Question

In line with South Bank’s current thrust to expand retail through its branches, Alex Roces, manager of the Marikina Branch, reviewed its list of depositors. Since Roces planned to offer South Bank’s loan services to its depositors, he inquired among the branch’s employees on potential loan clients. He was informed that Fe Javier, the owner of Darling Dolls Company (DCC), had plans to borrow money for use in her business.

Early in January 1995, Roces set up a meeting with Javier. During their meeting, Javier informed Roces that DDC was in need of P1 million for additional working capital during the year.

DDC had no formal accounting records. Javier confidentially informed Roces that its financial statements were only prepared when she had to report her income for tax puposes. In view of this, Roces wanted a new set of DDC’s financial statements prepared for his evaluation.

Company’s Background

Darling Dolls Company was a small manufacturer of stuffed dolls operating from 200-sq.m. leased building in Parang, Marikina. Fe Javier established the business in early 1992 with an initial capital of P2 million from her savings (P1 million) and from personal borrowings from relatives and friends (P1 million). Of the initial investment, about P500,000 was used for improvement of building. Sandee, one of her daughters and a Stuyvesant School of Fine Arts graduate, helped in the management of business and designed the dolls.

Javier started the business with only major customer, Martie Designs. After a year, she was able to ink contracts with four additional customers. DDC dolls were unique and appealing not only to children and teenagers but also to working ladies and young mothers.

DDC had 25 employees, two of whom handled administrative work. Its production process was simple, and its equipment were mainly high-speed sewing machines. In December 1994, Javier invested in 10 new high-speed sewing machines at a total cost of P270,000.

Dolls made by DDC soon became popular. During the fourth quarter of 1994, Javier was able to establish contact with three additional store chains based in Visayas and Mindanao. She believed that a lasting business relationship could be established with these prospective clients. She estimated that production would increase by 80 percent from the current annual level of 27,000 dolls. But as a result of the recent acquisition of 10 sewing machines, Javier did not have sufficient funds to cover the increase in working capital. Moreover, she anticipated that the prices of raw materials and factory supplies would also increase due to the expected implementation of new tax measures.

Up until this time, DDC had no bank loans of any other credit accommodation, except for suppliers’ credit.

Roces assigned a member of his staff to interview Javier, and visit her factory. Based on the results of the interview, Roces’ staff prepared a brief description of the company and summarized the financial data. (see Exhibit 1).

Exhibit 1

Darling Dolls Company

Interview Questions and Answers

Questions	Answers
1. How much was the 1994 sales?	P 4.32 million; 21, 600 dolls at P200/doll
2. Who were the major customers? How much in sales were registered per customer?	5 major customers, namely: Customer                              % Sales Martie Designs                        50 Sophie’s Gifts and Tags         10 Whims                                        15 Cuddles and Toys                    15 Aspen Boutique                       10 Total                                                    100%
3. Was the company a depositor of other banks besides South Bank?	No, maintains deposit with South Bank only.
4. What was its cash balance as of December 31, 1994?	P 75,000
5. How much was the amount collectible from customer?	Customer Amount (P) Martie Designs 362,100 Sophie’s Gifts and Tags 72,500 Whims 115,000 Cuddles and Toys 132,000 Aspen Boutique 68,400 750,000
6. How much in raw materials and factory supplies were on hand as of December 31, 1994	P 320,000 raw materials P   58,000 factory supplies
7. Were there any unfinished dolls as of December 31, 1994? How many were they and what is their average stage of completion?	Yes, 3,600 dolls are still in process of which 2000 are 90 percent complete and 1,600 are 50 percent complete.
8. How many completed dolls remained unsold as of December 31, 1994	1,800 dolls
9. How much is the average production cost per doll?	Production cost per doll: P140
10. How much is the current balance of payable to suppliers?	About P500,000
11. What are Javier’s personal assets? Which of these assets are used by Darling Dolls Company?	Personal Assets Used in Business Cost (P000,s) Sewing machines (7 units) 130 Office furniture 90 Office equipment 75 Toyota Tamarraw 450 745 Personal Assets NOT used in Business Cost (P000’s) Residential House and Lot 1,200 Vacant Lot in Cavite 450 Jewelries and others 150 1,800
12. When did Javier buy the assets used in the business?	Early 1992, it is estimated that fixed assets would be operational for 10 years from their acquisition dates.
13. How long is the lease agreement?	10 years
14. What major operating expenses were incurred for the year?	Selling Price P5/doll Salaries of Staff doing administrative work 136,500 Rent 200,000 Light and Water 205,300 Repairs and maintenance 57,000 Depreciation Expense 124,500 Others 25,800
15. What other liablilities does Darling Dolls Company have besiudes the amount of payable to suppliers?	Overtime pay of 10 workers for P26,000. All other operating expenses incurred have been paid as of December 31, 1994.

Guide Questions:

C. If you were Roces, would you favorably consider the P1 million loan requested by Darling Dolls Company? What assets can be used as collateral?

Answer 1

If I were Roces, I would favourably consider P1 million loan facility for working capital requirement of Darling dolls.

The business is sound, with Gross margin of 30% and net margin of 13%. Current ratio is very high, meaning sound liquity position of the business.

Receivables turnover is sound (almost 6 times), which means,it is able to collect dues from customer very efficiently. Just 17% of total sales is pending to be collected.

The current assets itself is 1.8 million (which can hypothecated for the loan).

Collateral:

Charge can be created against the fixed assets of the business which is 1.2 million and personal assets of 1.8m can be used as collateral for the loan.

Detailed working to support the conclusion is given below;