Assignment-4 Servicing, Research and Risk Assignment Answer

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Question 1

In this exercise we are analysing some financial statements in preparation for completing a submission to a financier. The scenario is provided below and an income statement and balance sheet are then provided for Wholesale Butchers Pty Ltd.

You will then have 3 tasks to complete – A, B and C below. TIP: You may wish to revisit the INT Services Practice Activity/Answers which you studied in Part 2 of the course learning guide:

Using the 2 financial statements provided, complete the manual Serviceability Analysis for Wholesale Butchers by inserting the figures into the table ^#
Using the 2 financial statements provided, calculate and insert the ratios in the table provided and comment as to the risk using Low/Medium/High ^#
List your comments on the outcome of your calculations and ratios as you would if presenting this in a submission to a ^#1

Scenario:

Mr Brett Olsen has owned his wholesale butcher company “Wholesale Butchers” for the past four years. He is the sole director and shareholder of the company. The past six months has seen an influx in orders and, to keep up with demand, he requires another refrigerated van in order to maintain delivery standards and turnaround times to his respective buyers.

Mr Olsen wants to purchase a second-hand van, 1 year old, from RV Dealers for

$55,000 and is considering a 5-year Chattel Mortgage (CM), with an interest rate of 6% and monthly repayments of $1,073. He has opted not to provide a deposit and is not seeking any balloon at the end of the loan term. As no deposit is to be applied, repayments will be monthly in advance.

Mr Olsen’s only business debts are an overdraft with CBA with a limit of $25,000 and current balance of $2,800 at 6% and his CM with 6% loan with Esanda for his existing refrigerated van, with monthly repayments of $1,058 pm and 2 years remaining.

His financials for the financial years ending 2022 and 2023 are provided here for your perusal and assessment (only $ are shown in financials, not cents, so there is some rounding in totals).

Q1.Task A – Serviceability Analysis

Using the financial statements provided – Wholesale Butchers Pty Ltd – manually complete the Serviceability Analysis below.

	30 June 20	30 June 20
Net Profit Before Tax (Note 1)
Plus Potential Add Backs:
Interest
Depreciation + Amortisation (Note 2)
Additional Superannuation (Note 3)
Extraordinary or non-recurring expenses (may be Plus or Minus) (Note 4)
Earnings Before Interest, Taxation, Depreciation, and Amortisation (EBITDA)
Less Taxation* calculated on Net Profit Before Tax figure above (Note 5)
Available for Debt Service (ie. EBITDA less tax above)
Interest Cover Ratio: Proposed Deductible Interest Costs:
Existing Overdraft ($25k limit, interest only incl buffer)
Existing CM Interest (Current + Long Term) [Hint: $34,952 @ 6% for 2022] (no buffer)
Plus Proposed facility ($55k @ 6%) (no buffer)
Total Proposed Interest Costs
Proposed Interest Coverage Ratio (Note 6) (EBITDA divided by Total Proposed Interest Cost)
Debt Service Cover Ratio:
Existing Overdraft from above, interest only incl buffer
Existing Loan Repayments ($1,058pm)
Proposed Loan Repayments ($1,073pm)
Total Commitment Proposed
DSCR (Note 7) (Amount available for Debt Service divided by Total Commitment Proposed)

Q1.Task B – Ratios

Using the financial statements provided – Wholesale Butchers Pty Ltd – you should fill in the table below by calculating the 9 different ratios for each of the 2022 and 2023 years. Then in the Risk Rating column please state whether the risk rating would be LOW, MODERATE or HIGH, for each of the ratios.

Q1.Task C – Comments

Complete some comments on the outcome from your completed Serviceability Analysis for Wholesale Butchers Pty Ltd, as you would if presenting this in a submission to the financier. Also include comments on your ratio outcomes. A tip is below.

Question 2.

Please research the Internet (eg. Google) on the subjects below and review the course material, then provide comprehensive answers to the following:

A TRUSTS

What is a Unit Trust?
What is a Discretionary Trust?
What is a Hybrid Trust?
What is a Discretionary Family Trust?
What is a Trustee?
Define the differences of each type of Trust, including the obligation/s of the Trustee
Provide an example of when each type of Trust would be

B COMPANY

What are the legal requirements of a company?
What are the personal obligations of directors by law (please summarise)?
Can anyone be a director of a company?
What is the minimum number of directors required?

Question 3:

From your research in the course and the Internet please provide answers to the following (from a Financial Accounting perspective):

What is a Balance sheet?
What is a Profit and Loss statement?
What is Depreciation?
What is Liquidity Ratio?
What is Current Ratio?
What is Debt to Equity Ratio?
What is a Cashflow Statement?
What is an Asset?
What is Liability?
How is a Net Profit determined?
How would you define Equity?
Under Australian taxation conditions, what are allowable expenses (provide 3 acceptable examples)?

Question 4:

From your research in the course and the Internet please provide a definition of the following 4 products and give examples:

Commercial Bank Bill
Invoice or Factoring Finance
Chattel Mortgage
Asset Finance product or Equipment Finance

Question 5:

In the Australian Standard ISO 31000:2018 there are 8 Principles of Risk Management.

Please list six (6) of them and B) briefly state what each one is about.

Question 6:

There are many ways that an Industry Analysis can be completed. We have provided a sample below of a simple process to categorise the overall risk of any business/industry that you may choose to analyse. Please review the entries below. To simplify the process some factors have been grouped together to alleviate any overlap of impact.

Task: In approximately 200 words, explain why you believe it is necessary to categorise risks

Question 7:

Referring to information in the Course Learning Guide Part 1 and using either your own, or a fictional finance broking company:

Identify and describe 2 specific risks that the broking company could face. For example, Fluctuating Income leading to inability to pay bills or a Compliance Breach.
Identify and describe what risk controls and risk mitigation strategies could be implemented to managing these 2

Your answer should cover the following points:

How would you categorise the risk (eg. Strategic / Financial / Other)?
Which stakeholders would potentially be involved or impacted?
What are the types and key principles of risk controls?
Which controls could be put in place to avoid or mitigate these specific risks?

Question 8:

Risk appetites should be aimed at improving business performance. If your broking firm had a strategic imperative of customer satisfaction and the risk appetite statement outlines a low tolerance for customer dissatisfaction, what risk management controls could be put in place?

Question 9:

You are a self-employed Credit Representative in your second year of operation working, under a Credit Licensee. Your PI insurance premium is due to be paid and it has been increased by over $500. Due to minimal income for the past few months, you decide to let it lapse as you are just coping thanks to trail commissions and you will aim to renew it again in six months’ time. After 3 months has passed your Licensee requests a copy of your renewal notice and you cannot supply it.

Would the Licensee be obliged to report you to ASIC?
If not, what would be the appropriate steps to take?
If so, what would be the reporting process?

Question 10:

A lender becomes aware of an individual mortgage broker falsifying information in their loan application documents after seeking to verify income statements used to support a client’s loan application. The broker’s client provides the lender with a copy of the income statement that they had provided to the mortgage broker and it contains a lower income figure than that provided by the mortgage broker to the lender.

Would this conduct be misleading and deceptive or possible fraud or both?
What action would the lender likely take in the first instance?
Would this be a reportable situation to ASIC and why?
Is the lender required to report within 7 days, 30 days, 60 days?

Question 11:

When identifying risks in a residential mortgage portfolio, name 5 areas that a bank may consider. For example, geographic concentrations (Refer to Part 1 Learning Guide on Risk).

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