ocks in the locality. JB has been operating in Caulville
for the last twenty years and is relatively well known locally. A few times you have
approached John, the owner of JB, at local business events with a view to switching his
financing to your bank. Typically, John has indicated that he was busy with local housing
boom and would consider the idea later.
Due to recently increasing interest rates, your bank currently charges an interest rate of 12%
per annum, compounded monthly for speculative construction loans. This increased interest
rate has seen the housing sector demand slowing recently.
John has just spoken to you on the phone. He has two larger than usual apartment
developments partially completed. John told you that he has been offered a block of land
with pre-approval for a complex of fifteen (15) apartments. The owner of the land is also a
local builder who is being pressured by his bank to reduce his leverage and so has decided to
sell this project.
An email arrives with the financial details of JB and some details for the development of the
new site, as shown below. You are asked to indicate the terms and conditions on which you
would be willing to finance this development project. You are told that council approvals and
all required permits are all completed and that JB expects the project to be completed in about
eighteen (18 months).
Required:
Critically evaluate the above request and recommend whether you would lend for this project
and the relevant conditions of the loan. Your answer must indicate the relevant facts of the
case; the appropriate concerns with this loan proposal and provide the relevant
recommendations.
John Builders
Balance Sheets $ $ $
As at end of Year 2021 2022 2023
Current Assets
Cash 186,000 155,000 109,974
Debtors 98,500 125,000 168,000
Developments and work in
progress 1,287,000 1,407,000 1,802,530
Total Current Assets
1,571,500 1,687,000 2,080,504
Current Liabilities 2021 2022 2023
Creditors 568,000 720,500 897,500
Bank Overdraft 359,000 499,700 789,000
Director's Loans 125,000 85,000 156,000
Current Tax 58,000 56,000 1,200
Total Current Liabilities 1,110,000 1,361,200 1,843,700
Net Current Assets 461,500 325,800 236,804
Fixed Assets 2021 2022 2023
Fixed Assets and Leasehold 587,000 625,000 750,000
587,000 625,000 750,000
Long Term Liabilities
Mortgage Loan 450,000 450,000 475,000
450,000 450,000 475,000
Net Assets 598,500 500,800 511,804
Financed by:
Issued Share Capital 230,000 250,000 250,000
Accumulated Reserves 120,000 316,700 250,800
Profit and Loss Account 196,700 - 65,900 11,004
Total Capital 598,500 500,800 511,804
Profit & Loss Account
Summary 2021 2022 2023
Sales 1,868,000 1,670,000 1,517,000
Cost of Goods Sold (including
labor) 1,539,900 1,585,930 1,329,346
Sponsorships 55,000 55,000 55,000
Interest 76,400 94,970 121,650
Gross Profit 273,100 29,070 132,654
Net Profit 196,700 - 65,900 11,004
Ratios and other information 2021 2022 2023
Current Ratio 1 to 1.42 1.24 1.13
Acid Test 1 to 0.26 0.21 0.15
Credit Given (days) 19.25 27.32 40.42
Credit Taken (days) 134.63 165.82 246.43
Stock Turnover (days) 251.47 307.52 433.70
Gross margin 14.6% 1.7% 8.7%
Net margin 10.5% -3.9% 0.7%
Interest Cover (times) 3.57 0.31 1.09
Net Gearing % per $1 of equity 230% 334% 422%
Net working assets to sales % 25% 20% 16%
Retained Profits to sales 10.5% -3.9% 0.7%
Note the breakdown between materials and labour has not been provided.
Development Proposal $
Purchase of Land 3,950,000.00
Building Costs 2,100,000.00
Drains and Roads 126,000.00
Council Services 135,000.00
Planning and Design fees 55,000.00
Legal Costs 35,000.00
Contingency Fund 363,000.00
Total Expected Cost 6,764,000.00
Sale of fifteen apartments at $550,000 each 8,250,000.00
Expected Profits 1,486,000.00
Profit Margin % (Before interest) 21.97