P24-3B (Ratio Computations and Additional Analysis) Montana Corporation was formed 5 years ago through a public subscription of common stock. Steve Young, who owns 20% of the common stock, was one of the organizers of Montana and is its current president. The company has been successful, but it cur- rently is experiencing a shortage of funds. On June 10, Steve Young approached the Jersey National Bank, asking for a 24-month extension on two $75,000 notes, which are due on April 30, 2015, and August 31, 2015. Another note of $20,000 is due on March 31, 2016, but he expects no difficulty in paying this note on its due date. Young explained that Montanas cash flow problems are due primarily to the companys desire to finance a $400,000 plant expansion over the next 2 fiscal years through internally generated funds. The commercial loan officer of Jersey National Bank requested financial reports for the last 2 fiscal years. These reports are reproduced below and on the next page. MONTANA CORPORATION BALANCE SHEET MARCH 31 2015 2014 21,600 105,000 205,000 160,000 Assets Cash $ 24,900 Notes receivable 120,000 Accounts receivable (net) 215,000 Inventories (at cost) 180,000 Plant & equipment (net of depreciation) 2,060,000 Total assets $2,599,900 $ 1,960,800 $2,452,400 Liabilities and Stockholders Equity Accounts payable Notes payable Accrued liabilities Common stock (300,000 shares, $5 par) Retained earningsa Total liabilities and stockholders equity $ $2,599,900 94,000 170,000 9,500 1,500,000 826,400 $ $2,452,400 90,000 123,000 12,000 1,500,000 727,400 B Problems 3 aCash dividends were paid at the rate of $0.50 per share in fiscal year 2014 and $0.75 per share in fiscal year 2015. MONTANA CORPORATION INCOME STATEMENT FOR THE FISCAL YEARS ENDED MARCH 31 Sales revenue Cost of goods solda Gross Margin Operating expenses Income before income taxes Income taxes (40%) Net income 2015 $2,938,000 1,680,000 1,258,000 718,000 540,000 216,000 $ 324,000 2014 $2,600,900 1,410,000 690,900 1,180,000 500,000 200,000 $ 300,000 aDepreciation charges on the plant and equipment of $120,000 and $112,500 for fiscal years ended March 31, 2014 and 2015, respectively, are included in cost of goods sold. Instructions (a) Compute the following items for Montana Corporation. (1) Current ratio for fiscal years 2014 and 2015. (2) Acid-test (quick) ratio for fiscal years 2014 and 2015. (3) Inventory turnover for fiscal year 2015. (4) Return on assets for fiscal years 2014 and 2015. (Assume total assets were $2,200,500 at 3/31/13.) (5) Percentage change in sales, cost of goods sold, gross margin, and net income after taxes from fiscal year 2014 to 2015. (b) Identify and explain what other financial reports and/or financial analyses might be helpful to the commercial loan officer of Jersey National Bank in evaluating Steve Youngs request for a time extension on Montanas notes. (c) Assume that the percentage changes experienced in fiscal year 2015 as compared with fiscal year 2014 for sales and cost of goods sold will be repeated in each of the next 2 years. Is Montanas desire to finance the plant expansion from internally generated funds realistic? Discuss. (d) Should Jersey National Bank grant the extension on Montanas notes considering Steve Youngs statement about financing the plant expansion through internally generated funds? Discuss.