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FINS5530 Group HBS Case Assignment

Semester 2, 2015
Dr Lixiong Guo
Readings:
1. Note on Bank Loans.
2. US Bank of Washington case.
Assignment:
Please prepare a Credit Proposal Memo similar to the one shown in Exhibit 1 of Note on Bank
Loans. However, you are only required to include the following components in your report:

Purpose of the credit extension


Keep this part short
Financial statement analysis, cash-flow projections, and debt service capacity.
You can start with an analysis of the borrowers historical financial conditions and
performance. This can include an analysis of the financial, operating, and leverage
ratios and trends in revenues and expenses over time, looking for positive and
negative changes in the companys profitability and industry positions. Potential
ratios to examine include: sales growth, interest coverage, return on sales, return
on equity, current ratio, quick ratio, leverage ratio, etc.
The key is to analyse the borrowers potential to generate sufficient free cash flow
to make principal and interest payments when due. Exhibit A-2 contains Redhooks
projected financial statements. You can conduct a ratio analysis based on the
projected numbers just as you did with the historical numbers. Most importantly,
you need to conduct a sensitivity analysis on the projected profits and losses and
the ability of the borrower to repay the loan under different scenarios.
Assessment of major risks, including impact of forecasted economic trends and the strength
of competitors.
You can conduct a qualitative assessment of the quality of the borrowers
management team, the alignment of the managements interests with the banks
interests and expectations. Ownership and compensation systems will indicate
managements stake in the business.
You can assess the key risks associated with the loan. Some risks are associated with
the borrower and his or her business; other risks are associated with potential
changes in environment, cyclical activity, regulations, or other unanticipated
developments.
Determining the banks willingness and ability to lend
In addition to the credit evaluation above, the loan officer must determine whether
approving a loan application is in the banks best interests. In this part, you need to
conduct an analysis on whether making this loan fits with the banks existing loan
portfolio and is in line with the banks strategy.
Based on you analysis above, make a decision on whether the loan should be granted or not
and clear state your reasons. The decision could be a conditional one, for example, you can
specify that when certain conditions are met, the loan will be granted, otherwise, the loan
will not be granted.

In the last section of the case Financing the Deal, the case mentions several things that Mal
Harding would do as well as some of his concerns. That should be taken as a hint on what you should
do and what concerns you should have.

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Report Format:
The report should have a cover page that lists the names and student IDs of each member in
the group. Your report should be typed using 11 point font. The page limit for the main text part of
the report is 10 pages. Tables and figures should be attached at the end of the report and they do
not count towards the page limit. You can save your report as either a Microsoft Words file or a PDF
file. Besides the report, you should also prepare an excel file that contains your sensitivity analysis
and other calculations. Both files should be named using the following format using the name and
student ID of the member who is responsible for submitting the report:
LastName_FirstName_StudentID
Submission and Due Date:
Each group should upload two files through Moodle: a PDF or Word file of your report and an
Excel file showing your calculations. The Excel file must contain your sensitivity analysis. The
deadline for submission is 9 am on Monday, October 12, 2015. Late report will NOT be accepted.
Peer Evaluation:
In a group project, all members share the same mark so each member is expected to contribute
his or her fair share. One important thing you learn from working on a group project is how to
coordinate with other people and become a good team player. However, one problem often met by
students in group work is that some members may refuse to share the work evenly with others and
try to free ride on the work of others. To prevent this from happening, we have a peer evaluation
step at the end of the project. Since most groups will not have this problem, I would not require
every group to do a peer evaluation. Instead, I encourage groups that have such free-riding problem
to send emails to me after submitting the project to report such person(s). If enough group
members agree with the allegation, the free-rider will not get the group mark and be penalized to
certain degree depending on the contents of the allegation.

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