You have just been hired as a loan officer at Fairfield State Bank. Your supervi

Question

You have just been hired as a loan officer at Fairfield State Bank. Your supervisor has given you a file containing a request from Hedrick Company, a manufacturer of auto components, for a $1,000,000 five-year loan. Financial statement data on the company for the last two years are given below:

Marva Rossen, who just two years ago was appointed president of Hedrick Company, admits that the company has been “inconsistent†in its performance over the past several years. But Rossen argues that the company has its costs under control and is now experiencing strong sales growth, as evidenced by the more than 28% increase in sales over the last year. Rossen also argues that investors have recognized the improving situation at Hedrick Company, as shown by the jump in the price of its common stock from $30 per share last year to $46 per share this year. Rossen believes that with strong leadership and with the modernized equipment that the $1,000,000 loan will enable the company to buy, profits will be even stronger in the future.

Anxious to impress your supervisor, you decide to generate all the information you can about the company. You determine that the following ratios are typical of companies in Hedrick’sindustry:

You decide first to assess the rate of return that the company is generating. Compute the following for both this year and last year:

The return on total assets. (Total assets at the beginning of last year were $4,380,000.) (Round your answers to 1 decimal place. Omit the "%" sign in your response.)

The return on common stockholders’ equity. (Stockholders' equity at the beginning of last year totaled $4,684,690. There has been no change in preferred or common stock over the last two years.) (Round your intermediate calculations to the nearest whole number and final answers to 1 decimal place. Omit the "%" sign in your response.)

Is the company’s financial leverage positive or negative?

You decide next to assess the well-being of the common stockholders. For both this year and last year, compute:

The earnings per share. (Round your answers to 2 decimal places. Omit the "$" sign in your response.)

The dividend yield ratio for common stock. (Round your intermediate calculations to 2 decimal places and final answers to 1 decimal place. Omit the "%" sign in your response.)

The price-earnings ratio. (Round your intermediate calculations to 2 decimal places and final answers to 1 decimal place.)

The book value per share of common stock. (Round your answers to 2 decimal places. Omit the "$" sign in your response.)

The gross margin percentage. (Round your answers to 1 decimal place. Omit the "%" sign in your response.)

You decide, finally, to assess creditor ratios to determine both short-term and long-term debt paying ability. For both this year and last year, compute:

The average collection period. (The accounts receivable at the beginning of last year totaled $525,000.) (Round your intermediate calculations to 2 decimal places and final answers to the nearest whole number. Use 365 days in a year.)

The average sale period. (The inventory at the beginning of last year totaled $640,000.) (Round your intermediate calculations to 2 decimal places and final answers to the nearest whole number. Use 365 days in a year.)

Hedrick Company Comparative Balance Sheet This Year Last Year Assets Current assets: Cash $ 320,000 $ 418,000 Marketable securities 0 109,000 Accounts receivable, net 900,000 607,000 Inventory 1,380,000 890,000 Prepaid expenses 88,000 65,000 Total current assets 2,688,000 2,089,000 Plant and equipment, net 3,481,300 3,136,900 Total assets $ 6,169,300 $ 5,225,900 Liabilities and Stockholders Equity Liabilities: Current liabilities $ 1,370,000 $ 900,000 Bonds payable, 10% 1,280,000 1,130,000 Total liabilities 2,650,000 2,030,000 Stockholders equity: Preferred stock, 8%, $30 par value 600,000 600,000 Common stock, $40 par value 2,000,000 2,000,000 Retained earnings 919,300 595,900 Total stockholders equity 3,519,300 3,195,900 Total liabilities and stockholders equity $ 6,169,300 $ 5,225,900

Explanation / Answer

Explanation:

 This Year Last Year   Net income  $ 280,000   $ 168,000    Add after-tax cost of interest:            $120,000 × (1 – 0.30)  84,000           $100,000 × (1 – 0.30)    70,000     Total (a)  $ 364,000   $ 238,000      Average total assets (b) $ 5,330,000  $ 4,640,000    Return on total assets (a) à · (b)  6.8%  5.1% Â

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