You have just been hired as a loan officer at San Diego State Bank. Your supervi

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:

     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 $48.00 per share last year to $52.00 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:

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 $4,392,000.) (Round your percentage answers to 1 decimal place i.e., 0.123 is considered as 12.3.)

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.)

Is the company’s financial leverage positive or negative?

You decide next to assess the well-being of the common stockholders. For both this year and last year, compute:

The earnings per share. (Round your answers to 2 decimal places.)

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.)

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.)

The price-earnings ratio. (Round your intermediate calculations to 2 decimal places and final answers to 1 decimal place.)

The book value per share of common stock. (Round your answers to 2 decimal places.)

The gross margin percentage. (Round your percentage answers to 1 decimal place i.e., 0.123 is considered as 12.3.)

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:

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.)

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.)

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

1a. Return on Assets (ROA) = Net Income/Total Assets

ROA (last year) = 326,200/5,051,000 = 6.46%

ROA (current year) = 487,200/6,116,000 = 7.97%

1b. Return on Equity (ROE) = Net Income/ average Shareholder's equity

Average shareholders equity (last year) = (4,392,000+3,176,200)/2 = 3,784,100

ROE (last year) = 326,200/3,784,100 = 8.62%

Average shareholders equity (current year) = (3,176,200+ 3,528,400)/2 = 3,352,300

ROE (current year) = 487,200/3,352,300 = 14.53%

1c. As the debt equity ratio is less than one, therefore financial leverage is positive. Less than one debt-equity ratio shows that equity is more than debt.

2a. Earnings per Share = (Net income - preferred dividend)/No. of equity shares

No. of common shares = 2,000,000/40 = 50,000 shares

EPS (last year) = (326,200 - 48,000)/50,000

= $5.56

EPS (current year) = (487,200 - 48,000)/50,000

= $8.78

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