Mitrium Corp. is a large privately held company that manufactures frozen ice cream products, which are sold to large and small retailers across North America. The shares of this company are held by 12 individuals, some of them related and some of them not. Four of these shareholders are actively involved in the management of the company and are com-pensated with bonuses based on earnings. There are annual dividend payouts to provide some return to the remaining shareholders. The company has been prosperous in the past but the current retail grocery market, slowly being taken over by private- label goods, is proving a challenge for Mitrium. However, the company is actively engaged in manufacturing private- label goods and enjoys healthy sales and profit margins in several of its flagship products, which have strong brand recognition with the end consumer.

The VP Finance has come to you has come to you, a staff member, for commentary on two key financial ratios (Exhibit 1) based on the draft statement of financial position (Exhibit 2) for the most recent fiscal year. She has isolated these ratios because they are the subject of loan covenants. Specifically, one chartered bank provides the $ 6 million financing that appears as long- term debt on the statement of financial position. As part of this lending agreement, the current ratio on audited financial statements must not go below 2: 1, and the debt- to- equity ratio must not go above 12: 1. If either of these ratio requirements is violated, or if interest is not paid annually, the debt becomes payable on demand. The current ratio condition is not met in the financial statements, although it is very close. The VP Finance suspects that the draft financial statements will change based on the additional information she has provided to you. Your task is to analyze this additional information and restate the ratios, providing any commentary or advice you feel is appropriate.

Required:

Prepare a report to the VP Finance that responds to her concerns. The tax rate is40%.

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EXHIBIT 1 MITRIUM CORP. Debt Covenant Ratios Calculation (Based on Draft Statements) Ratio Definition Current ratio $2.360 1.95 $1,211 Current assets Current liabilities $8,808 10.2 $867 Debt/equity Total debt Total owners' equity