Empire Labs Inc. was organized several years ago to produce and market several new miracle drugs. The following data on the company are available for the past two years:

EMPIRE LABS INC. Comparative Income Statement For the Years Ended December 31
	This Year	Last Year
Sales	$20,000,000	$15,000,000
Less: Cost of goods sold	13,000,000	9,000,000
Gross margin	7,000,000	6,000,000
Less: Operating expenses	5,260,000	4,560,000
Net operating income	1,740,000	1,440,000
Less: Interest expense	240,000	240,000
Net income before taxes	1,500,000	1,200,000
Less: Income taxes (30%)	450,000	360,000
Net income	$ 1,050,000	$ 840,000

EMPIRE LABS INC. Comparative Retained Earnings Statement For the Years Ended December 31
	This Year	Last Year
Retained earnings, January 1	$2,400,000	$1,960,000
Add: Net income (above)	1,050,000	840,000
Total	3,450,000	2,800,000
Deduct: Cash dividends paid:
Preferred dividends	120,000	120,000
Common dividends	360,000	280,000
Total dividends paid	480,000	400,000
Retained earnings, December 31	$2,970,000	$2,400,000

EMPIRE LABS INC. Comparative Balance Sheet December 31
	This Year	Last Year
Assets
Current assets:
Cash	$ 200,000	$ 400,000
Accounts receivable, net	1,500,000	800,000
Inventory	3,000,000	1,200,000
Prepaid expenses	100,000	100,000
Total current assets	4,800,000	2,500,000
Plant and equipment, net	5,170,000	5,400,000
Total assets	$9,970,000	$7,900,000
Liabilities and Shareholders Equity
Liabilities:
Current liabilities	$2,500,000	$1,000,000
Bonds payable, 12%	2,000,000	2,000,000
Total liabilities	4,500,000	3,000,000
Shareholders equity:
Preferred shares, 8%, $10 par	1,500,000	1,500,000
Common shares, no par (200,000 @ $5)	1,000,000	1,000,000
Retained earnings	2,970,000	2,400,000
Total shareholders equity	5,470,000	4,900,000
Total liabilities and shareholders equity	$9,970,000	$7,900,000

Although Empire Labs Inc. has been profitable since it was organized several years ago, the company is beginning to experience some difficulty in paying its bills as they come due. Management has approached Security National Bank requesting a two-year, $500,000 loan to bolster the cash account.

Security National Bank has assigned you to evaluate the loan request. You have gathered the following data relating to firms in the pharmaceutical industry:

Current ratio	2.4 to 1
Acid-test (quick) ratio	1.2 to 1
Average age of receivables	16 days
Inventory turnover in days	40 days
Times interest earned	7 times
Debt-to-equity ratio	0.70 to 1

The following additional information is available on Empire Labs Inc.:

1. All sales are on account.
2. At the beginning of last year, the accounts receivable balance was $600,000 and the inventory balance was $1,000,000.

Required:

1. Compute the following amounts and ratios for both last year and this year:
   1. The working capital.
   2. The current ratio.
   3. The acid-test ratio.
   4. The accounts receivable turnover in days.
   5. The inventory turnover in days.
   6. The times interest earned.
   7. The debt-to-equity ratio.

2. Comment on the results of your analysis in part (1).

3. Would you recommend that the loan be approved? Explain.