Modern Building Supply sells various building materials to retail outlets. The company has just approached Linden State Bank requesting a $300,000 loan to strengthen the Cash account and to pay certain pressing short-term obligations. The company's financial statements for the most recent two years follow:

During the past year, the company has expanded the number of lines that it carries in order to stimulate sales and increase profits. It has also moved aggressively to acquire new customers. Sales terms are 2/10, n/30. All sales are on account.
Assume that the following ratios are typical of companies in the building supply industry:
Current ratio . . . . . . . . . . . . . . . . . . 2.5
Acid-test ratio . . . . . . . . . . . . . . . . . 1.2
Average collection period . . . . . . . . 18 days
Average sale period . . . . . . . . . . . . 50 days
Debt-to-equity ratio . . . . . . . . . . . . 0.75
Times interest earned . . . . . . . . . . 6.0
Return on total assets . . . . . . . . . . 10%
Price-earnings ratio . . . . . . . . . . . . 9
Required:
1. Linden State Bank is uncertain whether the loan should be made. To assist it in making a decision, you have been asked to compute the following amounts and ratios for both this year and last year:
a. Working capital.
b. Current ratio.
c. Acid-test ratio.
d. Average collection period. (The accounts receivable at the beginning of last year totaled $350,000.)
e. Average sale period. (The inventory at the beginning of last year totaled $720,000.)
f. Debt-to-equity ratio.
g. Times interest earned.
2. For both this year and last year (carry computations to one decimal place):
a. Present the balance sheet in common-size form.
b. Present the income statement in common-size form down through net income.
3. From your analysis in (1) and (2) above, what problems or strengths do you see for Modern
Building Supply? Make a recommendation as to whether the loan should beapproved.

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Modern Building Supply Comparative Balance Sheet This Year Last Year Assets Current assets: ...S 90,000 200,000 50,000 650,000 400,000 800,000 20,000 Marketable securities Accounts receivable, net.n 0 1,300,000 20,000 Prepaid expenses. Total current assets Plant and equipment, net . 2,060,000 1,470,000 1.940.000 1.830,000 $4,000,000 $3,300,000 Liabilities and Stockholders' Equity Liabilities: Current liabilities Bonds payable, 12% $1,100,000 $ 600,000 750,000 750,000 Total liabilities... -r*t1,850,000 1,350,000 Stockholders' equity: Preferred stock, $50 par, 8% . -.-...-.. . Common stock, $10 par Retained earnings 200,000 200,000 500,000 500,000 1,450,000 1.250,000 2.150,000 1.950,000 Total stockholders' equity Total liabilities and stockholders equity $4,000,000 S3,300,000 Modem Building Supply Comparative Income Statement and Reconciliation Sales Cost of goods sold Gross margin Selling and administrative expenses.. . .. This Year Last Year $7,000,000 $6,000,000 5,400,000 4,800,000 1.600,000 1200.,000 970,000 710,000 Net operating income Interest expense Net income before taxes Income taxes (40%) Net income.... 630.000 49,000 90,000 90,000 540,000 400,000 216,000 160,000 324.000 240,000 Dividends paid: Preferred dividends 16,000 108,000 124,000 16,000 rrt dividends. Total dividends paide Net income retained 60,000 76,000 200,000 164,000 Retained earnings, end of year . $1,4 .50,000 $1,250,000