BFRM.docx - Evaluation of Costa Plc As a loan officer the...

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Evaluation of Costa Plc. As a loan officer, the current financial status of Costa Plc., as seen in the company’s balance sheet provides data about the company’s financial status. The information provided helps equate: Sales – C.O.G.S – Operating Costs = E.B.I.T, E.B.I.T – Interest = E.B.T (In millions), 500 – 420 – 70 = 10, 10 – 2 = 8. $8 million, represents the earnings before tax and in the company’s balance sheet and we also find that the company’s long term debt is $30million, with a total equity of $40million. This shows that the company has a leverage ratio of 0.75, representing a low debt to equity ratio. Having established this, the bank will offer the loan request to Costa Plc., and assuming we create a new balance sheet for the bank, as follows: The bank borrows $7million from the interbank and $3million equity producing $10million loan for Costa Plc. With the new balance sheet the equity of $3million, the break even for the bank where no loss or profit is made needs to be established. To find out what the breakeven rate is: 3 = (99% x 10+ (1-20%)) + 1% x (9.6+ (20% x 0.4)) - (7 x (1+0.04376%) 2 x (1-20%) 1+8% 1+8% + (97% x 10 + (1-20%)) + 3% x (9.3+ (20% x 0.7)) - (7 x (1+0.04376%) 2 x (1-20%) (1+8%) 2 (1+8%) 2 + (94% x 10 + (1-20%) +10) + 6% x (9.0+ (20% x 1.0)) - (7 x (1+0.04376%) 2 x (1-20%) (1+8%) 3 (1+8%) 3 X = 0.1650, 16.50% (In the calculations, it is assumed that the final year (3 rd year), the bank will be paying off what it borrowed from the interbank.)
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With the breakeven rate, the Net Value Loss will be calculated as: NLV yr1 = 99% x [10 + (16.50%x10) x (1-20%)] + 1% x [9.6+ (20%x0.4)] - [(7x1.4376%x (1-20%)) + 7] 1+8% =16.42 NLV yr2 = 97% x [10 + (16.50%x10) x (1-20%)] + 3% x [9.3+ (20%x0.7)] - [(7x1.4376%x (1-20%)) + 7] 1+8% =16.39 NLV yr3 = 94% x [10 + (16.50%x10) x (1-20%)] + 6% x [9.0+ (20%x1.0)] - [(7x1.4376%x (1-20%)) + 7] 1+8% =16.32 The 3 rd year has the lowest in equity because of the assumption that the principle will be paid back to the interbank in full i.e. $7million which means that the cost of funding for the final year was higher than the previous two years. After establishing the NLV, the bank can establish if the loan will provide a profit or a loss after the three years. This is calculated as: (16.42+16.39+16.32)/3=16.38 The results indicate that the loan will lead to a profit of 16.82 – 7 = 9.32.
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