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AGB 310 Lec 3 Credit Analysis

AGB 310 Lec 3 Credit Analysis - 2-1 Lecture 3 Introduction...

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2-1 Lecture 3 Introduction to Credit Analysis 2-2 Topics in Chapter Ratio analysis Du Pont system Effects of improving ratios Limitations of ratio analysis Qualitative factors
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2-3 Granddaddy of All Ratios: The Du Pont System ( )( )( ) = ROE Profit margin TA turnover Equity multiplier NI Sales Sales TA TA CE x x = ROE. 2-4 Five C’s of Credit Capital Collateral Capacity Conditions Character
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2-5 C1 – Capital Solvency – borrower’s ability to repay debt Leverage – amount of debt already on books Risk – what are overall risk conditions affecting debt? 2-6 C2 – Collateral Hard assets that bank can seize if borrower fails to repay debt Bank will sell the assets to raise cash to satisfy debt Land, equipment, buildings, other fixed assets, cash, vehicles, inventory, livestock, etc.
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2-7 C3 – Capacity Measure of ability to service new and existing debt out of cash flows Takes into account current debt levels and debt service costs Adds to that new debt and resulting cash flows Defined as: Change in Net Assets + Depreciation Expense + Interest Expense 2-8 C4 – Conditions Purpose of Loan – refinancing, acquisition, land, inventory, operations, etc. Loan Structure – terms of loan must match nature of assets Loan Pricing – interest rate, points, fees, fixed rate vs. variable rate Loan Controls – financial reports required by lender for purpose of monitoring performance
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2-9 C5 – Character Is borrower known to lender? Is borrower reliable with good credit? Is borrower a good manager? Are assets and operations well maintained and cared for? Does borrower make money? 2-10 Characteristics of a Good Manager Follows a strategic business plan Has good quantitative skills Expert in the business and industry Maintains accurate and up-to-date financial records B/S, I/S, SCF, whole farm budget Understands forecasts and variances and reasons for variance
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