Page 19 - CIMA SCS Workbook February 2019 - Day 2 Suggested Solutions

CIMA FEBRUARY 2019 – STRATEGIC CASE STUDY

Credit rating

The credit rating is also an important factor. A company with a poor credit rating will find it more
difficult to borrow money. If the lender does decide to lend, a higher interest rate would be
charged to compensate for the risk taken on by the lender.

Other borrowings and covenants

The risk to the lender will be higher if the borrower is already highly geared and has debt
covenants attached to its existing borrowings.

Application to Vita

Business plan

If we decide to apply for some new debt finance, it will be really important to present a good
quality business plan to the lender. If we don’t have the expertise in the Finance Department to
prepare this, we could employ a Corporate Finance firm to help.

In the business plan, we’ll have to acknowledge the fact that our sales growth has been slowing,
but the lenders will be more interested in future plans than past performance, so it will be critical
to incorporate the impact of any planned investments and strategies. For example, if we have
finalised our plans to innovate and stay ahead of the competition (e.g. with investment in new
technologies and products), a detailed analysis of the likely impact of these plans will be vital.
Any investments in new non-current assets would also increase the amount of assets Vita has to
offer as security. This could be viewed very positively by the lenders.

Interest cover and credit rating

Our interest cover is not a problem at the moment. In fact we pay so little interest that we have
had a net interest received figure in our accounts in the last two years. Vita is a profitable
company, so could afford to increase its interest payments significantly before interest cover
would become a problem.

Even if the slowdown in sales growth rate is taken into account, and the fact that Vita operates in
a fast-moving industry where product obsolescence is a key risk, Vita’s credit rating shouldn’t be
too badly affected. Vita is a low-geared, profitable company with a history of producing successful
products, so it is likely to have a good credit rating.

Conclusion

It should be easy to convince lenders that Vita is a creditworthy business – it is profitable, has very
low gearing at the moment and has a reputation for innovation that should enable it to remain
competitive in the future.

78 KAPLAN PUBLISHING