商业银行管理Bank Managment&Financial Services(7th)第17章课后题答案

CHAPTER 17

LENDING TO BUSINESS FIRMS AND PRICING BUSINESS LOANS

Goal of This Chapter: The purpose of this chapter is to explore how bankers can respond to a business customer seeking a loan and to reveal the factors they must consider in evaluating a business loan request. In addition, we explore the different methods used today to price business loans and to evaluate the strengths and weaknesses of these pricing methods for achieving a financial institution’s goals.

Key Topics in This Chapter

? Types of Business Loans: Short-Term and Long-Term ? Analyzing Business Loan Requests ? Collateral and Contingent Liabilities ? Sources and Uses of Business Funds ? Pricing Business Loans

? Customer Profitability Analysis

Chapter Outline I. Introduction II. Brief History of Business Lending III. Types of Business Loans

IV. Short-Term Loans to Business Firms A. Self-Liquidating Inventory Loans

B. Working-Capital Loans C. Interim Construction Financing D. Security-Dealer Financing E. Retailer and Equipment Financing F. Asset-Based Financing G. Syndicated Loans V. Long-Term Loans to Business Firms

A. Term Business Loans B. Revolving Credit Financing C. Long-Term Project Loans D. Loans to Support Acquisitions of Other Business Firms VI. Analyzing Business Loan Applications

A. Most Common Sources of Loan Repayment B. Analysis of a Business Borrower's Financial Statements VII Financial Ratio Analysis of a Customer's Financial Statements

A. The Business Customer's Control Over Expenses B. Operating Efficiency: Measure of a Business Firm's Performance Effectiveness

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C. D. E. F. G. VIII IX.

X.

XI.

Marketability of the Customer's Product or Service Coverage Ratios Measuring the Adequacy of Earnings Liquidity Indicators for Business Customers Profitability Indicators

The Financial Leverage Factor as a Barometer of a Business Firm's Capital Structure

Comparing a Business Customer’s performance to the Performance of Its Industry A. Contingent Liabilities B. Environmental Liabilities

Preparing Statements of Cash Flows from Business Financial Statements A. Cash Flow Statements B. Pro Forma Statements of Cash Flow and Balance Sheets C. The Loan Officer's Responsibility to the Lending Institution and the Customer Pricing Business Loans A. The Cost-Plus Loan pricing Method B. The Price Leadership Model C. Below-Prime Market Pricing D. Customer Profitability Analysis (CPA)

1. An Example of Annualized Customer profitability Analysis 2. Earnings Credits for Customer Deposits 3. The Future of Customer Profitability Analysis

Summary of the Chapter

Concept Checks

17-1. What special problems does business lending present to the management of a business lending institution?

While business loans are usually considered among the safest types of lending (their default rate, for example, is usually well below default rates on most other types of loans), these loans average much larger in dollar volume than other loans and, therefore, can subject an institution to excessive risk of loss and, if a substantial number of loans fail, can lead to failure. Moreover, business loans are usually much more complex financial deals than most other kinds of loans, requiring larger numbers of personnel with special skills and knowledge. These additional resources required increase the magnitude of potential losses unless the business loan portfolio is managed with great care and skill.

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17-2. What are the essential differences among working capital loans, open credit lines, asset-based loans, term loans, revolving credit lines, interim financing, project loans, and acquisition loans?

a. Working Capital Loans -- Loans to fund the current assets of a business, such as accounts receivable, inventories, or to replenish cash.

b. Open Credit Lines -- A credit agreement allowing a business to borrow up to a specified maximum amount of credit at any time until the point in time when the credit line expires.

c. Asset-based Loans -- Credit whose amount and timing is based directly upon the value, condition, and maturity of certain assets held by a business firm (such as accounts receivable or inventory) with those assets usually being pledged as collateral behind the loan.

d. Term Loans -- Business loans that have an original maturity of more than one year and normally are used to fund the purchase of new plant and equipment or to provide for a permanent increase in working capital.

e. Revolving Credit Lines -- Lines of credit that promise the business borrower access to any amount of borrowed funds up to a specified maximum amount; moreover, the customer may borrow, repay, and borrow again any number of times until the credit line reaches its maturity date.

f. Interim Financing -- Bank funding to start construction or to complete construction of a business project in the form of a short-term loan; once the project is completed, long-term funding will normally pay off and replace the interim financing.

g. Project Loans -- Credit to support the start up of a new business project, such as the construction of an offshore drilling platform or the installation of a new warehouse or assembly line; often such loans are secured by the property or equipment that are part of the new project.

h. Acquisition Loans--Loans to finance mergers and acquisitions of businesses. Among the most noteworthy of these acquisition credits are leveraged buyouts of firms by small groups of investors.

