Question

Barton Company requested a large loan from First National bank to acquire a large piece of land for future expansion. Bart reported current assets of R1,900 ,000 (R430 000 in cash) and current liabilities of R1,075,000. FNB denied the request for a number of reasons. When the Company received the news, the financial controller immediately paid R420 000 that was owed to several trade creditors.
He then asked the bank to reconsider the loan application. Based on the abbreviated facts would you advise FNB to advance the loan? Why? Are the actions of the financial controller ethical?
1) What could be the reasons for the denial of the request for a loan? (2)
2. After the actions of the controller what would be your advice for FNB and why (7)
3. Are the actions of the financial controller ethical? (1)

Answer 1

1. There could be a lot of reasons for the denial of request for a loan. For example, Defaulting on a secured loan, how it may have settled past debts, multiple inquiries or applications over a short period, etc.

2. The FNB can calculate the various analysis ratios to see whether to accept the loan application or not.

Financial figures of Barton Company : Current Assets 1900000-420000= 1480000

Current Liabilities 1075000-420000= 655000

Current Ratio = 1480000/ 655000=2.26

This can help FNB figure out the liquidity position of the Barton Company

3. The controller in order to reduce its liabilities, immediately after getting rejected, paid off its creditors. In my opinion, this was just to reduce the liabilities and also its done through company's cash which has nothing unethical about it. So in my opinion, the actions of controller were ethical.