1.

0 Case Summary
J.J. Kimani is the general manager of the Kenya Financial Service (KFS) branch in
Malindi. Currently J.J. Kimani has been visited by the owners of the Sapphire Beach Hotel
and they are expressing their dissatisfaction with the present banker which is West German
Bank because the bank refused to give additional fund for their project. Thus the three owners
had approached the KFS to request the loan to assist their project of Sapphire Beach Hotel
that was scheduled to be opened at the end of September.
Sapphire Beach Hotel Ltd. was the ideas of the three talented and A-1 businessmen to
be part of the hotels competitors in the Malindi area. The Sapphire Beach Hotel was designed
in the traditional, white stucco exterior architecture and classified as the three-star hotel. The
construction costs of the hotel at the first estimation by the owners was at Kshs 12.5 million,
however, there are setback that caused the project to delay four month behind it schedule and
this lead to the increasing in the cost of the constructions by Kshs 2.5 million.
Thus, to help the project of the Sapphire Beach Hotel, the owners asked for the loan
from KFS to fund their overrun costs as well as made the repayment to the West German
Bank for the present loan, since they have to make the repayment back to the bank after the
hotel start opened for business. J.J. Kimani was the person who was in charges in this case of
Sapphire Beach Hotel, hence he needs to evaluate all the relevant documents and analysis the
situations carefully to ensure he would not give the wrong decision as the general manager of
the KFS.
As stated in the case, during this case on 1980s the environment of Kenya is not
favourable for the tourist activities since there are economic problems that caused the effect
to the tourism industry in Kenya. Moreover, the governments rules and regulations was so
frustrated that mostly are not effectively performs by the Kenyans. J.J. Kimani also looking at
the political issues in the Kenya that draw a fear mind for every tourists.
Thus, it is depending on the J.J. Kimani decision whether to approve the loan
requested by the three owners or reject the loan. All of these assumptions need to be
evaluated correctly since the future of the Sapphire Beach Hotel Ltd and the KFS in the hand
of J.J. Kimani.

