MCKAY CABINETS McKay Cabinets, located in north-central West Virginia, was established and later incorporated by Steve McKay. The fimm manufactures custom cabinets for area suppliers, dealers and builders. The firm specializes in kitchen cabinets, but has expanded its product line to include bathroom vanities, entertainment centers/bookcases, and custom fumitore. McKay gradually built the business up, increasing sales and profits each year. In the two most recent years, the firm grossed over one million dollars in sales. (See Exhibits ONE and TWO for the firm's Balance Sheet and Income Statement for the most recent fiscal years.) However, the increasing volume of sales caused severe strains on the firm's level of working capital. McKay kept his Accounts Payable current for most of the year only by borrowing relatively large amounts on the firm's credit-line. This was one of the firm's two borrowing arrangements with Mountain State Bank (MSB); the other was a series of intermediate term loans for the purchase of specific pieces of equipment. The short-term line of credit was intended to finance seasonal fluctuations and was personally guaranteed by McKay, the term loans were secured by the specific pieces of equipment that these loans had been used to purchase. As with most seasonal loans, the short-term line of credit included the provision that the loan be paid off for sixty days during the year. In early 20X3, McKay realized that in order to clean up the line of credit during the coming year he would either have to curtail sales to hold down receivables and necessary inventories or stretch out payables to lengths that he knew would not be acceptable to suppliers. Neither option seemed desirable. Ile arranged a meeting with William Hanley, loan officer at Mountain State Bank, to to describe and discuss his problem. Hanley knew that MSB had been seeking new local loan business. McKay had been a customer at the bank for more than ten years and had always honored loan agreements in the past. The obvious solution would be to convert the short-term line of credit into some type of longer-term unsecured loan guaranteed by McKay. This would replace the firm's outstanding balance on the short-term credit line and provide needed additional cash to finance the firm's expected sales growth. However, Hanley wondered about the quality and safety of the loan, QUESTIONS: The following is a list of specific questions and tasks that you should address. You are asked to put your entire project in a report format. You will not, therefore, address each question in question answer formal, You should incorporate the answers into the context of your report 1. Compute key performance ratios, then compare to the industry 2. Interpret the key financial ratios and draw inferences regarding the firm's operating strengths and weaknesses 3. If you were the MSB loan officer, would you grant the loan request? Why or why not? EXHIBIT ONE Mckay Cabinets Balance Sheet (5000) 20x7 20X2 EXHIBIT TWO Mckay Cabinets Income Statement (8000) Cash SJOS 5280 20x7 20X2 Accounts Receivable 275 290 Sales (100% credit) $1,100 $1.330 Cost of Goods Sold 600 160 Inventory 600 570 Gross Profit 5500 $570 TOTAL Current Assets 1,180 1,140 20 30 Plant and Equipment 1.700 1,940 160 200 Accumulated Depreciation (500) (600) Operating Expenses Depreciation Net Operating Income Interest Expense $320 $340 Net Plant and Equipment 1.340 1,200 $2,380 64 57 TOTAL ASSETS $2,480 Income Before Taxes 256 283 150 200 Accounts Payable Bank Line of Credit Taxes 87 96 115 0 Net Income S16 5187 TOTAL Current Liab 265 200 Term Loans 500 500 Common Stock 175 305 Paid-in Capital 775 775 Retained Earnings 665 700 Typical ratios for firms in the same industry as McKay Cabinets are as follows Industry Rates Mckay Cabinet Current Ratio Quick Ratio Average Collection Period Inventory Turnover Debt Ratio Times Interest Earned Total Assets Tumover Operating Profil Marin Net Profile Maria Return on Asact Ketum anty 5x 3x 90 days 22 3396 78 JS 2014 12 6