CASE 3: GLOBAL MACHINERY AND METALS COMPANY, INC.

I. Facts of the Case

In 1996, Mr. David Farmer, assistant vice-president at Motor City National Bank,
Detroit Michigan, was considering an expanded loan request from an established
customer, Global Machinery and Metals Company, Inc. (GMMC). Farmer recently
joined Motor City Bank after 2 years of credit analysis and lending experience at
nearby competing institution, while GMMC has established account about 4 years
ago and had been brought to the bank officer whom Farmer recently replaced.
Wayne Newton, one of GMMC Principals, requests for a material expansion in
company’s credit facilities, and asks for an increased line of credit to $1 million and
increase in letter of credit line to $1 million. GMMC was organized in 1965 as a sole
proprietorship, owned and operated by Wayne Newton, who was 54 years of age. It
operated as a dealer for new and used machine tools. In 1980, Newton converted
the firm to a corporation and concluded that some diversification of product and
activity would serve to reduce the firm’s risk and increase profitability. GMMC began
importing finished steel products from Japan, Spain and Korea.

II. Statement of the Problem

Should David Farmer grant Global Machinery and Metal Company’s request to
increase/expand their line of credit to $1 million and to increase their letter of credit line
to $1 million?

III. Objectives

The objective of this study is to assess whether GMMC deserves the extension of
credit considering its background and purpose.

IV. Areas of Consideration

GMMC credit currently approved
1. Line of credit: $500,000 at prime plus 2%.
2. Letter of credit line: $750,000 at prime plus 2%, with a fee of 1% per annum at
issue plus 1% at funding.

The letter of credit line had been in constant use since its establishment in 1984 at or
near authorized limit. GMMC wishes to increase its line of credit to $1 million to
strengthen its ability to buy closed manufacturing plants and/or surplus machinery on
short notice to enable the company to enter larger joint venture deals.

Metals Division
Its sales had shown rapid growth in recent years by selling stainless steel products to
about 450 customers in the South and Southwest. Sales were managed through 5
salesmen, primarily to small and medium-sized distributors and fabricators. Mr.
William Hardin, 46, directed the metals division and its sales staff, and operated in
GMMC with a great deal of autonomy. Recently, the company had begun building
inventory of stainless steel products anticipation of voluntary industry import
restrictions on supplies from Japan and Korea. The disadvantage to imported supply
is that GMMC customers had to place their order 60 days in advance of needed
delivery.

Machine Tool Division

Mr. Wayne Newton closely supervised the activities of the machine tool division. 3
salesmen serviced approximately 400 accounts, which were primarily machine shops
and small manufacturers. GMMC frequently purchased surplus used machinery, and
even bought small manufacturing plants, using in these cases various joint venture
partners. Sales by GMMC, when a large-scale purchase was made, would either be
at auction or to existing customers within about 30 days. GMMC had maintained an
excellent reputation for selling quality used machinery, and profit margins on this
business were excellent.

Facilities and Staffing

The company owned office and warehouse space containing approximately 36,000
square feet. Other warehouse and yard area was leased with annual payments of
$25,000. The majority of its facilities had been constructed from materials acquired
through purchase of closed manufacturing plants. The company employed 18
people, none of whom were union members. Newton and Hardin drew annual
salaries of $50,000 each and also participated in a bonus program based upon
performance. Common stock ownership was divided: 60% for Newton and 40% for
Hardin.

Financials

LIQUIDITY RATIOS
2.00
1.50
1.00
0.50
0.00
1993 1994 1995
Quick Ratio 1.48 1.29 1.31
Activity Ratio 0.66 0.47 0.39
 The current ratios for the past 3 years are good which indicate that the
company can pay its debt. Its quick ratio, however, shows that the company will
have a hard time in meeting its short-term obligations with its most liquid assets .

Activity Ratios
7.00
6.00
5.00
4.00
3.00
2.00
1.00
0.00
1993 1994 1995
Inventory Turnover 2.62 2.04 1.52
Receivable Turnover 5.80 5.50 5.38
Asset Turnover 1.52 5.38 1.43

Activity ratios are currently good Inventory turnover significantly went

down due to the company’s decision to stock more inventory than the pervious
years to anticipate import problems. . Asset turnover is quite going down due to
the same reason as inventory turnover. However, receivables turnover shows
that the company is currently collecting 5 times a year

Profitability Ratios
0.40
0.35
0.30
0.25
0.20
0.15
0.10
0.05
0.00
Category 1 Category 2 Category 3
Growth profit margin 0.36 0.28 0.28
Net profit margin 0.07 0.04 0.06
Net operating margin 0.14 0.09 0.11
 The ratio shows that its total earnings of the recent years are composed of
went to 28% from 30% of their sales. Its net profit margin is small but it shows
that the company is earning this is small because the company has have costly
materials. Its operating profit margin is also fluctuating.

Debt to equity
3.00

2.50

2.00

1.50

1.00

0.50

0.00
1993 1994 1995
Debt to equity 1.54 2.72 2.74

The debt to equity ratio ranges from 1.54 to 2.74. This can mean that GMMC
has greater debt than their equity which is quite troublesome and a problem for
the company, because this can mean that they are more risky.

V. Alternative Course of Action

1. Grant the expanded loan proposal of GMMC

Advantage: The bank will still retain one of their established customers. The bank
can earn more interest income and would have…

Disadvantage: If GMMC would have a decline in their growth and sales in the
succeeding year, the bank would have a hard time collecting the loans.
 2. Grant the loan after but with revised terms & conditions

Advantage: Extending the terms & conditions while granting the loan will benefit
both parties. Switching the terms & conditions such as increasing the interest
rate to ensure prompt payment of credit.

Disadvantage: Granting the loan with new terms & conditions will not ensure the
minimization of burden.

3. Do not grant the loan proposal of GMMC

Advantage: They would have prevented the risk that GMMC might not be able to
pay them if GMMC might have problems that would occur during the
implementation of their expansion program.

Disadvantage: They would lose GMMC’S trust and probably a good account.
Possibly, making GMMC transfer to another bank to get their funds needed for
expansion.