In this chapter, it talks about credit risk analysis and interpretation, the company it focuses on is Home Depot and to how to have asset: borrow, gift, or earn. The way Home Depot manages their company is by borrowing money from their operating and nonoperating creditors. On their 2011 balance sheet it shows that some of the money that was borrowed came from their operating liabilities, was is $4,717 million and the other money borrowed came from nonoperating liabilities which are long-term debt. Several companies borrow from banks to, but Home Depot doesn’t, because their debt is publicly traded. Because Home Depot borrows its money from leasing companies and sellers which offer financing, the creditors should evaluate Home Depot’s credit …show more content…
These lenders perform a risk assessment in order to determine the interest rates and how long the loan will be for the applying company. These parties that supply credit are trade credit, revolving credit lines, lines of credit, letters of credit, term loans, mortgages. “Trade credit from suppliers is a routine and most often non-interest bearing, revolving credit lines are loans that companies draw on as needed, lines of credit are guarantees that funds will be available when needed, letter of credit interposes a bank between the two parties to a transaction, term loans are what we commonly understand by bank loan, and mortgages are loans secured by long-term assets such as land and building. Another parties that companies borrow from is the nonbank private financing, leasing financing, and publicly traded debt when they have been denied by banks. The bad thing from borrowing from nonbank private lenders is that they can fund higher risks …show more content…
Credit limits is usually given to the company or any person from the creditor with the ability to receive the most sum that they might need whenever needed. Once given the loan, the company or person must take on the responsibility of making sure they meet the payment due date, being making payments on time shows the creditor that the company or person are being responsible and would likely increase their credit. Collateral is something the company or the customer own that has value. Most banks or creditors will ask the company or the person who is asking for the loan something of collateral in order to release the loan. By doing this the bank or creditor secures themselves just in case the company or person are not able to be paid back the loan. Some items used for collateral are as follows, property, land, and equipment. In the repayment terms section it discusses the Then we have repayment terms, when the loan is approved, both the creditor and the company or the persons must come into an agreements on the loan repayment term. If the company or the persons decide to go long-term, their interest rate will be higher than a short term repayment plan. Either way the company or persons chooses between long-term or short-term the bank will make money off the loan, but going
These ratios can be used to determine the most desirable company to grant a loan to between Wendy’s and Bob Evans. Wendy’s has a debt to assets ratio of 34.93% while Bob Evans is 43.68%. When it comes to debt to asset ratios, the company with the lower percentage has the lowest risk. Therefore, Wendy’s is more desirable than Bob Evans. In the area of debt to equity ratios, Wendy’s comes in at 84.31% while Bob Evans comes in at 118.71%. Like debt to assets, a low debt to equity ratio indicates less risk in a company. Again, Wendy’s is the less risky company. Finally, Wendy’s has a times interest earned ratio of 4.86 while Bob Evans owns a 3.78. Unlike the previous two ratios, times interest earned ratio is measured on a scale of 1 to 5. The closer the ratio is to 5, the less risky a company is. From the view of a banker, any ratio over 2.5 is an acceptable risk. Both companies are an acceptable risk, however, Wendy’s is once again more desirable. Based on these findings, Wendy’s is the better choice for banks to loan money to because of the lower level of
Net working capital represents organization’s operating liquidity. In order to compute the net working capital, total current assets are divided from total current liabilities. When there is sufficient excess of current assets over current liabilities, an organization might be considered sufficiently liquid. Another ratio that helps in assessing the operating liquidity of as company is a current ratio. The ratio is calculated by dividing the total current assets over total current liabilities. When the current ratio is high, the organization has enough of current assets to pay for the liabilities. Yet, another mean of calculating the organization’s debt-paying ability is the debt ratio. To calculate the ratio, total liabilities are divided by total assets. The computation gives information on what proportion of organization’s assets is financed by a debt, and what is the entity’s ability to pay for current and long term liabilities. Lower debt ratio is better, because the low liabilities require low debt payments. To be able to lend money, an organization’s current ratio has to fall above a certain level, also the debt ratio cannot rise above a certain threshold. Otherwise, the entity will not be able to lend money or will have to pay high penalties. The following steps can be undertaken by a company to keep the debt ratio within normal
The Corporation has sustained losses and negative cash flows from operations since its inception. The Corporation is exposed to liquidity risk as it continues to have net cash outflows to support its operations.
