Modern Building Supply sells various building materials to retail outlets. The company has just approached Linden State Bank requesting a $300,000 loan to strengthen the Cash account and to pay certain pressing short-term obligations. The company’s financial statements for the most recent two years follow:
Modern Building Supply
Comparative Balance Sheet
This Year
Last Year
Assets
Current assets:
Cash
$
90,000
$
200,000
Marketable securities
0
50,000
Accounts receivable, net
650,000
400,000
Inventory
1,300,000
800,000
Prepaid expenses
20,000
20,000
Total current assets
2,060,000
1,470,000
Plant and equipment, net
1,940,000
1,830,000
Total assets
$
4,000,000
$
3,300,000
Liabilities and Stockholders Equity
Liabilities:
Current liabilities
$
1,100,000
$
600,000
Bonds payable, 12%
750,000
750,000
Total liabilities
1,850,000
1,350,000
Stockholders equity:
Preferred stock, $50 par, 8%
200,000
200,000
Common stock, $10 par
500,000
500,000
Retained earnings
1,450,000
1,250,000
Total stockholders equity
2,150,000
1,950,000
Total liabilities and stockholders equity
$
4,000,000
$
3,300,000
Modern Building Supply
Comparative Income Statement and Reconciliation
This Year
Last Year
Sales
$
7,000,000
$
6,000,000
Cost of goods sold
5,400,000
4,800,000
Gross margin
1,600,000
1,200,000
Selling and administrative expenses
970,000
710,000
Net operating income
630,000
490,000
Interest expense
90,000
90,000
Net income before taxes
540,000
400,000
Income taxes (40%)
216,000
160,000
Net income
324,000
240,000
Dividends paid:
Preferred dividends
16,000
16,000
Common dividends
108,000
60,000
Total dividends paid
124,000
76,000
Net income retained
200,000
164,000
Retained earnings, beginning of year
1,250,000
1,086,000
Retained earnings, end of year
$
1,450,000
$
1,250,000
During the past year, the company has expanded the number of lines that it carries in order to stimulate sales and increase profits. It has also moved aggressively to acquire new customers. Sales terms are 2/10, n/30. All sales are on account.
Assume that the following ratios are typical of companies in the building supply industry:
Current ratio
2.5
Acid-test ratio
1.2
Average collection period
18
days
Average sale period
50
days
Debt-to-equity ratio
0.75
Times interest earned
6.0
Return on total assets
10
%
Price-earnings ratio
9
Required:
1.
Linden State Bank is uncertain whether the loan should be made. To assist it in making a decision, you have been asked to compute the following amounts and ratios for both this year and last year:
a.
Working capital. (Omit the \"$\" sign in your response.)
b.
Current ratio. (Round your answers to 2 decimal places.)
c.
Acid-test ratio. (Round your answers to 2 decimal places.)
d.
Average collection period. (The accounts receivable at the beginning of last year totaled $350,000.) (Round your intermediate calculations and final answer to 1 decimal place. Use 365 days in a year.)
e.
Average sale period. (The inventory at the beginning of last year totaled $720,000.) (Round your intermediate calculations and final answer to 1 decimal place. Use 365 days in a year.)
f.
Debt-to-equity ratio. (Round your answers to 2 decimal places.)
g.
Times interest earned. (Round your answers to 1 decimal place.)
2.
For both this year and last year:
a.
Present the balance sheet in common-size form. (Round your answers to 1 decimal place. Leave no cells blank - be certain to enter \"0\" wherever required. Omit the \"%\" sign in your response.)
b.
Present the income statement in common-size form down through net income. (Input all amounts as positive values. Round your answers to 1 decimal place. Omit the \"%\" sign in your response.)
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