Scribd
Upload
213 views2 pages

Pricing, Loans, Ammar

Loan officers and credit analysts examine several key aspects of a business's financial statements when evaluating loans. These include expenses, operating efficiency, product marketability, and profitability indicators. Ratios analyzed include cost of goods sold to net sales, current and acid-test ratios, and return on assets. However, ratios only show symptoms and not underlying causes, so deeper analysis is needed. When pricing business loans, banks consider the marginal cost of funds, non-operating costs, default and term risk premiums, and desired profit margins. Using these factors, a bank determined a borrower would pay an interest rate of 5.125% on a $10 million loan, resulting in $512,500 in annual interest.

Uploaded by

Ammar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
213 views2 pages

Pricing, Loans, Ammar

Loan officers and credit analysts examine several key aspects of a business's financial statements when evaluating loans. These include expenses, operating efficiency, product marketability, and profitability indicators. Ratios analyzed include cost of goods sold to net sales, current and acid-test ratios, and return on assets. However, ratios only show symptoms and not underlying causes, so deeper analysis is needed. When pricing business loans, banks consider the marginal cost of funds, non-operating costs, default and term risk premiums, and desired profit margins. Using these factors, a bank determined a borrower would pay an interest rate of 5.125% on a $10 million loan, resulting in $512,500 in annual interest.

Uploaded by

Ammar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 2

BANKING

ALI AMMAR
1. What aspects of a business firm’s financial statements do loan officers and
credit analysts examine carefully?
Loan officers and credit analysts examine the following aspects of a business firm's
financial statements:
a. Control over Expenses? Key ratios here include cost of goods sold/net sales; selling,
administrative and other expenses/net sales; wages and salaries/net sales; interest
expenses on borrowed funds/net sales; overhead expenses/net sales; depreciation
expenses/net sales and taxes/net sales
b. Operating Efficiency? Important ratios here are net sales/total assets, annual cost of
goods sold divided by average inventory levels, net sales/net fixed assets and net
sales/accounts and notes receivable.
c. Marketability of a Product, Service, or Skill? Key ratio measures in this area are the
gross profit margin, or net sales less cost of goods sold to net sales, and the net profit
margin, or net income after taxes to net sales.
d. Profitability Indicators? Key barometers in this area can include such ratios as before-
tax net income divided by total assets, net worth, or sales, and after-tax net income
divided by total assets (or ROA), net worth (or ROE), or total sales (or ROS) or profit
margin.
e. Liquidity Indicators? Important ratio measures here usually include the current ratio
(current assets divided by current liabilities), and the acid-test ratio (current assets
less inventories divided by current liabilities).
One problem with employing ratio measures of business performance is that they only
reflect symptoms of a possible problem but usually don't tell us the nature of the problem
or its causes. Management must look much more deeply into the reasons behind any
apparent trend in a ratio. Moreover, any time the value of a ratio changes that change
could be due to a shift in the numerator of the ratio, in the denominator, or both.
2. What methods are used to price business loans?
• Cost-Plus Loan Pricing Method
• Price Leadership Model
• Below Prime Market Pricing (Markup Model)
• Customer Profitability Analysis
3. Suppose a bank estimates that the marginal cost of raising loanable funds to
make a $10m loan to one of its corporate customers is 4%, its nonfunds
operating costs to evaluate and offer this loan are 0.5%, the default-risk
premium on the loan is 0.375%, a term-risk premium of 0.625% is to be
added, and the desired profit margin is 0.25%. What loan rate should be
quoted this borrower? How much interest will this borrower pay in a year?
According to the cost-plus loan pricing model:
Loan interest rate = Marginal cost of raising loanable funds to lend to the borrower
+Nonfunds operating costs + Estimated margin to compensate for default risk + Desired
profit margin
Based on a $10 million loan to be raised, the customer will pay interest of:
 Loan interest rate = 4 percent + 0.50 percent + 0.375 percent + 0.25 percent =
5.125 percent $10,000,000 × 5.125 percent = $512,500.

You might also like