2.0 Major Issue

The identified major issue faced by J.J. Kimani in the case of Sapphire Beach Hotel
Ltd. is to determine whether to approve the loan request by the three directors of Sapphire
Beach Hotel Ltd.. As indicated in this case, Kimani felt that the current situation for tourism
industry in Kenya is unfavourable. So, he is contemplating on whether to approve the loan
requested by the directors as he questioned the ability of this business to pay back the loan in
the future. This issue arise due to many events occurred that can give bad impact on Sapphire
Beach Hotel Ltd. to run their business successfully and may be unable to pay back their loan.
Hence, a right decision must be made by Kimani for Kenya Financial Services from
accepting the bad loan request.
2.1 Decision Maker
In this case J.J. Kimani is decision maker, as he is the General Manager of the Kenya
Financial Services that will analyse the loan request by the three directors of Sapphire Beach
Hotel.
2.2 When
Since there is urgency in responding to the situation confronted by Kimani, immediate
decision must be done for the sake of the three directors and their business. If Kimani delayed
his decision to approve or reject the loan, it will affect the directors repayment process to
West German Bank since they need to begin the repayment after the hotel opened for
business in which they expected to open the business at the end of September.
3.0 Alternatives
There are two alternatives that can be done by Kimani which are to approve the loan
request of Kshs12 million or to reject the loan request and let them find another financial
institution.
4.0 Analytical Tools
4.1 PESTEL Analysis
The first factor is Political. Based on Daily Nation that was published at July 2012, on
1st August 1982, the Kenyans woke up to the coup attempt against the government of
President Daniel arap Moi by junior rebel officers of the Kenya Air Force. In the accident,
more than 100 soldiers and 200 civilians died included two West Germans an Englishwoman
and a Japanese male tourist and his child. In other situation, two Asian woman committed
suicide after being raped. This also damages the economy of the country by Kshs 500 million
ceiling. Referred to the bad publicity of the country during the coup, it affects the tourism
industry in Kenya. In other terrorist-related incidents reported in The New York Times
published on January 1, 1981, it was stated that in 31 st December 1980, there are bomb set up
in the room where it is directly above the dining room where the dinners had assembled at the
Norfolk for a New Years Eve. It was exploded shortly before midnight. In the news, it was
reported that the main part of the hotels was occupied with thousands of tourists. This created
fears in the minds of the tourists and could affect the tourism industry in Kenya.
Next is Economical factor. According to the websites of Soft Kenya, it is stated that
Kenyas economic performance during 1980s and 1990s war is far from it potentials. After
the tragedy of coup attempt and the New Years Eve bombing it slightly affected the tourism
sector in Kenya since Kenya was the main tourists centre within East Africa. Besides, the
deep economic crisis in the Western economies in the early 1980s had diminishing effect to
the tourism industry and this caused the period of relative non-growth for Kenya. In addition,
stated in The Commonwealth website, the poor harvest and political uncertainty slowed the
average annual growth in the late 1990s. This situation could influence the J.J. Kimani
decisions in considering the ability of the Sapphire Beach Hotel to sustain it growth in the
economic situation where there are unstable political and economic growth for the country.
For Social factor, in Malindi they are depending on the foreign tourist for its
livelihood since the area is flooded with the tourists especially Italians was also known as
Little Italy in Africa as stated in The Africa Report. Revise the population of Malindi, the
area is the poorest town in Kenya. The population about 50,000 lives with less than Kshs
1,562 a month. This brings to the sex trafficking in Malindi where the parents force their
children for sex to generate more income. Besides that, it was stated in the case that the
occasional stories of the terrorist attack on tourists were created the fear in mind of the
tourists to visit Kenya. The incidents can affect the tourism industry in Kenya if there are no
rules and regulation to strengthen the lives of Kenyan in future.
Next is the Technological factor. It is stated in the case that in Malindi there is no
international airport which it will caused the tourists have difficulties in accessing the Malindi
area. Moreover, the hotels in the Malindi need to have good relationship with the travel
agencies to occupy their hotel rooms. Thus it is important for the Sapphire Beach Hotel to
have their own travelling agencies and binding the contract with the airlines to help them to
get the customers as well as to occupy their rooms. Besides it important as they need to be
competitive because there are many hotels in Malindi that could give them competitive
challenges as the Sapphire Beach Hotel still new in the industry and need to be outstanding
over the other hotels.
While the Environmental factor, Kenya is the dominant centre for tourists because the
tourists have choices of cosmopolitan Nairobi, the sun-drenched-coast and Sapphire Beach
Hotel was located in the beachfront in Malindi. This could attract the tourists as the scenery is
beautiful and calmly the people around. This could give the strength for the Sapphire Beach
Hotel to sustain their business in the hotel industry in Malindi.
Lastly, for the Legal factor in Kenya, the government had the authority to standardize
the rooms rental rate for the hotel industry this is because the hotel occupancy were
increasingly being inflated by beds which filled at extremely low prices. Thus, the
management of the hotels suffering the exceptionally low occupancy especially for those
offered cut-rate prices and promotions to invite the tourists. Moreover, the regulations made
by the government where the currency controls, import restrictions on vehicles, numerous
reporting documents and restrictions on charter flights into Kenya had frustrated the industry.
The government was trying to liberalization of the Kenyas economy in 1980s and 1990s
according to the articles written by Geoffrey Gertz in the article Kenyas Trade
Liberalization of 1980s and 1990s: Policies, Impacts and Implications. In addition, according
to the social analysis above regarding to the sex trafficking which are mostly involving the
children in Kenya that could affect their education. This child sex activity was going on 30
years. Thus, if the government could impose the regulations to protect the children lives in
future, it also can affect the tourist industry in Kenya because these activities are the main
sources for the tourism industry in the area. J.J. Kimani could take this future consideration in
making the decision for Sapphire Beach Hotels requested loan.

