(Ratio Computations and Additional Analysis) Bradburn Corporation was formed 5 y

Question

(Ratio Computations and Additional Analysis) Bradburn Corporation was formed 5 years ago through a public subscription of common stock. Daniel Brown, who owns 15% of the common stock, was one of the organizers of Bradburn and is its current president. The company has been successful, but it currently is experiencing a shortage of funds. On June 10, 2014, Daniel Brown approached the Topeka National Bank, asking for a 24-month extension on two $35,000 notes, which are due on June 30, 2015, and September 30, 2015. Another note of $6,000 is due on March 31, 2016, but he expects no difficulty in paying this note on its due date. Brown explained that Bradburn’s cash flow problems are due primarily to the company’s desire to finance a $300,000 plant expansion over the next 2 fiscal years through internally generated funds. The commercial loan officer of Topeka National Bank requested the following financial reports for the last 2 fiscal years.

Instructions:

(b) Identify and explain what other financial reports and/or financial analyses might be helpful to the
commercial loan officer of Topeka National Bank in evaluating Daniel Brown’s request for a time
extension on Bradburn’s notes.

(c) Assume that the percentage changes experienced in fiscal year 2015 as compared with fiscal year
2014 for sales and cost of goods sold will be repeated in each of the next 2 years. Is Bradburn’s desire
to finance the plant expansion from internally generated funds realistic? Discuss.

(d) Should Topeka National Bank grant the extension on Bradburn’s notes considering Daniel Brown’s
statement about financing the plant expansion through internally generated funds? Discuss.

BRADBURN CORPORATION BALANCE SHEET MARCH 31 Assets Cash Notes receivable Accounts receivable (net) Inventories (at cost) Plant & equipment (net of depreciation) 2015 2014 $18,200 148,000 131,800 105,000 1,449,000 $1,852,000 $ 12,500 132,000 125,500 50,000 1,420,500 $1,740,500 Total assets Liabilities and Stockholders' E $ 79,000 91,000 61,500 6,000 1,300,000 282,000 $1,740,500 s payable Notes payable Accrued liabilities Common stock (130,000 shares, $10 par) Retained earningsa 76,000 9,000 1,300,000 388,000 $1,852,000 Total liabilities and stockholders' equity Cash dividends were paid at the rate of $1 per share in fiscal year 2014 and $2 per share in fiscal year 2015

Explanation / Answer

(b)

Other financial reports and financial analyses which might be helpful to the commercial loan officer of Topeka National Bank include:

1. The statement of cash flows, as it is the statement which helps in analyzing the cash inflows and outflows of the company as well as the reasons of increase or decrease in cash

2. Projected financial statements for 2016 including a projected statement of cash flows. This will help in analyzing the estimates of the upcoming year

3. Some additional ratios, such as day’s sales in receivables, accounts receivable turnover, and day’s sales in inventory will help in analyzing the liquidity of the company

4. Analyzing the leverage factor of the company.

(C)

Bradburn Corporation should be able to finance the plant expansion from internally generated funds as shown in the calculations presented below.

Assumptions:

Sales increase at a rate of[($30,00,000 -$27,00,000 / $27,00,000] = 11.11%

Cost of goods sold increases at a rate of [($15,30,000 -$14,25,000) / $14,25,000] = 7.37%

despite depreciation remaining constant.

Other operating expenses increase at the same rate experienced from 2010 to 2011; i.e., at

[($860,000 - $780,000) / $780,000] = 10.26%

Depreciation remains constant at $102,500

Diidend remain at $2 per share

Plant expansion is financed equally over the two years($150,000 each year)

Loan extension is granted.

(d)

Topeka National Bank should grant the extension of the loan, as looking at the projected cash flows we can say that the company will have adequate cash to run the operations of the business smoothly as well as financing the plnt expansion as well as to replay the loan. The company would request for the extension of the loan as after completing these operations the company would have low cash balance.

2015 2016 2017 Sales $3000 $3333.3 $3703.7 Cost of goods sold 1530 1642.7 1763.8 Gross margin 1470 1690.6 1939.9 Operating expenses 860 948.2 1045.5 Income before taxes 610 742.4 894.5 Income taxes (40%) 244 297 357.8 Net income $366 $445.4 $536.7 Add Dericiation 102.5 102.5 Deduct: Dividends (260) (260) Note repayment (6) Funds available for plant expansion 281.9 379.2 Plant expansion (150) (150) Excess funds $131.9 $229.2

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