4

Additional information:

Natalie and Curtis are thinking about borrowing an additional $20,000 to buy more equipment. The loan would be repaid over a 4-year period. The terms of the loan provide for equal semiannual installment payments of $2,500 on May 1 and November 1 of each year, plus interest of 5% on the outstanding balance. Dividends on preferred stock were $1,400. Since this is the first year of operations and the beginning balances are zero, use the ending balance as the average balance where appropriate.

Instructions

(a) Calculate the following ratios.

1. Current ratio 6. Gross profit rate

2. Accounts receivable turnover 7. Profit margin

3. Inventory turnover 8. Asset turnover

4. Debt to assets ratio 9. Return on assets

5. Times interest earned 10. Return on common stockholders' equity

(b) Comment on your findings from part (a).

(c) Based on your analysis in parts (a) and (b), do you think a bank would lend Cookie & Coffee Creations Inc. $20,000 to buy the additional equipment? Explain your reasoning.

(d) What alternatives could Cookie & Coffee Creations consider instead of bank financing?

COOKIE & COFFEE CREATIONS INC. Balance Sheet October 31, 2021 Assets Current assets Cash $32,219 Accounts receivable 3,250 Inventory Prepaid Rent Property, plant, and equipment Equipment Accumulated depreciation-equipment 17,897 6,300 $59,666 $99,700 (9,850) 89,850 $149,516 Total assets Liabilities and Stockholders' Equity Current liabilities $5,786 Accounts payable Income taxes payable Dividends payable Salaries and wages payable Interest payable Notes payable-current portion Long-term liabilities Notes payable-Hong-term portion 18,500 700 2,250 250 4,000 $31,486 6,000 Total liabilities 37,486 Stockholders' equity Paid-in capital Preferred stock, 2,800 shares issued and outstanding Common stock, 25,930 shares issued, 25,180 outstanding Retained earnings $14,000 25,930 39,930 72,600 Total paid-in capital and retained earnings Less: Treasury stock-common (750 shares), at cost Total stockholders' equity Total liabilities and stockholders' equity 112,530 500 112,030 $149,516