The chief executive officer of Ginny’s Fashions has included the following finan
ID: 2445785 • Letter: T
Question
The chief executive officer of Ginny’s Fashions has included the following financial statements in a loan application submitted to Priority Bank. The company intends to acquire additional equipment and wishes to finance the purchase with a long-term note.
2015
2014
Balance Sheet
Current Assets
$21,000
$14,000
Long-term Assets
52,000
50,000
Current Liabilities
9,000
7,000
Long-term Liabilities
24,000
26,000
Contributed Capital
25,000
25,000
Retained Earnings
15,000
6,000
2015
2014
Income Statement
Revenues
$74,000
$70,000
Expenses
56,000
53,000
Statement of Cash Flows
Net cash from operating activities
$9,000
$15,000
Net cash from investing activities
(12,000)
(14,000)
Net cash from financing activities
5,000
7,000
Change in cash balance
--------$2,000
-----------$8,000
Beginning cash balance
9,000
1,000
Ending cash balance
--------$11,000
------------9,000
Assume that you, a bank loan officer, review the financial statements, and recommend whether Ginny’s Fashions should be considered for a loan. Support your recommendation with financial ratios. Assume a tax rate of 30 percent. Interest expense is $2,000 in 2015 and $2,000 in 2014.
2015
2014
Balance Sheet
Current Assets
$21,000
$14,000
Long-term Assets
52,000
50,000
Current Liabilities
9,000
7,000
Long-term Liabilities
24,000
26,000
Contributed Capital
25,000
25,000
Retained Earnings
15,000
6,000
Explanation / Answer
To determine if the company should be considered for a loan the following ratios can be used:
Debt to Equity Ratio: Total Debt / Total Equity
Current Ratio: Current Assets / Current Liabilities
Debt to Equity Ratio:
73000 / 73000 = 1
A debt to equity ratio of 1 means that investors and creditors have an equal stake in the business assets.
Current Ratio:
21000 / 9000 = 2.33
A current ratio of 2 means that current assets are sufficient to cover for twice the amount of a company's short term liabilities.
By using the above two ratios we can determine that it would be safe to grant a loan to Ginny’s Fashions. As mentioned above after each ratio the debt and equity are equal hence, the investors are matching the creditors and the creditors do not have a larger share.
Similarly, the current ratio shows that their current assets are twice more capable in covering their current liabilities.
From this we can ascertain that granting them a loan is fine.
To determine if the company should be considered for a loan the following ratios can be used:
Debt to Equity Ratio:
73000 / 73000 = 1
A debt to equity ratio of 1 means that investors and creditors have an equal stake in the business assets.
Current Ratio:
21000 / 9000 = 2.33
A current ratio of 2 means that current assets are sufficient to cover for twice the amount of a company's short term liabilities.
By using the above two ratios we can determine that it would be safe to grant a loan to Ginny’s Fashions. As mentioned above after each ratio the debt and equity are equal hence, the investors are matching the creditors and the creditors do not have a larger share.
Similarly, the current ratio shows that their current assets are twice more capable in covering their current liabilities.
From this we can ascertain that granting them a loan is fine.
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