4.2 5Cs Credit Analysis

The 5Cs Credit analysis is to analyse the credit history, capacity, collateral, capital and
condition of the owners credit of the Sapphire Beach Hotel. Firstly, the credit history of the
owners is they have asked for the loans to finance the construction of the Sapphire Beach
Hotel from the West German Bank for about Kshs 10 million with the interest of 15%.
Through the agreement with the West German Bank Sapphire Beach Hotel need to make the
repayment after the business has started which scheduled in upcoming September.
Furthermore, it also stated that the West German Bank refused to extend the additional loan
to the owners due to the overruns costs. This could help J.J. Kimani to ponder before
approving the loan. The bazaar report about the three owners that evaluate their credibility
had resulted to be favourable and this could help J.J. Kimani to decide and evaluate before
making the decision.
Secondly is the capacity of the owners that need to be assessed by the J.J. Kimani. As
stated in the case the construction has been setback for several problems which are due to the
coup attempt that caused a dip in tourism and another problem is the overrun costs. The
construction was delayed four months behind the schedule and this caused the additional cost
for the owners to settle the costs for about Kshs 15 million. The Sapphire Beach Hotel was
expected to get losses for first two years of the business with the occupancies rate of 60% and
70% respectively. But, in third year, with the occupancies rate of 75% the hotel are able to get
profits. However, the Sapphire Beach Hotel unable to reach more than the break-even point.
J.J. Kimani needs this important data to clearly and properly evaluate the potential of the
owners to able for the repayment of the loan in future.
Next is the collateral analysis or a guarantee which is the assets that J.J. Kimani
should assess as the form of security for the KFS. In this case, it was mentioned that all the
hotels property and the assets had been secured by the West German Bank. If the owners of
Sapphire Beach Hotel want to request the loan from the KFS they do not have the other assets
to be mortgage except their own assets.
The fourth is the capital analysis. The owners of the Sapphire Beach Hotel had
invested their own capital for about Kshs 833,333 each and in total equity investment of Kshs
2.5 million to cover the overruns costs of the project. Referring to this information, J.J.
Kimani would evaluated that the three owners have enough capital for make a repayment
since they have invest their own money to cater the overruns cost. However, it could be the
possibilities that the owners were claimed to be bankrupt if they keep on injecting their own
money and assets in this Sapphire Beach Hotel project. The three owners could face the
insufficient capital in future in order to make a repayment to the KFS.
Lastly are the conditions which will describe the intended purpose of the requested
loan and the conditions of the current economic situation in the Malindi that could give
impact to the Sapphire Beach Hotel to run the business. As be mentioned in the PESTEL
analysis above and also in the case, the current economic condition in Kenya is not
favourable for the tourism industry since there are deep economic crisis in the Western that
give effect on the tourism sector in Kenya. Moreover, the issue of the unstable political in
Kenya is also giving the bad impact to the tourism industry in Kenya during 1980s and
1990s. This should give views to the J.J. Kimani to make the correct decision for the sake of
KFS in future to avoid the bad loan borrowers.
4.3 Financial Analysis
There are two financial analysis been done in analysing the case, which are break-
even analysis and debt-service coverage ratio (DSCR).
4.3.1 Break-Even Analysis
In exhibit 1, the forecasted statement profit and loss of Sapphire Beach Hotel is
calculated by following the estimated occupancy rate given by the owners of Sapphire Beach
Hotel. By following the given estimated occupancy rate, Sapphire Beach Hotel will incur net
loss for the first two years and will only have net profit in the third year of operation. As
depicted in exhibit 3, it portrays the break-even point (in units/bed) that Sapphire Beach
Hotel should surpass, if they want to have net profit in the business for each year. Sapphire
Beach Hotel incurred more expenses than they actually earned. As for the year 1, Sapphire
Beach Hotel should acquire more than 76% occupancy rate to have profitable business. Due
to Sapphire Beach Hotel only estimated 65% occupancy rate for year 1, much lower than
break-even occupancy rate, thus, the business show unprofitable financial statement for year
1. For the year 3, they achieve profitable financial statement as the estimated occupancy rate
is higher than the break-even occupancy rate by 4%.
However, as J.J. Kimani questioned the achievability of estimated occupancy levels of
Sapphire Beach Hotel made by the three directors, the forecasted statement profit and loss of
Sapphire Beach Hotel is calculated by using 51% of occupancy rate for year 1, 56% of
occupancy rate for year 2 and 61% of occupancy rate for year 3. The reason why 51% of
