Loan Evaluation Assignment for Wacky Wines

or this individual assignment, you will take on the role of Brad (or Brandy) Banker who works
as a credit analyst for Big Bucks Lending. Your job is to evaluate Wacky Wines loan request. As a
relatively new credit analyst, you will not get to make the final determination on the loan.
Instead, you will present your results and recommendation to the credit committee of Big
Bucks Lending in a write-up.
This is an individual assignment and collaboration is not allowed; you must calculate the ratios,
conduct the analysis, and write the write-up on your own. Suspected plagiarism cases will be
reported to the Dean of Students Office.
The members of the Committee are extremely well versed in finance. Hence, do not dedicate a
great deal of space to explaining simple finance concepts. The members are looking for
advanced analysis with evidence of critical thinking. The members always appreciate wellwritten documents that make appropriate use of correct grammar and spelling. They are also
very busy evaluating numerous loan proposals therefore documents written in a concise
manner are better received. Use the information below, the two sets of pro forma financial
statements (expected and worst cases), and industry average information to complete the
analysis of the loan request. Your write-up should clearly state your recommendation regarding
the loan with a supporting analysis. You must justify your decision using both qualitative and
quantitative analyses. While concisely written documents are appreciated, there is no
possible way that you can address all items in the rubric in one page. Thus, if your write-up is
only one page of analysis (written words) or less, your assignment will not be read or graded.
You will earn a zero.
More specifically, please evaluate the financial health of the firm and loan request by
constructing common-size financial statements (income statement and balance sheet),
calculating appropriate financial ratios, and evaluating the 5 Cs of Credit. You must explicitly
address each of the Cs in your write-up. Please use the ratios (liquidity, solvency, profitability,
repayment capacity, efficiency, etc.) that we discussed in class to support your analysis. A
competent analysis will include a discussion of the company’s past performance in terms of the
financial ratios as well as also assess projected cash flows and ratios under the various scenarios
(expected and worst cases). In other words, you are expected to calculate relevant ratios for
the historic data (years 2017, 2018, 2019, and 2020) as well as for projected years (2021, 2022,
and 2023) for both the expected and worst-case scenarios. You should discuss changes/trends
in the ratios (but avoid elevator analysis – it went up and then it went down), what is driving
these changes by linking the discussion to specific accounts on the financial statements and
common-size financial statements, which ratios are strengthens and weaknesses, and why the
ratios differ cross the two scenarios. Please also compare the ratios to the industry averages
given in the excel file as well as standard benchmarks discussed in class (e.g., current ratio
should be greater than 1).
AEB 4138 – Advanced Agribusiness Management Fall 2021
Please see the rubric below for more details. Note: You are asked to calculate a certain number
of each type of ratio, however, do not use two ratios that convey the same information (e.g.,
asset turnover and capital intensity; or debt-equity ratio and equity multiplier) as these will be
counted as just one ratio.
In addition, you are expected to conduct Du Pont analysis of ROE for all years (historic and
projected) and both cases (expected and worst). Recall, that Du Pont analysis is useful for
identifying the drivers of ROE and hence you must show all three parts of the analysis
separately (profit margin, asset turnover, and the equity multiplier).
Banks often request that potential borrowers submit additional information to support their
loan application. Please also discuss additional factors/information that you would like Dr.
Kropp and Mr. Wolf (the potential borrowers) to supply to assist the Committee in making a
final determination about the Wacky Wines credit worthiness.
Canvas will only allow you to submit Microsoft word documents. Thus, you will need to embed
(or copy and paste in) the excel tables and graphs in your word document before uploading
your write-up to Canvas. Please make sure that the tables are formatted such that they are easy
to read, fit on the page, and can be read easily when they are printed. Please guide the reader
by labeling your tables/graphs and referring to the tables/graphs in the text (e.g., as shown in
table 1…).
Your write-up must be submitted through Canvas by 1:55pm on the due date. Otherwise, the
write-up is considered late, will not be graded, and you will receive a zero.
References cited within the text (and only those cited in the text) need to be listed in
alphabetical order by lead author’s last name in a reference list. Please refer to this guide when
preparing your reference list:
http://www.oxfordjournals.org/our_journals/ajae/for_authors/guide.pdf .
Sources should be cited within the text of your write-up using the author(s)’s last name(s) or
source and the year of publication. For example, Kropp (2021) stated all statistics and other
items that are not common knowledge must be cited properly.
Extra Credit Opportunity: I will award an additional 5 points (essentially half a letter grade) to
any write-up that properly references at least two relevant articles from Harvard Business
Review, Economist, Bloomberg, NY Times, Wall Street Journal, or equivalently reputable popular
press sources. The Harvard Business Review (HBR) is a magazine typically written by academics
(i.e., professors and other researchers) for practitioners (i.e., managers). The HBR, therefore, is
written in a manner that is very accessible and relatively enjoyable to read. Many senior-level
managers read the HBR to learn about the most cutting-edge management, marketing, human
resource, and finance research. The HBR is easily accessed via the UF Libraries website.
