You have just been hired as a loan officer at Fairfield State Bank. Your supervi
ID: 2468516 • Letter: Y
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, 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 $512,000.) (Use 365 days in a year. Round your intermediate calculations to 2 decimal places and final answers to the nearest whole number.)
The average sale period. (The inventory at the beginning of last year totaled $730,000.) (Use 365 days in a year.Round your intermediate calculations to 2 decimal places and final answers to the nearest whole number.)
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
Answer:
Loan can be granted as Debt to Equity Ratio and Time interest ratio is good.
a. Working Capital Formula Working this year This year Working last year Last year Industry Standard Compare Result with this year =Current Assets- Current Liabilities =2681000-1220000 1,461,000.00 =1889000-900000 989,000.00 - - b. Current Ratio Formula Working this year This year Working last year Last year Industry Standard Compare Result with this year =Current Assets : Current Liabilities =2681000 : 1220000 2.20:1 =1889000-900000 2.10:1 2.3 : 1 Not Good c. Acid Test Ratio Formula Working this year This year Working last year Last year Industry Standard Compare Result with this year =Cash+Account Receivable+ Marketable Securities: Current Liabilities =306000+905000 : 1220000 1 : 1 =428000+93000 +599000:900000 1.24 : 1 1.20 : 1 Not Good d. Average Collection Period Formula Working this year This year Working last year Last year Industry Standard Compare Result with this year = Average account receivable * Days / Total Credit Sales =905000+599000/2 * 365 /5330000 51 Days =599000+512000/2 * 365 /4280000 47 Days 31 Days Not Good e. Average Sale Period Formula Working this year This year Working last year Last year Industry Standard Compare Result with this year =365/Inventory Turnover(Cost of goods sold/Average Inven) = 365/4060000/(1390000+710000/2) 94 days = 365/3200000/(730000+710000/2) 82 days 60 days Not Good f. Debt to Equity Ratio Formula Working this year This year Working last year Last year Industry Standard Compare Result with this year = Debt : Equity =1150000:3508800 .33 : 1 =1010000:3192300 .32 : 1 .65 : 1 Good g. Time interest ratio Formula Working this year This year Working last year Last year Industry Standard Compare Result with this year = EBIT/ Interest Expense =750000/115000 6.52 times =560000/101000 5.54 times 5.7 times Good h. Return on assets Formula Working this year This year Working last year Last year Industry Standard Compare Result with this year =Net Income / Total Assets =444500/5878800 7.56% =321300/ 5102300 6.30% 9.50% Not Good i. Price Earning Ratio Formula Working this year This year Working last year Last year Industry Standard Compare Result with this year =Price per share : Earning per share =49: (444500-48000/20000) 2.47 =33: (321300-48000/20000) 2.41 10 Good
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