im10a - Chapter 16 Evaluating Commercial Loan Requests...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 16 Evaluating Commercial Loan Requests Chapter Objectives 1. Introduce a procedure for analyzing the quantifiable aspects of commercial loan requests. 2. Introduce the fundamental credit issues when analyzing a loan request. 3. Demonstrate the importance and use of spreading financial statements. 4. Demonstrate how to obtain estimates of operating cash flow from a firm's financial data. 5. Demonstrate the role and importance of pro forma projections of a borrower's financial condition when evaluating repayment prospects. 6. Provide an application of commercial credit analysis using a simplified loan request. Key Concepts 1. The basic issue in credit analysis is to determine whether a borrower has the commitment and ability to repay a loan in line with the terms of the agreement- 2. Banks should obtain satisfactory answers to at least the following basic questions before extending credit. a. What is the character of the borrower and quality of information provided? b. What are the loan proceeds going to be used for? c. How much does the customer need to borrow? d. What is the primary source of repayment, and when will the loan be repaid? e. What secondary source of repayment or collateral is available? 3. After assessing character and other subjective elements of a loan request, lenders often perform a three-stage analytical evaluation of the borrower's financial condition. Stage 1: Review of historical financial data to identify trends and peer comparisons. Stage 2: Analyze historical cash flow from operations used to service debt and make other discretionary expenditures. Stage 3: Project balance sheet and income statement data into the future to obtain cash flow estimates to compare with debt service requirements. This information allows a lender to estimate whether cash flow will be sufficient to cover debt service requirements as a loan is structured. 4. A statement of changes reconciled to cash converts a firm's balance sheet and income statement data into a cash-based income statement. The statement differentiates between sources of cash and uses of cash. This provides an estimate of a firm's cash flow from operations. A strong signal of potential problems is the situation where cash flow from operations is not large enough to cover current maturities of long-term debt (mandated principal payments on long-term debt) plus cash dividends paid.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
5. Cash flow analysis is critical to understanding a borrower’s ability to repay a loan. Earnings figures can be especially misleading given how firms historically managed earnings and manipulated the data. Still, cash flow figures can be manipulated as well. Students need to review financial statements carefully, including footnotes to get a sense of management’s approach to financial reporting. The requirement that CEOs sign-off on the accuracy of financial statements, introduced in August 2002, should help improve the quality of data. 6.
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 04/14/2010 for the course BANK 2312 taught by Professor William during the Spring '09 term at 東京大学.

Page1 / 7

im10a - Chapter 16 Evaluating Commercial Loan Requests...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online