Question
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
Step by Step Solution
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