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You have just been hired as a loan officer at Fairfield State Bank

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Question;PROBLEM 15?16 Comprehensive Ratio Analysis [LO2, LO3, LO4]You have just been hired as a loan officer at Fairfield State Bank. Your supervisor has given you a filecontaining a request from Hedrick Company, a manufacturer of auto components, for a $1,000,000five-year loan. Financial statement data on the company for the last two years are given below:Hedrick CompanyComparative Balance SheetThis Year Last YearAssetsCurrent assets:Cash............................. $ 320,000 $ 420,000Marketable securities................ 0 100,000Accounts receivable, net.............. 900,000 600,000Inventory.......................... 1,300,000 800,000Prepaid expenses................... 80,000 60,000Total current assets................... 2,600,000 1,980,000Plant and equipment, net............... 3,100,000 2,980,000Total assets......................... $5,700,000 $4,960,000Liabilities and Stockholders? EquityLiabilities:Current liabilities.................... $1,300,000 $ 920,000Bonds payable, 10%................. 1,200,000 1,000,000Total liabilities........................ 2,500,000 1,920,000Stockholders? equity:Preferred stock, 8%, $30 par value...... 600,000 600,000Common stock, $40 par value......... 2,000,000 2,000,000Retained earnings................... 600,000 440,000Total stockholders? equity............... 3,200,000 3,040,000Total liabilities and stockholders? equity.... $5,700,000 $4,960,000Hedrick CompanyComparative Income Statement and ReconciliationThis Year Last YearSales (all on account).................. $5,250,000 $4,160,000Cost of goods sold.................... 4,200,000 3,300,000Gross margin........................ 1,050,000 860,000Selling and administrative expenses...... 530,000 520,000Net operating income.................. 520,000 340,000Interest expense...................... 120,000 100,000Net income before taxes................ 400,000 240,000Income taxes (30%)................... 120,000 72,000Net income.......................... 280,000 168,000Dividends paid:Preferred stock..................... 48,000 48,000Common stock..................... 72,000 36,000Total dividends paid................... 120,000 84,000Net income retained................... 160,000 84,000Retained earnings, beginning of year...... 440,000 356,000Retained earnings, end of year.......... $ 600,000 $ 440,000Marva Rossen, who just two years ago was appointed president of Hedrick Company, admitsthat the company has been ?inconsistent? in its performance over the past several years. ButRossen argues that the company has its costs under control and is now experiencing strong sales growth, as evidenced by the more than 25% increase in sales over the last year. Rossen also arguesthat investors have recognized the improving situation at Hedrick Company, as shown by the jumpin the price of its common stock from $20 per share last year to $36 per share this year. Rossenbelieves that with strong leadership and with the modernized equipment that the $1,000,000 loanwill 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 canabout the company. You determine that the following ratios are typical of companies in Hedrick?sindustry:Current ratio.............. 2.3Acid-test ratio............. 1.2Average collection period.... 31 daysAverage sale period........ 60 daysReturn on assets.......... 9.5%Debt-to-equity ratio......... 0.65Times interest earned....... 5.7Price-earnings ratio........ 10Required:1. You decide first to assess the rate of return that the company is generating. Compute the followingfor both this year and last year:a. The return on total assets. (Total assets at the beginning of last year were $4,320,000.)b. The return on common stockholders? equity. (Stockholders? equity at the beginning oflast year totaled $3,016,000. There has been no change in preferred or common stockover the last two years.)c. Is the company?s financial leverage positive or negative? Explain.2. You decide next to assess the well-being of the common stockholders. For both this year andlast year, compute:a. The earnings per share.b. The dividend yield ratio for common stock.c. The dividend payout ratio for common stock.d. The price-earnings ratio. How do investors regard Hedrick Company as compared toother companies in the industry? Explain.e. The book value per share of common stock. Does the difference between market valueper share and book value per share suggest that the stock at its current price is a bargain?Explain.f. The gross margin percentage.3. You decide, finally, to assess creditor ratios to determine both short-term and long-term debtpaying ability. For both this year and last year, compute:a. Working capital.b. The current ratio.c. The acid-test ratio.d. The average collection period. (The accounts receivable at the beginning of last yeartotaled $520,000.)e. The average sale period. (The inventory at the beginning of last year totaled $640,000.)f. The debt-to-equity ratio.g. The times interest earned.4. Make a recommendation to your supervisor as to whether the loan should be approved.

 

Paper#41928 | Written in 18-Jul-2015

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