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CREDIT APPRAISAL

CREDIT APPRAISAL. THE FORTUNE TELLER- CASE STUDY. Kharag & Co. Vs. Sahil Kapoor & Brothers- credit period case Current ratio: 2.49 1.52 Liquid Ratio: 0.57 1.17 Payment Period: 121days 89days Delhi Based Co.- Bankruptcy case- MDA Take over Case. MULTIPLE DISCRIMINANT ANALYSIS (MDA).

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CREDIT APPRAISAL

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  1. CREDIT APPRAISAL

  2. THE FORTUNE TELLER- CASE STUDY • Kharag & Co. Vs. Sahil Kapoor & Brothers- credit period case • Current ratio: 2.49 1.52 • Liquid Ratio: 0.57 1.17 • Payment Period: 121days 89days • Delhi Based Co.- Bankruptcy case- MDA • Take over Case

  3. MULTIPLE DISCRIMINANT ANALYSIS (MDA) = 0.012 x (Net Working Capital/ Total Assets%) + 0.014 (Retained Earning/ Total Assets) + 0.033(EBIT/ Total Assets%) + 0.006 (Market Value of Total Equity/ Book value of Debt%)+ 0.999 (Sales/Total Assets) = 2.675 * Only for large companies whose shares are traded in stock exchanges

  4. 0.012 x (15%) + 0.014 (31%) + 0.033(13%) + 0.006 (107%)+ 0.999 (0.9) = 2.5841 • 2.5841 < 2.675

  5. Credit Appraisal Refers to the consideration of a fresh proposal for loan or an enhancement proposal for additional loan.

  6. IMPORTANCE OF CREDIT APPRAISAL • To take Correct Credit Decision • To Decide the Quantum of Credit • To Ascertain the Ability to repay • To Find out liquidity, Profitability, Solvency of Concern • To judge the viability of project

  7. Documents Necessary for Credit Appraisal • Balance Sheet • Income statement • Cost of Project in the case of new concern of for a concern going in for expansion • Means of financing the Project • Cost of Production and profitability statements • Cash flow statements covering the period of loan • Projected Balances Sheet at the end of each financial year during the period of loan • Feasibility report of the Project

  8. PROCEDURE FOR CREDIT APPRAISAL • EXAMINATION OF BUSINESS PLAN/PROPOSAL • SCRUTINY OF CASH FLOW STATEMENT- • =Debt Service Coverage ratio= =net profit(after tax)+ Interest on longterm debt+ depreciation Installments of long term debt & deferred payments + Interest thereon • STUDY OF FUND-FLOW STATEMENT • APPLICATION OF RATIO TECHNIQUE • INTER-FIRM COMPARISON • ANALYSIS OF MANAGERIAL COMPETENCE

  9. LIQUIDITY ratios • Current Ratio Current Assets Current Liabilities Ideal ratio: 2:1 • Acid Test Ratio Liquid Assets Liquid Liabilities Ideal ratio: 1:1

  10. SOLVENCY RATIO • Debt Equity ratio Outsiders’ funds Shareholders’ funds Ideal Ratio: 1:1 • Equity Ratio Shareholders’ Funds Total Assets

  11. Profitability Ratio • Gross Profit Ratio Gross Profit * 100 Net Sales • Net Profit Ratio Net Profit After Tax*100 Net Sales

  12. Operating Profit Ratio Profit Before Dep. Interest &Tax Net sales • Return on Networth Net Profit After Tax Capital Employed • Net Profit to Fixed Assets Ratio PBIT Amount invested in fixed Assets

  13. Activity Ratio Stock Turnover Ratio= Cost of goods Sold Average Inventory • Debtors turnover Ratio Credit Sales Total Debtors

  14. Average Payment Period Creditors *365 Purchases • Fixed Assets Turnover Ratio Sales Fixed Assets

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