AEB 4138 – Advanced Agribusiness Management Fall 2021
To receive extra credit, you must show evidence that you have read and understood the articles
and use the articles to support your analysis. If you simply quote directly from the article, you
will not receive extra credit. Stock price quotes do not count toward the extra credit.
Loan Request Information: Wacky Wines opened in 2009 as a boutique wine retailer
specializing in hard-to-find premium wines from around the world. Wacky Wines is unlike other
wine retailers in that it employs several level 3 sommeliers who are available to assist
costumers whenever the store is open. In addition, Wacky Wines offers an innovative
interactive wine of the month club. When members enroll, they complete a survey that
indicates their wine preferences. Each month each member receives a custom selection of
wines based on his/her preferences. The member then rates the selections and future wines
received through the club are selected based on the member’s prior ratings. Because of this
customization, Wacky Wines can charge a premium on its wine club membership relative to
other on-line clubs. In addition, Wacky Wines requires members to pick up their club selections
at the store. On average, club members purchase six additional bottles of wine when they pick
up their customized club selections.
As a result of these innovative marketing activities as well as traditional marketing techniques
such as regular wine tastings events and discounts on cases, Wacky Wines has achieved
accolades from Somm and Wine Spectator magazines. Hence, Wacky Wines has brand
recognition and is ready to expand into two new locations while maintaining its flagship store
located in Manhattan. Wacky Wines is requesting a $500,000 real estate loan to purchase retail
space (along with furniture and fixtures, signage, etc.) to open new stores in Washington, DC
and Boca Raton, FL. If the expansion is successful, Wacky Wines would like to open an
additional store in LA. However, Wacky Wines views expansions into the California market as
being riskier due to the presence of serval competitors and close proximity to Napa and
Sonoma. Washington, DC and Boca Raton, FL were chosen as optimal expansion locations
based on the per capita incomes of residents, per capital wine expenditures, and other market
research.
Wacky Wines is owned and operated as a LLC by Dr. Kropp and her business partner, Mr. Wolf.
Dr. Kropp and Mr. Wolf met in college where Kropp studied finance and Wolf studied food and
beverage management with a minor in viticulture. After receiving her doctorate, Kropp taught
finance at a prestigious university for several years before opening Kropp’s Hops Brewery.
Unfortunately, Kropp’s Hops Brewery suffered from liquidity issues (pun intended), product
quality issues (Kropp had no idea how to make beer), and low profits due to stiff competition,
and went out of business three years after opening. Realizing the shortcomings of her prior
business failure, Kropp contacted Wolf who had developed a stellar reputation as an industry
leader in the wine world since entering the industry in 2001. Wolf’s contacts and reputation are
responsible for Wacky Wines ability to procure and maintain such an eclectic inventory of hardto-find wines.
AEB 4138 – Advanced Agribusiness Management Fall 2021
Key assumptions used to construct the pro forma statement projections:
1) In both the expected and worst-case scenarios, Wacky Wines receives the $500,000 loan
and uses the loan proceeds to purchase retail space, furniture and fixtures, signage, etc.
2) In the expected scenario, Wacky Wines’ sales from the flagship store are expected to
increase by 15% in 2021 over the 2020’s value. Also in 2021, Wacky Wines is expected to
generate $500,000 in revenue from the new stores. Sales growth is expected to be 15%
at all stores in both 2022 and 2023 over the prior year’s sales figures.
3) In the worst-case scenario, Wacky Wines’ sales from the flagship store are expected to
increase by only 10% in 2021, while revenue generated from the new stores is expected
to be $250,000. Annual sales growth is expected to be 10% at all stores in both 2022 and
2023.
4) The gross profit margin is assumed to be 5 percentage points lower in the worst-case
scenario than the expected case.
5) The interest rate on all loans is assumed to be 3 percentage points higher in the worstcase scenario than the expected-case scenario.
6) It is assumed that 50% of all sales are made on credit.
7) Wages and benefits are assumed to be 10% of sales in the expected case scenario, while
wages and benefits are assumed to be 15% of sales in the worst-case scenario.
Extra Extra Credit Opportunity: Prior AEB 4138 students indicated in the end of semester
course evaluations and reflection videos that they found the case study assignments confusing.
In an effort to improve the clarity of these assignments for future students, I will award up to 3
points of extra credit to students who submitted a marked-up version of the syllabus
highlighting the language that they found confusing, explaining why it is confusing, and
provding constructive suggestions to improve the clarity of the assignment’s instructions.