Following balances are available from the books of a loan applicant.

	2017	2016
	$	$
Accounts payable	205	195
Accounts receivable	315	290
Cash	10	15
Cost of goods sold	1270	1265
Interest expense	30	30
Inventory	230	200
Long-term debt	200	200
Non-current assets (net)	780	750
Operating expenses	500	495
Retained earnings	200	125
Sales	2000	1910
Share capital (600 shares issued)	600	600
Short-term loan	130	135

Assume that (i) the tax rate is 20% and (ii) market value of each share is $1.20 and $1.10 at the year-end of 2017 and 2016 respectively.

Required:

a) Calculate and comment on following ratios to assess liquidity, efficiency, profitability and gearing of the applicant.

1. Current ratio 2. Quick ratio 3. Inventory turnover ratio

4. Average collection period

5. Gross profit ratio 6. Net profit ratio 7. Interest coverage ratio 8. Debt/equity ratio

[Hint: Prepare an Income Statement and a Balance Sheet first.]

b) Calculate Altman's Z-Score for 2017 and 2016.

(Notes: Please use the format below to complete the solution)

Solution Income statement 2017 2016 Balance sheet 2017 2016 Solution Formula CA/CL 2017 Ratio 2016 1. Current ratio (CA- Inventory)/CL 2. Quick ratio 3. Inventory turnover ratio (times) 4. Average collection AR 365/sales period (days) 5. Gross profit ratio COGS/inventory Gross profit/sales EAT/sales 6. Net profit ratio IT/ interest expense Total liabilities/ Shareholders funds 7. Interest coverage ratio 8. Debt/equity ratio 2017 2016 CA CL WC MV shares Total assets RE EBIT MV liabilities Sales 2016 2017 x1 WC/TA x2 RE/TA EBIT/ TA 1.2 1.4 3.3 X4 MV Eq/Liab 0.6 xs Sales/TA 1 Z Score