Student’s Name
Institution Affiliation
 
 
 
 
 
 
 
 
 
 
 
Kristin Raina Interior Designs
Question One
A clear explanation of how much money is being requested from the lender and how the money will be used to expand the business.
Solution
Loan Application Amount= $100,000
Uses of the Money

  1. Payment of 10 months lease of show house in CBD = $18,000 [Monthly lease* 10 months] (1,800*12= $18,000)
  2. Furnishing the show house= $32,000
  3. Stocking the show house:
  • Carpets $12,500
  • Draperies $7,500
  • Lamps $6,700
  • Mirrors $3,300
  1. Recruiting and staffing employees in CBD show house $12,000
  2. Government business licenses and permits $4,000
  3. Insurance and security for CBD shop $4,000

Loan Application
Three-year loan of $100,000
Loan interest 2.4% per annum
Monthly repayment of the loan
Monthly interest expense 2.4%*100,000/12= $200
Monthly principal repayment $100,000/36= $2,777.8
Total amount paid per month= $2, 977.8
Question Two
An overview of the 12-months pro forma budgeted income statement created in the previous module.
Solution
 
Question Three
An analysis of the budgeted income statement that includes key financial ratios.
Solution
Total business current liabilities as at end of March $7, 326.5
Total equity at end of March $56,655.00
Business will take a new loan at end of July [Loan value $100,000]
Total Liabilities by end of July $107,326.5
Net Income for business for April $8,285.38 May 8,418.00 June 14,905 July 20,725
Note: April uses the actual net income in the balance sheet
Equity as at end of July= [equity as at March + Net Income for April, May, June, July]
July Equity= 56,655+ 8,285.38+8,418+14,905+20,725= 108,988.38
Equity as at end of February 2017=[equity as at March+ Net Income for April, May, June, July, August, September, October, November, December, January, February]
Equity as at end of February= 56,655+8,285.38+8,418+14,905+20,725+24,486+32,703+36,792+44,234+59,850+52,470+ 56,471 = $415,994.38
Debt to Equity Ratio
February
Total Liabilities $ 13,300
Equity                $ 54,230
Debt to Equity Ratio= Total liabilities/ Equity
Debt to Equity Ratio= 13,300/54,230= 0.245
The company’s debt was 24.5% of its equity. Therefore, it could easily repay all its obligations when they are due.
March
Total Liabilities $ 15,076.5
Equity                $ 56,655
Debt to Equity Ratio= Total liabilities/ Equity
Debt to Equity Ratio= 15,076.5/56,655= 0.2661
Debt to Equity Ratio= 26.61%
July 2016
Debt $107,326.5
Equity 108,988.38
Debt to equity ratio= 107,326.5/108,988.38=0.98475
The company can fully repay its debts using its capital
Profit Margin
February
Net income= $4,630
Sales= $7240
Profit Margin= Net Income/ Sales
Profit Margin= 4630/7240= 0.6395
March
Net Income= $2,425
Sales= $3,950
Profit Margin= 0.6139
July
Net Income= $20,725
Sales= $29,930.0
Profit Margin= 0.69245
The business enjoys high profitability rates for its sales
Return on Equity
February
Net Income= $4,630
Shareholders Equity= $54,230
Return on Equity= Net Income/ Shareholders Equity
Return on Equity= 4630/54,230= 0.08538
March
Net Income= $2,425
Shareholders Equity= $56,665
Return on Equity= Net Income/ Shareholders Equity
Return on Equity= 2,425/56,665=0.0428
July
Net Income=$20,725.00
Shareholders Equity= $108,988.38
Return on Equity= 20,725/108,988.38= 0.1902
The new investments especially in the CBD will result in the business having a high return on equity to the shareholders.
Question Four
An overview of the financial strengths and weaknesses of the company and an explanation of how those elements will be leveraged and minimized to insure that the loan will be a good solid investment and financially manageable. Make sure to use financial ratios to support your argument and help sell this idea to the lender).
Financial Strengths
The business has very little liability when compared to its equity. As of March, its debt to equity ratio was 26.61%.
The business has a high profitability ratio. As of March 2016, it had a profit margin of 0.6139.
Financial Weakness
The business has been having a very low return on equity invested. As at March 2016, it had a return on equity of 0.0428.
The business plans to change this situation by opening a new branch at the CBD, which will have more sales than the current one.
The acquisition of a new loan will increase the company’s debt to equity ratio from 26.61% in March to 98.475% at the end of July. Given the business current low return on equity, this debt margins are very high for the business. In order to avoid any risks of default, the business will raise additional capital from its shareholders on March 2017.