GIMPA

CREDIT ANALYSIS AND CORPORATE FAILURE PREDICTION MODEL CASE STUDIES FOR
FINANCIAL INSTITUTIONS

Exercise 1 [Case study]

Kofi Nyame & Sons Limited started business as a small wholesaler about 12 years ago, distributing
beer and spirits to most of the retail shops, bar and restaurants in Central Accra. Due to stiff
competition from other well-established distributors, the company saw the need to expand its activities
to the small towns and cities outside Accra. This expansion paid dividends as sales have grown so
rapidly in the last two years, pushing the business into a bigger size. As part of the strategy, some
depots in key towns and cities have been leased to hold regular supplies ready for distribution.
The company is run by Kofi Nyame 65 years, and assisted by his two sons, Kwame and Kojo both 32
and 26 years respectively. Kwame has been with the company for the past 3 years after resigning from
a leading pharmaceutical company. You also know he holds a first degree in Marketing from the
University of Ghana. Kojo joined the team recently after his national service. Kofi Nyame who is a semiliterate has requested a meeting today during which the following were discussed:
(i)

(ii)

(iii)

(iv)

He is very pleased with the present performance of the company explaining that the
business owes its rapid expansion to the ingenuity of Kwame. As a result, he is preparing
to hand over the reins of management to Kwame.
Although Kofi Nyame and sons Limited continue to make good profits, the rapid expansion
has affected working capital and the brewery companies are not willing to extend further
credit. He would therefore want the bank to assist as the company account has been with
your bank since the inception of the company.
He plans to continue to keep his equity in the business for as long as possible even in
retirement. He would however want the bank to release its charge on his personal property
used as collateral for the companys existing borrowings.
He would be grateful if the bank would increase the existing limit to GH350,000 against
the existing assets of stock and debtors which has increased in recent years.

Your enquiry revealed that Kwame, who is not yet married, has no property of his own. You already
mark a GH200,000 overdraft for Nyame and Sons Limited and is usually in excess of the limit. You
also hold a non-property debenture over stock and debtors supported by a surety mortgage over the
Kofi Nyames personal property which was last valued at GH300,000 three years ago.
Interest rates are 30% per annum for the financial market and the facility is to be payable in five years
time.
Required: You are required to respond to his request stating whether you will recommend the new
request.

The information below relates to Kofi Nyame & Sons Limited:

KOFI NYAME & SONS LIMITED
Statement of financial position as at December 2011
GH
Current assets
Debtors
110,000
Stock
135,000
Total current assets
245,000

210,000
250,140
460,140

195,000
345,390
540,390

Current liabilities
Creditors
Hire purchase
Bank
Tax
Directors loans
Total current liabilities

110,000
2,000
70,000
8,000
10,000
200,000

240,000
2,000
135,000
10,000
10,000
397,000

310,000
2,000
188,000
5,000
10,000
515,000

Net current assets

45,000

63,140

25,390

2012
GH

2013
GH

Non-current assets
Leasehold property
Fixtures and fittings
Motor vehicles
Total fixed assets
Long term HP

36,000
7,000
8,000
51,000
16,000

36,000
6,000
6,000
48,000
5,000

66,000
28,625
25,000
119,625
7,000

Net assets

80,000

106,140

138,015

20,000
60,000
80,000

20,000
86,140
106,140

20,000
118,015
138,105

900,000
810,000
90,000
57,000
33,000
8,000
25,000
8,000
17,000

1,950,000
1,765,500
184,500
127,100
57,400
14,500
42,900
16,760
26,140

3,802,500
3,596,444
206,056
140,625
65,431
21,000
44,431
12,556
31,875

Capital and surplus

Share capital
Profit and loss account

Statement of comprehensive income

Sales
Cost of sales
Gross profit
Administration and distribution expenses
Operating profit
Interest paid
Profit before tax
Tax
Profit after tax

Exercise 2 [Case study]

Lisa Limited is a company that deals in various brands of electronic appliances. The company was
established 3 years ago and has being with your bank since inception. Most of the goods are imported
from the Far East and payments are usually made on a 90-day letter of credit basis. About 60% of the
sales are made to employees of public and private institutions.

About two years ago the company won a contract to supply a total of 600 pieces LG gas cookers and
washing machines to the employees of large public organizations. In order to part-finance the deal, the
company raised an import loan against trust receipts of GH120,000 repayable in 6 months. Although
the company was relatively new, your bank agreed to the deal.
There was a long delay in the arrival of the goods leading to the cancellation of the order. The customer
had no choice but to dispose off the goods on the market, an action which took a considerable period of
time. Meanwhile interest continued to accrue on the import loan leading to excess. In order to help the
company out of it difficulties the facility was extended for another period but the position continue to
deteriorate.
As the account relationship manager, you were particularly worried about the state of the account and
have invited the directors to a meeting. They inform you that steps are being taken to repay the loan but
that their efforts have been thwarted by the general lull in economic activity this year and the high
interest rates charged by the bank. In addition, the directors wanted to get your support in financing a
new lucrative deal in the pipeline. They have tendered for the supply of 100 pieces of LG split airconditioners to one of the United Nation agencies in Accra. They are confident of winning the contract
and they claim, by their estimation, the profit on this deal net of expenses is about GH120,000. The
required support is GH400,000 at an interest rate of 25% payable within 3 years.
The only security you hold on this company whose outstanding debt as at today is GH80,000 is a
nonproperty debenture over the remaining stock of LG cookers and washing machines with a market
valuation of GH206,000.
Required: Assess the financial situation of the company using the following framework:
(i)
Background of the company
(ii)
Financial analysis
(iii)
Proposition
(iv)
Repayment
(v)
Collateral security
(vi)
Decision/Recommendations

