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 24% 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 $33 per share last year to $49 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’s industry:

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 $4,330,000.) (Round your answers to 1 decimal place.)

The return on common stockholders’ equity. (Stockholders' equity at the beginning of last year totaled $4,764,189. There has been no change in preferred or common stock over the last two years.)(Round your intermediate calculations to whole numbers and final answer to 1 decimal place)

Is the company’s financial leverage positive or negative?

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:

Explanation / Answer

Required: 1 You decide first to assess the rate of return that the company is generating. Compute the following for both this year and last year: (All values in $) a. The return on total assets. (Total assets at the beginning of last year were $4,330,000.) (Round your answers to 1 decimal place.)        This year          Last year   Return on total assets % % Return on Total Assets = Net Income/Average Total Assets Average Total Assets for last year = 2767650 Average Total Assets for this year = 5490550 Net Income for last year 321300 Net Income for this year 444500 Hence, Return on Total Assets 8.1% 11.6% b. The return on common stockholders’ equity. (Stockholders' equity at the beginning of last year totaled $4,764,189. There has been no change in preferred or common stock over the last two years.) (Round your intermediate calculations to whole numbers and final answer to 1 decimal place)    This year    Last year   Return on common stockholders' equity % % Return on Common Stockholders' Equity = Net Income/Average Shareholders' Equity Average Equity for the last year = 3978245 Average Equity for this year = 3350550 Hence, Return on Shareholders' Equity 13.3% 8.1% c. Is the company’s financial leverage positive or negative?   This year (Click to select)PositiveNegative   Positive, since the return on shareholders' equity is higher than the return on total assets   Last year (Click to select)PositiveNegative   Negative, since the return on shareholders' equity is lower than the return on total assets

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