Question

PART 3 – MARK ANGELO CASE STUDY

You are a business development officer of ABC bank. An existing client of yours told you about Mr Mark Angelo who is presently banking with MMM bank. You were told that Mr Angelo is a very rich and influential client who could be approached to move his business to your bank should you be able to offer him favourable rates. During your initial contact with Mr Angelo he indicated that he is not looking for another banker but that you should provide him with a proposal which he can consider.

  MARK ANGELO

STATEMENT OF FINANCIAL POSITION AS AT 1 SEPTEMBER 20XX

ASSETS
Residential property – Mill Point Rd, South Perth	$ 15 000 000
Holiday home – Dunsborough	$ 5 160 000
Vineyard farm – Margaret River	$ 7 500 000
Investments:
Mark Equipment Pty Ltd - 50% shareholding	$ 1 527 600
Mark Equipment Pty Ltd - loan account	$ 5 325800
Fixed deposit	$ 750 000
Vehicles:
20XX Range Rover	$ 80 000
20XX Mercedes 600 SL	$ 190 000
20XX Porsche	$ 190 000
Household goods, Persian carpets and work of art	$ 1 000 000
	$ 36 723 400
LIABILITIES
Bond on Mill Point Rd, South Perth property	$ 11 500 000
Bond on Dunsborough property	$ 2 500 000
Bond on farm	$ 4 500 000
Instalment sale agreements on vehicles	$ 1 000 000
Overdraft	$ 50 000
	$ 19 550 000
Net asset value	$ 17 173 400

You as a banker identified three types of finance that can be taken over by your bank if he can be convinced to change his bank:

• Mortgage bonds over his fixed properties
• Finance (instalment sale agreements) over his vehicles
• Overdraft facility.

You also identified the residential properties and vineyard farm, the vehicles and the fixed deposit as the most suitable types of collateral. Answer the following questions for each of the three prominent types of collateral identified:

i.              Can the bank easily obtain effective control or custody over the asset?

                ii.             Can the bank realise the asset quickly and with little expense?

                iii.            What is the possibility that the collateral can become worthless?

Complete the table to answer this question. Substantiate your answers with good reasons.

	Properties	Vehicles	Fixed deposits
Can the bank easily obtain effective control or custody over the asset?
Can the bank realise the asset quickly and with little expense?
What is the possibility that the collateral can become worthless?

Answer 1

Given that the following information about

You are a business development officer of ABC bank. An existing client of yours told you about Mr Mark Angelo who is presently banking with MMM bank.

The priority is as follows:

1) Fixed deposit (it is the most liquid and least risky asset) hence making it the safest bet as chances of default on it by bank are less and it can easily be liquidated. Note: margin requirement will be less due to less riskiness say 10%

2) Loan account as loans are to be paid first in case of a default and its value is not subject to change like property values it is the 2nd best bet. Margin requirements will be more around 10-20%

3) Residential property: As it is a residential property which makes it safer than other properties( because no one wants to lose a home deliberately due to emotional attachments) , after subtracting the value of liabilities from the asset price, and a margin a loan can be given against it as collateral, margin requirements minimum 20%

4) Vineyard farm: Again its price can be volatile and like residential property as its location is not that good margin requirements will be higher than residential property.

5) Prices of carpets etc.. are subjective to the owner who buys them hence it will have maximum margin requirements.