occupancy rate is chosen due to follow the information given by Republic of Kenya, Central
Bureau of Statistics that stated bed occupancy in Malindi is 51%. The estimated occupancy
rate is increased by 5% in year 2 due to expectation that the tourism industry in Malindi will
increase. It is the same for the third year operation of Sapphire Beach Hotel, which it is,
anticipate having 61% occupancy rate in year 3. As shown in exhibit 2, it depicts that with the
realistic value of estimated occupancy rate, Sapphire Beach Hotel will experience a net loss
in the business from the year 1 till year 3. It is because of the anticipated occupancy rate is
lower than the break-even point of occupancy rate for the three years. Therefore, from this
information, Sapphire Beach Hotel needs to revise their forecasted statement of profit and
loss if they want their requested loan to be approved by financial institutions. They may need
to revise back their revenue and expenses amount for showing that they are operating
profitable business industry. Based on this analysis, Kimani may analyse that Sapphire Beach
Hotel will not be in profitable state within three years of their business operation. He might
be contemplating to approve the loan requested with the current estimated break-even
analysis as he does not want to approve the bad loan that can give bad impact on the
performance of Kenya Financial Services.
4.3.2 Debt-Service Coverage Ratio (DSCR)
My Accounting Course stated that the debt service coverage ratio is a financial ratio
that measures a company's ability to service its current debts by comparing its net operating
income with its total debt service obligations. In other words, this ratio compares a company's
available cash with its current interest, principal, and sinking fund obligations.
DSCR = Net Operating Income / Total Debt Service
Based on Investopedia, it specified that the total debt service refers to current debt
obligations, meaning any interest, principal, sinking-fund and lease payments that are due in
the coming year. On a balance sheet, this will include short-term debt and the current portion
of long-term debt.
Constructed on exhibit 4, it is estimated that if KFS does not approve the loan to the
Sapphire Beach Hotel Ltd., their current debt obligation is to West German Bank only. Thus,
it is estimated that Sapphire Beach Hotel Ltd. need to pay back the amount that they loan
from West German bank by 96 equal monthly instalments with an interest rate of 15 per cent
per annum that would be charged on a reducing balance basis.
From the calculation made in exhibit 5 and 6, it shows that Sapphire Beach Hotel is
unable to pay its future debt obligation as the ratio value is below than 1. If the ratio value is
below than 1, it depicts that the business does not have enough cash to pay its current debt
obligation too. Most of the lenders will view the requested loan favourably if the firm or
person achieves the ratio value above than 1.
Typically, banks use the DSCR method to help them to determine whether to make or
refinance loans for investment property. A DSCR greater than 1 means the entity whether a
person, company or government has sufficient income to pay its current debt obligations. A
DSCR less than 1 means it does not. Therefore, from calculation above, it shows that
Sapphire Beach Hotel Ltd. cannot afford to pay its current debt obligation and also its future
obligation. Thus, it is bad situation for Kimani to refinance loans for Sapphire Beach Hotel
Ltd with its current forecasted financial statement.
5.0 Recommended Alternative
It is recommended for J.J. Kimani to reject the loan requested by the three directors of
Sapphire Beach Hotel. The suggestion is based on few factors portrayed in the analysis.
Firstly, it is because as has been stated above in PESTEL analysis regarding the current
situation of Malindi it is hard for Sapphire Beach Hotel to survive in current economics
condition. Besides, the government has an authority to standardize the room rental rates and it
is very challenging for Sapphire to increase their occupancy rates as the client has many
choices since there are many hotels in Malindi area.
Furthermore, the 5-Cs analysis shows that although the three owners have the
favourable risk profile of bazaar report, but the fact that none of them have any prior
experience in managing a hotel cannot be ignored. Due to that, it is still unsure that they may
be able to make repayment of loan in the future. Moreover, as has been mentioned in the
case, the three owners had already contributed a large amount of capital by using their own
source. Thus, if the business is unable to make repayment in the future, the three owners
might not have enough funds to cover it by using their own funds too. Other than that, the
construction of Sapphire Beach Hotel has an experienced of setback twice and had caused
them to incurred more cost. Therefore, by referring to this fact, the future of Sapphire Beach
Hotel is still uncertain as there might be another situation that can delay the progress of the
hotel to run effectively and incurring more cost in the future.
