You have just been hired as a loan officer at San Diego State Bank. Your supervi
ID: 2501833 • Letter: Y
Question
You have just been hired as a loan officer at San Diego State Bank. Your supervisor has given you a file containing a request from Mobile 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:
Mobile Company
Comparative Balance Sheet
This Year
Last Year
Assets
Current assets:
Cash
$
267,400
$
342,100
Marketable securities
0
117,000
Accounts receivable, net
940,000
643,000
Inventory
1,357,000
757,000
Prepaid expenses
101,200
86,200
Total current assets
2,665,600
1,945,300
Plant and equipment, net
3,453,800
3,109,400
Total assets
$
6,119,400
$
5,054,700
Liabilities and Stockholders’ Equity
Liabilities:
Current liabilities
$
1,278,800
$
764,400
Bonds payable
1,316,000
1,116,000
Total liabilities
2,594,800
1,880,400
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
924,600
574,300
Total stockholders' equity
3,524,600
3,174,300
Total liabilities and stockholders' equity
$
6,119,400
$
5,054,700
Mobile Company
Comparative Income Statement and Reconciliation
This Year
Last Year
Sales
$
5,508,000
$
4,328,000
Cost of goods sold
4,124,000
3,214,000
Gross margin
1,384,000
1,114,000
Selling and administrative expenses
548,000
528,000
Net operating income
836,000
586,000
Interest expense
137,000
117,000
Net income before taxes
699,000
469,000
Income taxes (30%)
209,700
140,700
Net income
489,300
328,300
Dividends paid:
Preferred stock
48,000
48,000
Common stock
91,000
67,000
Total dividends paid
139,000
115,000
Net income retained
350,300
213,300
Retained earnings, beginning of year
574,300
361,000
Retained earnings, end of year
$
924,600
$
574,300
Loretta Young, who just two years ago was appointed president of Mobile Company, admits that the company has been “inconsistent” in its performance over the past several years. But Young argues that the company has its costs under control and is now experiencing strong sales growth, as evidenced by the more than 27% increase in sales over the last year. Young also argues that investors have recognized the improving situation at Mobile Company, as shown by the jump in the price of its common stock from $42.00 per share last year to $54.00 per share this year. Young 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 Mobile’s industry:
Current ratio
2.3
Acid-test ratio
1.2
Average collection period
31
days
Average sale period
60
days
Return on assets
9.5
%
Debt-to-equity ratio
0.65
Times interest earned
5.7
Price-earnings ratio
10
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:
a.
The return on total assets. (Total assets at the beginning of last year were $4,396,000.) (Round your percentage answers to 1 decimal place i.e., 0.123 is considered as 12.3.)
Return on total assets: This year_______% Last year_______%
b.
The return on common stockholders’ equity. (Stockholders' equity at the beginning of last year totaled $4,519,185. There has been no change in preferred or common stock over the last two years.) (Do not round your intermediate calculations. Round your percentage answers to 1 decimal place i.e., 0.123 is considered as 12.3.)
Return on common stockholders’ equity: This year_____% Last year_____%
c.
Is the company’s financial leverage positive or negative?
This Year______ Last Year____
2.
You decide next to assess the well-being of the common stockholders. For both this year and last year, compute:
a.
The earnings per share. (Round your answers to 2 decimal places.)
Earnings per share: This Year_______ Last Year______
b.
The dividend yield ratio for common stock. (Round your intermediate calculations to 2 decimal places and and your percentage answers to 1 decimal place i.e., 0.123 is considered as 12.3.)
Dividend yield ratio: This Year______ Last Year_______
c.
The dividend payout ratio for common stock. (Round your intermediate calculations to 2 decimal places and your percentage answers to 1 decimal place i.e., 0.123 is considered as 12.3.)
Dividend payout ratio: This Year______ Last Year_______
d.
The price-earnings ratio. (Round your intermediate calculations to 2 decimal places and final answers to 1 decimal place.)
Price earning ratio: Time______ Time_______
e.
The book value per share of common stock. (Round your answers to 2 decimal places.)
f.
The gross margin percentage. (Round your percentage answers to 1 decimal place i.e., 0.123 is considered as 12.3.)
3.
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:
a.
Working capital.
b.
The current ratio. (Round your answers to 2 decimal places.)
c.
The acid-test ratio. (Round your answers to 2 decimal places.)
d.
The average collection period. (The accounts receivable at the beginning of last year totaled $520,000.) (Use 365 days in a year. Do not round intermediate calculations. Round your final answers to the nearest whole number.)
e.
The average sale period. (The inventory at the beginning of last year totaled $650,000.) (Use 365 days in a year. Round your intermediate calculations to 2 decimal and final answers to the nearest whole number.)
f.
The debt-to-equity ratio. (Round your answers to 2 decimal places.)
g.
The times interest earned. (Round your answers to 1 decimal place.)
You have just been hired as a loan officer at San Diego State Bank. Your supervisor has given you a file containing a request from Mobile 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
CALCULATION OF RATES 1(a). Return on total assets : CY PY Assets at the beginning of the year A 5054700 4396000 Net income B 699000 469000 Return % B/A *100 13.83 1.67 1(b). Return on common stockholders equity : Net income 489300 328300 Less : preferred equity dividend 48000 48000 income available for common equity A 441300 280300 Common stockholders equity B 2000000 2000000 Return on common equity % A/B*100 22.07 14.02 1(c) Financial Leverage Positive Positive 2(a)Earnings PEr share : Net income after preferred dividend A 441300 280300 no. of common equity shares B 50000 50000 Earnings per share A/B5.61 8.83 5.61 2(b). dividend Yield Ratio No. of shares A 50000 50000 dividend B 91000 57000 dividend per share B/A = C 1.82 1.14 Market price per share D 54.00 42.00 Yield ratio C/D*100 3.37 2.71 2(c) Dividend Payout ratio Total dividends A 139000 115000 net income B 489300 328300 dividend payout % A/B*100 28.41 35.03 2(d) Price Earnings Ratio Market price A 54 42 Earnings per share B 8.83 5.61 P/E ratio A/B 6.12 7.49 2(e) Book value per share of common stock Stockholders equity 3524600 3174300 Less : preferred stock 600000 600000 Net common equity a 2924600 2574300 no. of common shares b 50000 50000 B.V per share of common equity b/a 58.49 51.49 2(f) Gross Margin Percentage Sales A 5508000 4328000 Gross Margin B 1384000 1114000 Gross Margin % B/A*100 25.13 25.74 3(a) Working Capital Current assets a 2665600 1945300 Current liabilities b 1278800 764400 Working capital a-b 1386800 1180900 3(b) Current ratio as above a/b 2.08 2.54 3(c) Acid test ratio Current assets (excld. inventory+prepaid expenses) a 1207400 1102100 Current liabilities b 1278800 764400 Ratio a/b 0.94 1.44 3(d) average Collection period Sales/365 days A 15090 11858 Receivables B 940000 643000 Collection period days B/A 62 54 3(e) average sale period Cost of goods sold A 4124000 3214000 Ending inventory B 1357000 757000 Average sale period days B/A *365 120 86 3(f) Debt-Equity ratio Total liabilities A 2594800 1880400 total equity B 3524600 3124300 Debt equity ratio A/B 0.74 0.60 3(g) times of interest earned net income before interest A 836000 586000 interest paid B 137000 117000 times interest earned A/B 6.10 5.01
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