1. Refer back to the four case studies which were covered as part of Question 7, Week 4. For each of these case studies calculate the Safe Lending Margin and compare it against the proposed borrowing. Comment on the overall strength of the second way out, making particular mention of whether the first and second ways out are independent.
Case (a) No further information required.
Commercial building and land = $650 K
Treated as commercial property and extended at 50% then
SLM = $325 K
Against a borrowing of $500K
First and 2nd ways out are NOT independent
Case (b) No further information required.
Mandurah House valued at $560 K
Perth House valued at $550 K
House …show more content…
(i) Generally, the stock that is left in the business when it fails is out of date or damaged and consequently has a low realisable value
(ii) Not a strong 2nd hand market for stock
(iii) Easily removed / stolen / broken prior to the bank exercising its charge over it
(iv) Can easily be overstated in value on B/S by the proprietor / accountant
3. You are working in a Bank in the credit sanctioning area. Your job is to make decisions to approve or decline deals which have been put together by lending managers. The reason why they have to send the deals up to you for approval is because the proposed lending exceeds their delegation.
A submission comes up to you for approval. A major point that is made in the lending submission to justify the request for finance is that “...the Bank is well secured and cannot lose”. Explain whether you agree, in general terms, with this reasoning. Can you think of any special circumstances where you might accept this line of reasoning.
Look for a critique of the idea that “we are fully secured and cannot loose”
* The customers reaction
* The courts reaction
* The banks reaction
to security lending to show why pure security based lending is wrong.
What about special circumstances where you might…