Konrath Company is considering extending credit to D. Hawk Company. L. Konrath Company estimated that sales to D. Hawk Company would amount to $2 million each year. L. Konrath Company, a wholesaler, sells throughout the Midwest. D. Hawk Company, a retail chain operation, has a number of stores in the Midwest. L. Konrath Company has had a gross profit of approximately 60% in recent years and expects to have a similar gross profit on the D. Hawk Company order. The D. Hawk Company order is approximately 15% of L. Konrath Company€™s present sales. Data from recent statements of D. Hawk Company follow:

Required
a. Calculate the following for D. Hawk Company for 2009:
1. Rate of return on total assets
2. Acid-test ratio
3. Return on sales
4. Current ratio
5. Inventory turnover
b. As part of the analysis to determine whether L. Konrath Company should extend credit to D. Hawk Company, assume the ratios were calculated from D. Hawk Company statements. For each ratio, indicate whether it is a favorable, an unfavorable, or a neutral statistic in the decision to grant D. Hawk Company credit. Briefly explain your choice in each case.

c. Would you grant credit to D. Hawk Company? Support your answer with facts given in the problem.
d. What additional information, if any, would you want before making a final decision?
Source: Materials identified as CFA Examination I, June 4, 1988, June 6, 1987 and June 6, 1988 are reproduced with permission from the Association for Investment Management and Research and the Institute of Chartered FinancialAnalysts.

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(In millions) Assets Current assets: 2007 2008 2009 2.6 0.4 Cash S 1.8 0.2 8.5 3.2 0.6 14.3 S1.6 Government securities (cost) Accounts and notes receivable (net) 2.8 0.7 14.5 2.8 0.6 13.5 Inventories Prepaid assets Total current assets Property,plant, and equipment (net) Total assets $18.8 $19.7 $19.4 Liabilities and Equities Current liabilities Long-term debt, 6% $ 8.5 6.9 3.0 9.9 8.9 $18.8 S 9.3 10.3 S19.4 Total liabilities Shareholders' equity Total liabilities and equities Income Net sales Cost of goods sold Gross margin Selling and administrative expenses Eamings (loss) before taxes Income taxes Net income 0.5 9. 2 S19.7 $24.5 17.2 7.3 6.8 0.5 0.2 S 0.3 $24.2 16.9 $24.9 18.0 6.9 6.6 (0.4) 0.3 S 0.4 2007 2008 2009 1.96% 1.69% 1.73 2.39 4.41 Rate of retum on total assets Return on sales 1,12% (87)% (.69)% Current ratio Inventory turnover (times per year) Equity relationships: 1.36 1.92 4.32 1.19 1.67 4.52 Curent liabilities Long-term liabilities Shareholders' equity 36.0% 16.0 48.0 100.0% 43.0% 10.5 46.5 100.0% 48.0% 5.0 47.0 100.0% 1 Asset relationships: Current assets Property, plant, and equipment 77.0% 695% 725% 27.5 100.0% 9 100.0% 100.0%