Thirdly, based on the break-even analysis, it shows that Sapphire Beach Hotel cannot
achieve its business operation of break-even for the first two years if used the given estimated
occupancy rate, which are 65% and 70%. Although in the third year Sapphire Beach Hotel
able to surpass it break-even point with 75% of estimated occupancy rate, it is already
mentioned in the case that Kimani questioned the achievability of the forecasted occupancy
levels of the Sapphire Beach Hotel given the past industry averages which only 51%
occupancy rate. The occupancy rate given by Sapphire Beach Hotel seems not to be realistic
with the current economic situation for hotel industry. By considering with present economic
situation, it will be reliable information if Sapphire Beach Hotel provides a low estimated
occupancy rate. Then, the financial statement of Sapphire Beach Hotel may be more accurate.
Based on the analysis, it shows that it is hard for Sapphire Beach Hotel to have profitable
income with its current forecasted financial statement profit and loss.
Lastly, from the finding in debt service coverage ratio (DSCR) analysis, it will give a
valid reason on why Kimani should reject the requested loan. Based on DSCR analysis
computed above, it shows that Sapphire Beach Hotel does not have sufficient income to pay
its current debt obligation, which is to West German Bank if KFS does not approve the loan
to pay lump sum to West German Bank. From the computation, it depicts that Sapphire Beach
Hotel does not achieve more than one value of DSCR for the three years consecutively.
Investopedia stated that if the ratio value less than one, it means that the three directors of
Sapphire Beach Hotel Ltd would have to delve into their own personal funds every month to
keep the business afloat. Even for some lenders will approve the negative cash flows of an
entity if the borrower has strong outside income, but in the case Sapphire Beach Hotel, it does
not stated that they have other sources of fixed incomes. Thus, it is agree that J.J. Kimani
should reject the requested loan made by Sapphire Beach Hotel.
6.0 Recommendation
6.1 Meeting with the owners of Sapphire Beach Hotel
J.J. Kimani should hold a meeting with the three owners of Sapphire Beach Hotel to
inform them that their requested loan is unaccepted. Therefore, J.J. Kimani can advise
Sapphire Beach Hotel to find other financial institutions that can help them to pay the loan to
West German Bank. In the case mentioned that J.J. Kimani had known the directors for years,
so he can recommend them to revise their estimated financial performances to be more
realistic before they made a request to other financial institutions.
6.2 Assessing other requested loans
Regarding to the case of Sapphire Beach Hotel, J.J. Kimani can make this case as
reference for him in future to make a better decision by assessing properly all the requested
loan made by the clients to ensure the credibility and help KFS to maintain their capitals
institution before engaging into the agreement. It is important for J.J. Kimani to assess into all
the financial performance, risk management and capabilities of clients to repay back the loan
in future. By assessing accurately, he can avoid KFS from accepting bad loans. Monicah
(2013) agrees that bad loans can be treated as unfavourable costs to loaning bank which
decreases the banks performance.
6.3 Action taken after approve requested loan
J.J. Kimani as a General Manager of KFS must ensure that there is a person in charge
that monitors the borrowers to make payment following the agreement made in the contract.
It is because to avoid the loan from falling into the category of non-performing loans.
Monicah stated that a loan is non-performing when payments of interests and principal are
past due by 90 days or more (2013, p. 2). If there are so many differed in loan repayment to
KFS, it will give bad impact to the reputation of KFS institution.
 In addition, according to Kithinji and Waweru (2007), banking problems is back-
dated as early as 1986 culminating in major bank failures (37 failed banks as at 1998)
following the crises of 1986 to 1989, 1993/1994 and 1998; they attributed these crises to non-
performing loans which is due to the interest rate spread(as quoted by Monicah,2013,p.1).
Thus, based on from this statement, to avoid KFS from including into the bank failures
category, Kimani must ensure KFS does not hold too many bad loans. Typically, bank that
imposed high interest rate will possess many non-performing loans since their client unable
to bear a high charges cost. Due to that, it is desirable for Kimani to review the interest
charges to all of his clients. Besides, Gorter and Bloem (2001) agree that bad loans may
considerably rise due to abrupt changes in interest rate (as quoted by Monicah, 2013, p.2).
Lastly, Monicah (2013) also suggests that it is desirable for bank to imposed lower rates as it
will reduce the level of non-performing loans since it is negatively correlated with ratio of
bad loans. In conclusion, it is good if J. J. Kimani can give loan to a profitable business since
it will have a benefit impact to Kenya Financial Services.
7.0 Appendix
Exhibit 1

