Allied Apparel Company received a large order from Websters Department Stores, which operates a chain of approximately 300 popular-priced department stores located primarily in the New England–Middle Atlantic states. Allied is considering extending trade credit to Websters. As part of its credit check, Allied obtained Websters’ balance sheets and income statements for the last three years. A check of several of Websters’ trade creditors has revealed that the firm generally takes any cash discounts when they are offered but averages about 30 days overdue on its payments to two suppliers whose credit terms are “net 30.”

A Dun & Bradstreet publication entitled Key Business Ratios yielded the following information concerning the “average” financial ratios for firms in the same line of business as Websters:

Current assets to current liabilities 2.82 Earnings after taxes to sales 1.89%

Earnings after taxes to stockholders’ equity 5.65%

Total liabilities to stockholders’ equity 1.48 Websters Department Stores Balance Sheet (in Thousands of Dollars)

2008 2009 2010 Assets Current assets:

Cash and marketable securities $ 9,283 $ 13,785 $ 23,893 Accounts receivable (net) 162,825 179,640 140,543 Inventories 119,860 135,191 120,707 Other 1,994 2,190 1,956 Total current assets $293,962 $ 330,806 $296,099 Long-term assets:

Building and equipment (net) $ 27,426 $ 30,295 $ 30,580 Other 11,821 14,794 16,687 Total long-term assets $ 39,247 $ 45,089 $ 47,267 Total assets $333,209 $ 375,895 $343,366 Liabilities and stockholders’ equity Current liabilities:

Accounts payable $ 23,637 $ 21,861 $ 15,020 Notes payable 117,010 135,929 165,299 Other 49,273 49,229 29,653 Total current liabilities $189,920 $ 207,019 $209,972 Long-term liabilities:

Debentures $ 38,001 $ 36,101 $ 35,201 Term loan — 28,440 29,701 Other 4,986 853 655 Total long-term liabilities $ 42,987 $ 65,394 $ 65,557 Stockholders’ equity:

Common stock $ 5,576 $ 5,576 $ 5,576 Preferred stock 2,580 2,580 2,580 Retained earnings 92,146 95,326 59,681 Total stockholders’ equity $100,302 $ 103,482 $ 67,837 Total liabilities and stockholders’ equity $333,209 $ 375,895 $343,366: L01