The 2010 financial statements for Royale and Cavalier companies are summarized here:

These two companies are in the same line of business and the same state but 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 10 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 uncollectible rates than Royale. Neither company issued stock in 2010.

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, give your choice and the supporting explanation.

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Royale Company Cavalier Company Cash Inventory Balance Sheet Accounts Receivable, Net Property and Equipment, Net $ 25,000 $ 45,000 55,000 5,000 110,000 25,000 550,000 160,000 Other Assets 140,000 57,000 Total Assets $880,000 $292,000 Current Liabilities $120,000 $ 15,000 Long-Term Debt 190,000 Capital Stock (par $20) 480,000 55,000 210,000 Additional Paid-in Capital 50,000 4,000 Retained Earnings 40,000 8,000 Total Liabilities and Stockholders' Equity $880,000 $292,000 Income Statement Sales Revenue $800,000 $280,000 Cost of Goods Sold (480,000) (150,000) (240,000) (95,000) Net Income $ 80,000 Expenses (including interest and income tax) Selected Data from 2009 Statements Accounts Receivable, Net Long-Term Debt Property and Equipment, Net Inventory Total Stockholders' Equity Other Data 550,000 95,000 570,000 $ 47,000 190,000 $ 35,000 $ 11,000 55,000 160,000 38,000 202,000 Per share price at end of 2010 $ 14.00 $ 11.00