Question

Question 3                                                                                                       10 marks

Barton Company requested a large loan from First National Bank (FNB) to acquire a large piece of land for future expansion. Bart reported current assets of R1,900 ,000 (R430 000 in cash) and current liabilities of R1,075,000. FNB denied the request for a number of reasons. When the Company received the news, the financial controller immediately paid R420 000 that was owed to several trade creditors. He then asked the bank to reconsider the loan application. Based on the abbreviated facts would you advise FNB to advance the loan? Why? Are the actions of the financial controller ethical?

1) What could be the reasons for the denial of the request for a loan? (2)

2) After the actions of the controller what would be your advice for FNB and why (7)

3) Are the actions of the financial controller ethical? (1)

NB: limit your answer for all 3 sub-questions to 500 words or less

Answer 1

Financial figures of Barton Company

Current Assets -: R 1,900,000

Current Liabilities -: R 1,075,000

Current Ratio -: Current Assets /Current Liabilities = 1,900,000/1,075,000

   =1.77

a) The possible reason for denial of loan is low current ratio. First National Bank might be considering a current ratio of 2:1 but since Barton Company current ratio is 1.77 (as computed above), So the bank has refused to disburse the loan.

b) Action of the financial controller ("FC") is totally legal and nothing wrong in it. FC can take decision to pay off any liabilities of the Company which is due and payable.

After payment of R 400,000 the revised current ratio stands as below

Current ratio-: (1,900,000-400,000)/(1,075,000-400,000) = 2.22

Bank consider 2:1 is the healthy ratio for disbursal of loan to customer. Hence now the current ratio is improved significantly we advise them to again file the proposal for loan.

c) Yes actions of the FC is ethical and is as per business practices. FC power includes operating decisions on behalf of the Company which includes management of working capital.