PART 3: MR ROTH/TTM PROJECTS CASE STUDY

Background

Mr Roth applies for a medium-term loan (5 years) of $4 000 000 to purchase specialised machinery which would expand the production capacity of his business substantially and $3 000 000 additional overdraft facilities to augment the working capital requirements as a result of the expansion.

The business TTM Projects Pty Ltd specialises in the manufacturing of electrical and electronic components for the automotive industry.

Mr Roth (the only shareholder of the company) offers the following collateral to the bank for the requested facilities:

• Unlimited guarantee/suretyship by himself;

• A second mortgage bond over his residential property for $2 000 000.  (The realistic market value of the property is $3 250 000 according to a valuation recently done by the bank. The first bond to the value of $2,500,000 in favour of your bank secures the existing debt pertaining to the residential property.);

• A cession of debtors;

• A cession of his loan accounts in TTM Projects Pty Ltd;

• A mortgage over the machinery to be purchased; and

• A mortgage over inventory.

TTM PROJECTS PTY LTD

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED

28 FEBRUARY 20XX

1. ACCOUNTING POLICIES

The principal accounting policies adopted by the Company are:

1.1 ACCOUNTING BASIS

These Financial Statements have been prepared on the historical cost basis;

1.2 NON CURRENT  ASSETS

Assets are depreciated on the reducing balance method at the following principal rates;

Motor Vehicles 20%

Furniture        10%

Equipment        20%

1.3 REVENUE

Revenue represent total amounts invoiced net of returns and discounts.

2. DIRECTORS’  LOAN

The loan is unsecured, with no fixed dates for repayment, but bears interest at 16 percent per annum.

3. INVENTORIES

Secured to the bank by way of a special bond.

4. NON CURRENT ASSETS

5. BANK OVERDRAFT

Bears interest at 17.5 percent per annum and is secured by a personal guarantee of Mr Zotwa, as well as a special bond over the inventories of the corporation.

6. NET INCOME

7. TAXATION

8. TRANSACTIONS WITH SHAREHOLDERS

There were no transactions with shareholders during the year under review.

9. CONTINGENT LIABILITY

Letter of credit for $1,500 000 issued by bank to Croation Supply Company

Questions for part 3 case study:

1. What is the collateral value of Mr.Roth's unlimited guarantee/suretyship to the bank? Compare your finding with the options listed below and select the option that will most accurately reflect the position regarding Mr. Roth's unlimited suretyship. (Please note: Two  of the listed options are correct.)

a. The value will be equal to the assets reflected on the balance sheet.. 

b. The value will be equal to the shareholder interest. 

c. The value will be equal to the projected value of the earnings. 

d. The nominal value will be equal to Mr Roth’s balance sheet surplus but the information is not provided. 

e. The real value is zero. 

2. Determine the collateral value of the second bond that Mr.Roth offers over his personal residential property.

Select the option that reflects the value of the second mortgage the best. (Please note: only one of the listed options is be correct.) 

a. No value can be attached to the second mortgage. 

b. The value will be exactly equal to the bank's valuation of the property. 

c. The maximum value will be equal to the valuation of the property by the bank less any amount associated with the first bond. 

d. The value will be equal to the value of the first bond registered. 

e. None of the options above is correct. 

3. Select the option that most accurately reflects the collateral value of Mr. Roth's debtors. (Please note: only one of the listed options is correct.)

a. The debtors will be excellent collateral. 

b. The value will be exactly equal to the amount that the debtors owe to TTM Projects Pty Ltd. 

c. The real value is zero. 

d. The number of debtors, their creditworthiness, the sizes of the individual debtor book accounts and how well payments are presently conducted by debtors. 

e. None of the options above is correct.

4. The new machinery could also serve as collateral for the new loan. Select the statement most relevant to new machinery as collateral. (Please note: only one of the listed options is be correct.)

a. Machinery normally serve as good collateral. 

b. Machinery ownership normally hard to determine. 

c. Specialized machinery usually assigned low or zero collateral value. 

d. The value of the machinery must be subtracted from the net asset value of the company to obtain the collateral value. 

e. None of the options are correct.

5. Is the following statement correct if the bank decides to accept the loan account of Mr Roth in TTM Projects Pty Ltd as collateral?

Statement:

When the loan account is accepted as collateral it will allow the bank to claim the amount of the loan account in addition to other outstanding amounts in case of the insolvency of TTM Projects Pty Ltd. It is not an easy realisable form of collateral, but it will improve the claims of the bank.

a. Correct

b. Incorrect