17-3. What aspects of a business firm's financial statements do loan officers and credit analysts examine carefully?

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Loan officers and credit analysts examine the following aspects of a business firm's financial statements:

a. Control Over Expenses? Key ratios here include cost of goods sold/net sales; selling, administrative and other expenses/net sales; wages and salaries/net sales; and interest expenses on borrowed funds/net sales.

b. Activity or Efficiency? Important ratios here are net sales/total assets, and fixed assets, accounts and notes receivable, and cost-of-goods sold divided by average inventory levels.

c. Marketability of a Product, Service, or Skill? Key ratio measures in this area are the gross profit margin, or net sales less cost of goods sold to net sales, and the net profit margin, or net income after taxes to net sales.

d. Coverage? Important measures here include interest coverage (such as before-tax income and interest payments divided by total interest payments), coverage of interest and principal payments (such as earnings before interest and taxes divided by annual interest payments plus principal payments adjusted for the tax effect), and the coverage of all fixed payments (such as before-tax income plus interest payments plus lease payments divided by interest payments plus lease payments).

e. Profitability Indicators? Key barometers in this area can include such ratios as before-tax net income divided by total assets, net worth, or sales, and after-tax net income divided by total assets, net worth, or total sales.

f. Liquidity Indicators? Important ratio measures here usually include the current ratio (current assets divided by current liabilities), and the acid-test liquidity ratio (current assets less inventories divided by current liabilities).

g. Leverage indicators? Ratios indicating trends in this dimension of business performance usually include the leverage ratio (total liabilities/total assets or net worth), the capitalization ratio (of long-term debt divided by total long-term

liabilities and net worth), and the debt-to-sales ratio (of total liabilities divided by net sales).

One problem with employing ratio measures of business performance is that they only reflect symptoms of a possible problem but usually don't tell us the nature of the problem or its causes. Management must look much more deeply into the reasons behind any apparent trend in a ratio. Moreover, any time the value of a ratio changes, that change could be due to a shift in the numerator of the ratio, in the denominator, or both.

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17-4. What aspect of a business firm's operations is reflected in its ratio of cost of goods sold to net sales? In its ratio of net sales to total assets? In its GPM ratio? Its ratio of income before interest and to taxes to total interest payments? Its acid-test ratio? In its ratio of before-tax net income to net worth? Its ratio of total liabilities to net sales? What are the principal limitations of these ratios?

The ratio of cost of goods sold to net sales is a widely used indicator of a business firm's expense controls and operating efficiency. The ratio of net sales to total assets reflects activity or efficiency, while the gross profit margin (GPM) measure reflects the marketability of a business's products or services. A firm's ratio of income before interest expense and taxes indicates how effectively a business is covering its interest expenses through the generation of before-tax income. The

acid-test ratio provides a rough measure of a firm's liquidity position, while the ratio of before-tax income to net worth represents a measure of profitability. Finally, the ratio of liabilities to sales is an indicator of management's use of financial leverage. These ratios are affected by changes in the numerator or the denominator or both; a financial or credit analyst would want to know the source of any change in a ratio's value. These ratios only measure problem symptoms; you must dig deeper to find the cause.

17-5. What are contingent liabilities and why might they be important in deciding whether to approve or disapprove a business loan request?

Contingent liabilities include such pending or possible future obligations as lawsuits against a business firm, and warranties or guarantees the firm has given to others regarding the quality, safety, or performance of its product or service. Another example is a credit guaranty in which the firm may have pledged its assets or credit to back up the borrowings of another business, such as a subsidiary. Environmental damage caused by a business borrower also has recently become of great concern as a contingent liability for many banks because a bank foreclosing on business property for nonpayment of a loan could become liable for cleanup costs, especially if the bank becomes significantly involved with a customer's business or treats foreclosed property as an investment rather than a repossessed asset that is quickly liquidated to recover the unpaid balance on a loan. Loan officers must be aware of all contingent liabilities because any or all of them could become due and payable claims against the business borrower, weakening the firm's ability to repay its loan to the bank.

17-6. What is cash flow analysis and what can it tell us about a business borrower’s financial condition and prospects?

A cash flow statement shows the changes in a business firm's assets and liabilities as well as its flow of net profit and noncash expenses (such as depreciation) over a specific time period. It shows where the firm raised its operating capital during the time period under examination and how it spent or used those funds in acquiring assets or paying down liabilities. From the

perspective of a loan officer the cash flow statement indicates whether the firm is relying heavily upon borrowed funds and sales of assets. These are two less desirable funding sources from the point of view of lending money to a business firm. In contrast, loan officers usually prefer to focus upon cash flow - whether the firm is generating sufficient cash flow (net income plus noncash expenses) to repay most of its debt.

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