Estimated Occupancy Rate 65% 70% 75%

Rate /Bed Kshs 150 Kshs 155 Kshs 165

Year 1 Year 2 Year 3

(In Kshs) (In Kshs) (In Kshs)

Sales
Accommodation 1,825,638.75 2,031,608.25 2,317,156.88
[47.5% (Occupancy Rate 108beds
365 days Rate/Bed)]
Restaurant 2,017,811.25 2,245,461.75 2,561,068.13
[52.5% (Occupancy Rate 108 beds
365 days Rate/Bed)]
Bar 1,369,229.06 1,523,706.19 1,737,867.66
[75% Accommodation Revenue]
Other 912,819.38 1,015,804.13 1,158,578.44
[50% Accommodation Revenue]

Total Sales 6,125,498.44 6,816,580.32 7,774,671.11

Less : Cost of Sales

Beverages 889,998.89 990,409.02 1,129.613.98
[65% Bar Revenue]
Food 1,109,796.19 1,235,003.96 1,408,587.47
[55% Restaurant Revenue]
Linens & Housekeeping supplies 146,051.10 162,528.66 185,372.55
[8% Accommodation Revenue]

Total Cost of Sales (2,145,846.18 (2,387,941.64 (2,723,574.00

) ) )

Contribution Margin 3,979,652.26 4,428,638.68 5,051,097.11

Less : Other Operating Expenses (Note 1) (4,750,153.82 (4,752,058.36 (4,750,426.00
) ) )

Net Profit / (Loss) (770,501.56) (323,419.68) 300,671.11

Note 1.This total is from total operating expenses given for each year minus with total cost of
sales computed.
Exhibit 2
Estimated Occupancy Rate 51% 56% 61%

Rate /Bed Kshs 150 Kshs 155 Kshs 165

Year 1 Year 2 Year 3

(In Kshs) (In Kshs) (In Kshs)

Sales
Accommodation 1,432,424.25 1,625,286.60 1,884,620.93
[47.5% (Occupancy Rate 108beds
365
days Rate/Bed)]
Restaurant 1,583,205.75 1,796,369.40 2,083,002.08
[52.5% (Occupancy Rate 108 beds
365 days Rate/Bed)]
Bar 1,074,318.19 1,218,964.95 1,413,465.69
[75% Accommodation Revenue]
Other 716,212.13 812,643.30 942,310.46
[50% Accommodation Revenue]
Total Sales 4,806,160.31 5,453,264.25 6,323,399.16
Less : Cost of Sales
Beverages 698,306.82 792,327.22 918,752.70
[65% Bar Revenue]
Food 870,763.16 988,003.17 1,145,651.14
[55% Restaurant Revenue]
Linens & Housekeeping supplies 114,593.94 130,022.93 150,769.67
[8% Accommodation Revenue]

Total Cost of Sales 1,683,663.92 1,910,353.32 2,215,173.52

Contribution Margin 3,122,496.39 3,542,910.93 4,108,225.64

Less : Other Operating Expenses (Note 1) (5,212,336.08 (5,229,646.68 (5,258,826.48
) ) )

Net Profit / (Loss) (2,089,839.69 (1,686,735.75 (1,150,600.84

 ) ) )
Note 1.This total is from total operating expenses given for each year minus with total cost of
sales computed.

