he T. P. Jarmon Company manufactures and sells a line of exclusive sportswear. The firm's sales were

$600,100

for the year just ended, and its total assets exceeded

$500,000.

The company was started by Mr. Jarmon just 10 years ago and has been profitable every year since its inception. The chief financial officer for the firm, Brent Vehlim, has decided to seek a line of credit from the firm's bank totaling

$87,000.

In the past, the company has relied on its suppliers to finance a large part of its needs for inventory. However, in recent months tight money conditions have led the firm's suppliers to offer sizable cash discounts to speed up payments for purchases. Mr. Vehlim wants to use the line of credit to supplant a large portion of the firm's payables during the summer, which is the firm's peak seasonal sales period.

The firm's two most recent balance sheets were presented to the bank in support of its loan request. In addition, the firm's income statement for the year just ended was provided. These statements are found in the following tables:

LOADING...

.

T. P. Jarmon Company Balance Sheets
	2012	2013
Cash	$14,900	$14,100
Marketable securities	6,000	6,210
Accounts receivable	41,900	33,100
Inventory	51,100	84,100
Prepaid rent	1,190	1,090
Total current assets	$115,090	$138,600
Net plant and equipment	286,100	270,000
Total assets	$401,190	$408,600
	2012	2013
Accounts payable	$48,100	$57,000
Notes payable	14,900	13,000
Accruals	5,990	5,000
Total current liabilities	$68,990	$75,000
Long-term debt	159,900	150,100
Common stockholders' equity	172,300	183,500
Total liabilities and owners' equity	$401,190	$408,600

(Click

on the icon

in order to copy its contents into a

spreadsheet.)

T. P. Jarmon Company
Income Statement for 2013
Sales (all credit)		$600,100
Less: Cost of goods sold		(460,000)
Gross profit		$140,100
Less: Operating and interest expenses
General and administrative	$(29,900)
Interest	(9,900)
Depreciation	(30,100)
Total		$(69,900)
Earnings before taxes		$70,200
Less: Taxes		(27,200)
Net income available to common stockholders		$43,000
Less: Cash dividends		(31,700)
Change in retained earnings		$11,300

Jan Fama, associate credit analyst for the Merchants National Bank of Midland, Michigan, was assigned the task of analyzing Jarmon's loan request.

a.Calculate the following financial ratios for 2013:

LOADING...

.

Current ratio	1.80
Acid-test ratio	0.90
Debt ratio	50.0%
Times interest earned	10.00
Average collection period	20.0
Inventory turnover (based on cost of goods sold)	7.00
Return on equity	12.0%
Operating return on assets	16.8%
Operating profit margin	14.0%
Total asset turnover	1.20
Fixed asset turnover	1.80

b.Which of the ratios calculated in part

(a)

do you think should be most crucial in determining whether the bank should extend the line of credit?

c. Use the information provided by the financial ratios and industry-norm ratios to decide if you would support making the loan. Discuss the basis for your recommendation.