The 2017 financial statements for Royale and Cavalier companies are summarized below.

These two companies are in the same business and the same province but in different cities. One-half of Royale?s sales and one-quarter of Cavalier?s sales are on credit. Each company has been in operation for about ten years. Both companies received an unqualified audit opinion on the financial statements. Royale Company wants to borrow $75,000 cash, and Cavalier Company is asking for $30,000. The loans will be for a two-year period. Both companies estimate bad debts based on an aging analysis, but Cavalier has estimated slightly higher uncollectable rates than Royale. Neither company issued shares in 2017.

Required:

1. Calculate the ratios in Exhibit 13.5 for which sufficient information is available. Round all calculations to two decimal places.

2. Assume that you work in the loan department of a local bank. You have been asked to analyze the situation and recommend which loan is preferable. Based on the data given, your analysis prepared in requirement 1, and any other information (e.g., accounting policies and decisions), give your choice and the supporting explanation.

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Royale Company Cavalier Company Balance Sheet $ 25,000 $ 45,000 Cash Accounts Receivable, Net 55,000 5,000 Inventory 110,000 25,000 Property and Equipment, Net 550,000 160,000 Other Assets 140,000 57,000 $ 880,000 $292,000 Total Assets Current Liabilities $ 120,000 $ 15,000 Long-Term Debt 190,000 55,000 Contributed Capital (24,000 shares; 10,500 shares) 480,000 210,000 Contributed Surplus 50,000 4,000 Retained Earnings 40,000 8,000 Total Liabilities and Shareholders' Equity $ 880,000 $ 292,000 Income Statement Sales Revenue $ 800,000 $ 280,000 Cost of Goods Sold (480,000) (150,000) Expenses (including interest and income tax) (240,000) (95,000) Net Income $ 80,000 $ 35,000 Selected Data from 2016 Statements Accounts Receivable, Net $ 47,000 $ 11,000 Long-Term Debt 190,000 55,000 Property and Equipment, Net 550,000 160,000 Inventory 95,000 38,000 Total Shareholders' Equity 570,000 202,000 Other Data Per share price at end of 2017 14.00 11.00