Question

A banker is analyzing a company which operates in the automotive industry. Which of the following will likely be the banker's most important consideration in determining whether the company should receive a loan?
a. The automotive industry suffers from political pressures concerning environmental regulation of products.
b. Inflation has been consistently high for several years.
c. The company has a large amount of interest payments related to other outstanding loans.
d. The company has state-of-the-art automated equipment which enhances the efficiency of its operating process.

Answer 1

Answer:

A Banker's Analysis of an Automotive Company for Loan

Most important consideration in determining grant of loan:

c. The company has a large amount of interest payments related to other outstanding loans.

Explanation:

The large amount of interest payments related to other outstanding loans means that the automotive company is highly leveraged.  To grant a bank loan will have added leverage risk.

In analyzing the request for a loan, a bank should consider the borrowing company's credit history.  With so much in interest payments, the company has already borrowed heavily.  The banker should consider the application of the past debts.  Were they used in investments or for working capital purposes or to repay liabilities and shareholders.

The banker also needs to review the cash flow history with line with the above, to know how the past debts have been applied, as already stated above.  In reviewing the cash flow history, the projections of the company should be tested for sustainability.  "Has the company been meeting its past projections?" is a relevant question to understand.#

Lastly, the banker should also consider the existence of collateral for the loan, especially given that the company is highly leveraged.  Are there unencumbered assets that can serve as collateral in case of default?