Question

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.

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.

Answer 1

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