Break-even point (in units) = other operating expenses unit contribution margin

Exhibit 3

Year 1 Year 2 Year 3

Estimated Occupancy Rate 65% 70% 75%

Unit Contribution Margin Kshs3,979,652.26 Kshs4,428,638.68 Kshs5,051,097.11

25,623 units 27,594 units 29,565 units
=155.32 =160.49 =170.85

Break-even point (in units) Kshs4,750,153.82 Kshs4,752,058.36 Kshs4,750,426.00

155.32 160.49 170.85
=30,583 units =29,610 units =27,805 units

Break-even Occupancy Rate 76% 75% 71%

Estimated Occupancy Rate 51% 56% 61%

Unit Contribution Margin Kshs3,122,496.39 Kshs3,542,910.93 Kshs4,108,225.64

20,104 units 22,075 units 24,046 units
=155.32 =160.49 =170.85

Break-even point (in units) Kshs5,212,336.08 Kshs5,229,646.68 Kshs5,258,826.48

155.32 160.49 170.85
=33,559 units =32,586 units =30,781 units

Break-even Occupancy Rate 85% 83% 78%

Exhibit 4 (Repayment loan schedule to West German Bank)

Outstanding Interest
Principle (15%)

Y0 10,000,000 0

Y1 8,750,000 1,500,000

Y2 7,500,000 1,312,500
 Y3 6,250,000 1,125,500

Y4 5,000,000 937,500

Y5 3,750,000 750,000

Y6 2,500,000 562,500

Y7 1,250,000 375,000

Y8 0 187,500
Net Operating Income = Net Profit/ (Loss) + Depreciation expenses + Bank Service Charge
Total Debt Service = Bank Service Charge + Loan Instalment
Exhibit 5

Year 1 Year 2 Year 3

Estimated 65% 70% 75%

Occupancy Rate

Net Operating (770,501.56) + (323,419.68) + 300,671.11 +

Income 360,000 + 1,500,000 360,000 + 1,312,500 360,000 +1,125,500
= 1,089,498.44 = 1,349,080.32 = 1,786,171.11

Total Debt 1,250,000 + 1,250,000 + 1,250,000 +

Service 1,500,000 1,312,500 1,125,500
=2,750,000 = 2,562,500 = 2,375,500

Debt-Service 1,089,498.44 1,349,080.32 1,786,171.11

Coverage Ratio 2,750,000 2,562,500 2,375,500
= 0.4 =0.52 =0.75

Exhibit 6

Year 1 Year 2 Year 3

Estimated 51% 56% 61%

Occupancy Rate

Net Operating (2,089,839.69) + (1,686,735.75) + (1,150,600.84) +

Income 360,000 + 1,500,000 360,000 + 1,312,500 360,000 +1,125,500
= (229,839.69) = (14,235.75) = 334,899.16

Total Debt 1,250,000 + 1,500,000 1,250,000 + 1,312,500 1,250,000 +

Service =2,750,000 = 2,562,500 1,125,500
= 2,375,500

Debt-Service (229,839.69) (14,235.75) 334,899.16

Coverage Ratio 2,750,000 2,562,500 2,375,500
= -0.08 = -0.006 =0.14
8.0 References
Investopedia. Debt-Service Coverage Ratio (DSCR). Retrieved from
http://www.investopedia.com/terms/d/dscr.asp
My Accounting Course. Debt Service Coverage Ratio DSCR. Retrieved from
http://www.myaccountingcourse.com/financial-ratios/debt-service-coverage-ratio
Monicah Wanjiru Muriithi, (2013). The Causes Of Non-Performing Loans In Commercial
Banks In Kenya. (pp.1-42). A Research Project Report Submitted In Partial
Fulfillment Of The Requirements For The Award Of Degree Of Masterof Business
Administration, University Of Nairobi Retrieved from
http://chss.uonbi.ac.ke/sites/default/files/chss/MONICAH%20WANJIRU
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