Unit 1: May 2011, Question #3 (a), (B) & (C)

Question #3(a)
In the table below shows the computed ratios of both Panorama Company and the Kaiso Fiesta Company.

Question #3(b) and #3(c)

To: National Commercial Bank
From: Loan Analyst
Subject: Report re: Performance of Panorama and Kaiso Fiesta.
 
To Whom it My Concern,
 
             Both the Panorama Company and the Kaiso Fiesta Company seem fairly liquid based on the acid test ratio as both showed results higher than the benchmark of 1:1.  However, Kaiso Fiesta had slighter better results than Panorama, as they have $0.64 cents more of assets available to cover their liabilities.

           The same held true for the accounts receivable collection period and the inventory turnover ratio. While both companies appear to be liquid Kaiso Fiesta has a collection period that is approximately 6 days shorter than that of the Panorama Company. Kaiso Fiesta’s inventory turnover ratio was also more favorable as it was 1.19 times faster than that of Panorama.

            In terms of solvency both companies are heavily financed through borrowing with approximately 50% of their assets being financed by credit. The level of gearing in both companies is over 90% which means that the risk to creditors is extremely high. Again it should be noted in both respects, that Kaiso Fiesta had slightly better results when compared to Panorama. The only area in which Panorama out performed Kaiso Fiesta was in the times interest earned ratio results and since their rate was only 0.13 times higher, this seems negligible.

            As a result it would be less risky for the National Commercial Bank if the unsecured loan is granted to the Kaiso Fiesta Company, as the performance of this company was more favorable in a number of areas, when compared to the Panorama Company.
 
________________________
Loan Analyst

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