Financial information of the company:

Lisa Company Limited
Statement of Financial Position at December

2011
GH

2012
GH

2013
GH

Current assets:
Debtors
Stock
Total current assets

150,000
135,000
285,000

170,000
190,000
360,000

230,000
257,000
487,000

Current liabilities:
Creditors
Hire purchase
Bank
Tax
Directors loans
Total current liabilities

140,000
2,000
90,000
8,000
10,000
250,000

180,000
2,000
105,000
10,000
10,000
307,000

280,000
2,000
138,000
5,000
10,000
435,000

Net current liabilities

35,000

53,000

52,000

Non-current assets:
Leasehold property
Fixtures and fittings
Motor vehicles
Total fixed assets

36,000
7,000
8,000
51,000

36,000
6,000
6,000
48,000

36,000
7,000
10,000
53,000

6,000

5,000

7,000

Net tangible assets

80,000

96,000

98,000

Share capital
P & L account
Shareholders funds

20,000
60,000
80,000

20,000
76,000
96,000

20,000
78,000
98,000

Long -term HP

Comprehensive Income Statement

Sales (2010: GH700,000)
Cost of goods sales
Gross profit
Administration & distribution expenses
Operating profit
Interest paid
Profit before tax
Tax
Profit after tax

2011
GH
900,000
810,000
90,000
57,000
33,000
8,000
25,000
8,000
17,000

2012
GH
1,050,000
956,000
94,000
59,000
34,500
8,500
26,000
10,000
16,000

The electronic appliances industry average figures are as follows:

Gearing (%)
65
Current ratio
1.5
Acid test ratio
0.5
Cash ratio
- 0.2
Debtors collection period (days)
75
Creditors payment period (days)
70
Stock turnover period (day)
65
Sales growth (%)
20
Gross profit margin (%)
8
Net profit margin (%)
1
Interests cover (times)
5

2013
GH
1,300,000
1,209,000
91,000
78,000
13,000
11,000
2,000
----2,000

Exercise [Corporate failure prediction model]

The trial balance of Desiree Limited as at December 31, 2013 is as follows:
GH
GH
Ordinary shares of GH1 each
18,000
10% Cumulative preference shares of GH each
5,000
Income surplus as at January 1, 2013
20,350
30% loan from Stanbic Bank
3,950
Profit for 2013
22,400
Creditors
28,925
Investment income
70
Premises
36,000
Equipment
19,000
Investments
1,255
Stock
32,900
Debtors
7,400
Bank
2,140
98,695
98,695
Additional information:
(a) Profits accrue evenly throughout the year
(b) Provision is to be made for:
(i)
Tax amounting to GH3,500 payable on the current years profit.
(ii)
Preference share dividend
(iii)
Proposed ordinary dividend of 10%
(c) Sales for the year totalled GH105,000 of which 5,000 was VAT.
(d) Market value of equity is GH5.25
Note: The industry benchmark for corporate stability has been fixed at 3.0 above which level
companies are regarded as safe from collapse in the short term. A score of 1.8 or below is a
signal for insolvency.
Required
As a financial analyst of your firm contracted by a Saudi millionaire who is interested in investing in
Desiree Limited, you are to advice on the going concern of Desiree Limited using Altmans corporate
failure model.

Exercise [Corporate failure prediction model]

Raja Limited is a company engaged in the packaging of shear butter for export. Its financial statements
for the year ended 31st December, 2013 are detailed as follows:
Income statement for the year ended 31 December 2013
GH
GH
Turnover
181,575
Cost of sales
157,500
Gross profit
24,075
Interest income
11,000
General expenses
20,750
Interest charges
6,000
26,750
Profit before tax
8,325
Taxation
4,165
Retained profit
4,160
Balanced sheet at 31st December 2013
Non-current assets:
Goodwill
Patent rights
Plant & equipment

GH
15,000
5,200
92,500

Current assets:
Stocks
Debtors
Prepayments
Bank

39,000
16,000
4,500
23,000
82,500
277,700

Financed by:
Ordinary shares (10,000 shares)
Capital surplus
Income surplus
Liabilities:
Creditors
10% Debenture stock

50,000
15,625
2,875
56,500
152,700
277,700

Additional information:
The shares of the company are now selling on the GSE for GH1.10 per share.
Required: Using Altmans prediction model, determine whether the company is in danger of collapse.

Exercise [Common size analysis and computation of ratios]

The following data relates to Alpha Industries Limited.
Profit and loss Account for December
2010
GH
1,127,450
689,710
28,740
718,450
409,000

2011
GH
885,680
544,780
31,110
575,890
309,800

2012
GH
1,058,630
632,140
35,490
667,630
391,000

2013
GH
1,501,000
710,820
38,900
749,720
751,280

Selling and distribution expense

Administration expense
Net operating profit

149,710
50,000
207,290

111,660
52,000
146,140

151,080
57,000
182,920

288,000
63,000
400,280

Interest income
Interest expense
Total other income (expense)
Profit before tax

6,300
32,340
(26,040)
181,250

3,730
33,920
(30,190)
115,950

3,890
24,350
(20,460)
162,460

4,200
33,280
(29,080)
371,200

Tax
Net profit after tax

68,250
113,000

53,620
62,330

75,990
86,470

86,420
284,780

Dividends payable
Retained earnings

20,000
93,000

-------62,330

20,000
66,470

25,000
259,780

Sales
Cost of sales
Depreciation expense
Total cost of sales
Gross profit

Required: (i) Conduct a common size analysis and comment on the results
(ii) Compute the following ratios:
Profitability ratios
Liquidity ratios
Efficiency ratios
Solvency ratios
.