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State Bank has hired you as a loan officer. You have been given a file containing a loan request from XYZ Company, a manufacturer of

State Bank has hired you as a loan officer. You have been given a file containing a loan request from XYZ Company, a manufacturer of farm machinery components. The requested loan is in the amount of $1,000,000 with a term of five years. Financial statements and other pertinent data is given on the spreadsheet below:

The president of XYZ admits that the company's performance has been inconsistent over the past several years, yet argues that XYZ has its cost under control and is currently experiencing strong sales growth over the last year. The president says that the jump in the price of the company's common stock from $20 per share last year to $36 per share this year shows investors' confidence in the improving situation at XYZ.

The president believes that the $1,000,000, which will be used to purchase modernized equipment, would allow XYZ to strengthen profits in the future.

Other given data:

The inventory at the beginning of last year totaled $640,000.

Total assets at the beginning of last year were $4,320,000.

Stockholders' equity at the beginning of last year was $3,016,000.

There has been no change in preferred or common stock over the last two years.

Accounts receivable at the beginning of last year totaled $520,000.

Typical ratios for companies in XYZ's industry


Current ratio

2.3


Acid-test ratio

1.2


Average collection period

31

days

Average sale period

60

days

Return on assets

9.50%


Debt-to-equity ratio

0.65


Times interest earned

5.7


Price-earnings ratio

10


XYZ Company Comparative Income Statement



This Year

Last Year

Sales (all on account)


$ 5,250,000

$ 4,160,000

Cost of goods sold


4,200,000

3,300,000

Gross margin


1,050,000

860,000

Selling and administrative expenses


530,000

520,000

Net operating income


520,000

340,000

Interest expense


120,000

100,000

Net income before taxes


400,000

240,000

Income taxes (30%)


120,000

72,000

Net income


$ 280,000

$ 168,000

XYZ Company Reconciliation of Retained Earnings


This Year

Last Year

Net income

$ 280,000

$ 168,000

Dividends paid:



Preferred stock

48,000

48,000

Common stock

72,000

36,000

Total dividends paid

120,000

84,000

Net income retained

160,000

84,000

Retained earnings, beginning of year

440,000

356,000

Retained earnings, end of year

$ 600,000

$ 440,000

XYZ Company Comparative Balance Sheet

Current assets

Cash

$ 320,000

$ 420,000

Marketable securities

-

100,000

Accounts receivable, net

900,000

600,000

Inventory

1,300,000

800,000

Prepaid expenses

80,000

60,000

Total current assets

2,600,000

1,980,000

Plant and equipment, net

3,100,000

2,980,000

Total assets

$ 5,700,000

$ 4,960,000

Liabilities and stock holders' equity

Liabilities:

Current liabilities

$ 1,300,000

$ 920,000

Bonds payable, 10%

1,200,000

1,000,000

Total liabilities

2,500,000

1,920,000

Stockholders' equity

Preferred stock, 8%, $30 par value

600,000

600,000

Common stock, $40 parvalue

2,000,000

2,000,000

Retained earnings

600,000

440,000

Total stockholders' equity

3,200,000

3,040,000

Total liabilities and stockholders' equity

$ 5,700,000

$ 4,960,000

Required:

1. Begin by assessing the rate of return that the company is generating by

(a) Computing the return on total assets for both this year and last year

(b) Computing the return on common stockholders' equity for both this year and last year

(c) Determining if xyz's financial leverage is positive or negative. explain your answer.

2. Assess the well-being of the common stockholders for both this year and last year

a. Compute the earnings per share

b. Compute the dividend yield ratio for common stock

c. Compute the dividend payout ratio for common stock

d. Compute the price-earnings ratio

e. Compute the gross margin percentage

f. What does the difference between market value per share and book value per share suggest


3. Assess creditor ratios in order to determine debt paying ability for both this year and last year.

a. Compute working capital

b. Compute current ratio

c. Compute acid-test ratio

d. Compute the average collection period

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