Pex - Mba

[kindly]

Hi guys! I'm sure alot of pexers out there would like to get an mba education --- pex style. Hehehe. I hope you could share your case studies which we could discuss... :D

[mac_bolan00]

ok, start with debt:equity (liabilities over equity)

why is the revaluation increment portion of equity (due to appraisal increase in asset value) removed when computing D:E?

[Lek-Lek]

Originally posted by mac_bolan00
ok, start with debt:equity (liabilities over equity)

why is the revaluation increment portion of equity (due to appraisal increase in asset value) removed when computing D:E?

Because as an empirical measure of financial leverage, DER can be tweaked for purposes of window dressing. A ballooned revaluation increment in property may "artificially" hide financial problems, such as over borrowing. Also, the revaluation increment is, strictly speaking, not a source of funding, and the DER aims to measure a firm's financing mix between debt and equity. Finally, the reval account is a highly subjective issue which management can manipulate to the disadvantage of a firm's stakeholders.

[mac_bolan00]

you're correct but let's extend the discussion a little further with a point-of-view for lenders:

the client argues that a 4:1 D:E using just tangible assets (without the revaluation fudge) is secondary to the current value of the land (currently having a fair market value 10x more than book value).

this land is up for collateral and covers the applied loan amount by more than 200%. also, with revaluation increment, net worth is tripled and the resulting D:E is less than 1:1.

lend him the money or not?

[Lek-Lek]

Originally posted by mac_bolan00
you're correct but let's extend the discussion a little further with a point-of-view for lenders:

the client argues that a 4:1 D:E using just tangible assets (without the revaluation fudge) is secondary to the current value of the land (currently having a fair market value 10x more than book value).

this land is up for collateral and covers the applied loan amount by more than 200%. also, with revaluation increment, net worth is tripled and the resulting D:E is less than 1:1.

lend him the money or not?

Usually, in tackling credit-related questions, it'll be useful to have the 5 C's of good credit as a framework.

The information given is just based on the collateral offered and the supposed fair market appraisal.

Personally, the first thing to look for is the quality of the client's cash flows. Credit nowadays must be cash flow oriented. Assuming cash flow capacity is excellent, as well as external business conditions, the next critical aspect to evaluate should be character. Who are the owners of the client? Any related business organizations? How is the management record of the company? After all these and other questions are answered, it's time to move on to capital. Based on tangible assets alone, it seems the company is over leveraged as it borrows P 4.00 per peso of equity invested.

Finally, let's look at collateral. Yes, the fair market value looks excellent. The ability to cover up to 200% of the loan amount sounds spectacular and more than enough to alleviate some of the risks. But is the land saleable? How easy is it to liquidate? In case of borrower's default, just how many creditors will be running after the same asset? Remember, the land is being applied as collateral for this new loan, and based on current figures alone, four times as much creditors will be running after a particular unit of asset in case of default or liquidation.

The decision therefore lies on the quality of documentation and the saleability of the land. Should we find it easier to sell, in case of default, and if it can be legally asserted that the land will be sold in favor of us, then, I don't think there's a reason to withhold credit.

Just my two cents worth.

[mac_bolan00]

the 'cash is king' theme has been sung since 1997 when batallions of lending officers thought they were immortal but discovered that a fat pay and a diploma from an elite school are no match to a regional contagion.

i joined the banking industry in 1999, when most of the financial geniuses have left and we were left with nothing but remedial accounts.

forget about the first way out (meaning ability to pay back the loan though cash from operations) for now. why don't we assume a lousy cash flow. real estate companies are best exemplifications of this. also, the borrower is not a bad person as philippine businessmen go. so forget character as well.

you're just left to evaluate his leverage and his collateral. i'll restate my basic question: does leverage still matter when you are looking at a superior form of security?

[Lek-Lek]

Originally posted by mac_bolan00


you're just left to evaluate his leverage and his collateral. i'll restate my basic question: does leverage still matter when you are looking at a superior form of security?

Ceteris paribus, I think leverage should no longer affect the go or no-go decision in this case. But that assumes that we both agree on what a "superior security" means.

[Braveheart]

Originally posted by mac_bolan00
you're just left to evaluate his leverage and his collateral. i'll restate my basic question: does leverage still matter when you are looking at a superior form of security?

how lean is the lien?

[anonymouse]

Umm.. dont know if this the right place to ask this.. but since you're talking about financial.. may i ask if anyone of you know where we can get industry standards for comparing financial ratios?

We are having a project feasibility study as a requirement for school and our topic is regarding an establishment of a rehabilitation center and we would like to know how our projections would match against the industry standards.

Tnx in advance!

[mac_bolan00]

big companies? the usual SEC top-5000 year books can give you D:E, TA, and NI at most. but the annual businessworld top-1000 gives you other useful things like GPM and CA.