The company I have chosen to research for my final paper is Home Depot. Home Depot’s principal assets, debt and stock information as of January 30, 2001 are as follows: (amounts in millions, except stock)
only make up 16.7% of the capital structure. Thus, the credit risk for any credit commitment was not too high
Thesis: Businesses deem financing necessary when they are just beginning, expanding, or recovering; Debt financing and equity financing have many advantages and disadvantages but also change the entire accounting method that is to be considered while running the business. Debt financing has both advantages and disadvantages. Debt financing is a business’ way to start up, expand, or recover by borrowing money from a person or company. The money borrowed has to be paid back along with the interest that was accrued during the length of time the loan was carried out. This option is great for company’s that do not want investors.
Debt capital refers to money borrowed. Examples of this include bonds and short-term commercial paper. Bonds are more widely used because it provides a company with years to come up with the principal while paying interest only. Bonds are rated (i.e. AAA, AA, BB, etc.), these ratings correspond to the risk of default. The higher the rating, the lower likelihood of default and therefore a lower interest rate accepted by the lender. Short-term commercial paper is typically...
In reviewing the company’s balance sheet, the current assets and liabilities were reviewed and liquidity ratios were calculated. The capital structure and the fixed and intangible asset accounting of the company were also reviewed. Off-balance sheet items such as leases and contingent liabilities were reported and noted. All of these aspects of the balance sheet were reviewed in order to do a proper analysis of the company’s balance sheet.
...el such as: purpose of the loan, maturity of the security pledged, the history of the client with the company and the unique characteristics that the bank’s customers might have.
②Creditors. ② creditors. Creditors of safety integrity and degree of credibility depends on the operating conditions. Interest income is directly related to the profitability of enterprises. Woolworths company's stakeholders include creditors.
Access to capital and credit at various stages in the business life cycle is identified as the major hurdle by the entrepreneurs. For many small firms and most start-ups, the personal funds of the business owners and entrepreneur and those of relatives and acquaintances constitute as the major source of capital. For many small businesses, especially during the early years of their operation, credit is simply not available. For many others, the limited available credit is not through bank loans. Due to this many of them rely on multiple credit card balances and home equity loans as major sources of credit for start-up firm. Because banks are bound by laws and regulations to prudent lending standards that require them a risk management assessment for each loan made. These regulations were made more vigor during the late 1980'' and early 1990 . Banks always found that lending to manufacturing firm with hard asset such as property, equipment, and inventory has always been easier than lending to today's expanding service sector firms. Because the service sector firms own few hard asses, therefor lending judgment have to be based in terms of character, markets, and cashflow, which make it difficult to the bank to meet the regulations for the approval of the loan. Additional, the banking industry, as well as the entire financial sector of the
Smaller companies are much more likely to obtain an attentive audience with a commercial loan officer after the start-up phase has been completed. In determining whether to extend debt financing--essentially, make a loan--bankers look first at general credit rating, collateral and your ability to repay. Bankers also closely examine the nature of your business, your management team, competition, industry trends and the way you plan to use the proceeds. A well-drafted loan proposal and business plan will go a long way in demonstrating your company's creditworthiness to the prospective lender.
Line of credit: They are a specified amount of money accessible for a specified time period, usually for a year. They can be drawn as needed during seasonal shortages of cash and this is the problem which is face by Dinner Bell hotel. They are of two types; committed and uncommitted. Committed is guaranteed when he company meet all of the conditions and Sarah does not approve of the conditions imposed by the bank thus she could go for uncommitted line of credit. However it has its flaws which are that in uncommitted the bank does not guarantee that it will give loan when the company needs it thus Dinner Bell could not rely upon it. Another flaw is that
...ower to wait a year or before to start to make the repayment. Somehow, some loans can be repaid at the end of the period instead of instalments. Besides, security, for example some assets and the properties of the business, is needed for the bank loan. There are three advantages in the bank loan. First, the timing and the amount of the repayment is known when getting the bank loan, so it is quite easy to budget. Second, there is also a repayment holiday, so the repayment schedule is quite flexibility. Third, the interest rates can be discussed and it can be lower than the overdraft. However, it is because the business loan is a long-term commitment, which is needed to service and this will be to high interest rate. Besides, security such as the house of the business owner is needed and this will not be good to the owner if the business is failed. (Cox, Fardon, 2009)
Financial institutions (banks and other lending companies) use them to decide whether to grant a company with fresh working capital or extend debt securities (such as a long-term bank loan or debentures) to finance expansion and other significant expenditures.