each member receives a custom selection of wines based on his/her preferences. The member then rates the selections and future wines received through the club are selected based on the member’s prior ratings. Because of this customization, Wacky Wines is able to charge a premium on its wine club memberships relative to other on-line clubs. In addition, Wacky Wines requires members to pick up their club selections at the store. On average, club members purchase six additional bottles of wine when they pick up their customized club selections.
As a result of these innovative marketing activities as well as traditional marketing techniques such as regular wine tastings events and discounts on cases, Wacky Wines has achieved accolades from Somm and Wine Spectator magazines. Hence, Wacky Wines has brand recognition and is ready to expand into two new locations while maintaining its flagship store located in Manhattan. Wacky Wines is requesting a $550,000 real estate loan to purchase retail space (along with furniture and fixtures, signage, etc.) to open new stores in Washington, DC and Boca Raton, FL. If the expansion is successful, Wacky Wines would like to open an additional store in LA. However, Wacky Wines views expansions into the California market as being more risky due to the presence of serval competitors and close proximity to Napa and Sonoma. Washington, DC and Boca Raton, FL were chosen as optimal expansion locations based on the per capita incomes of residents, per capital wine expenditures, and other market research.
Wacky Wines is owned and operated as a LLC by Dr. Kropp and her partner Mr. Wolf. Dr. Kropp and Mr. Wolf met in college where Kropp studied finance and Wolf studied food and beverage management with a minor in viticulture. After receiving her doctorate, Kropp taught finance at a prestigious university for several years before opening Kropp’s Hops Brewery. Unfortunately, Kropp’s Hops Brewery suffered from liquidity issues, product quality issues (Kropp had no idea how to make beer), and low profits due to stiff competition and went out of business three years after opening. Realizing the shortcomings of her prior business failure, Kropp contacted Wolf who had developed a stellar reputation as an industry leader in the wine world since entering the industry in 2001. Wolf’s contacts and reputation are responsible for Wacky Wines ability to procure and maintain such an eclectic inventory of hard to find wines.
Key assumptions used to construct the pro forma statement projections:
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