PB13-6Using Ratios to Compare Loan Requests from Two Companies

The financial statements for Thor and Gunnar companies are summarized here:

Required:

1. Calculated the following ratios:

2. Assume that you work in the loan department of a local bank. You have been asked to analyze the situation and recommend which loan is preferable. Based on the data given, your analysis prepared in requirement 1, and any other information, give your choice and the supporting explanation.

(Please show the procedure for requirement 1 and a good explanation for 2)

Thor Company Gunnar Company Balance Sheet Cash Accounts Receivable, Net Inventory Equipment, Net Other Assets Total Assets Current Liabilities Notes Payable (long-term) (12\% interest rate) Common Stock (par \$20) Additional Paid-In Capital Retained Earnings Total Liabilities and Stockholders' Equity Income Statement Sales Revenue Cost of Goods Sold Other Expenses Net Income Other Data Per share price at end of year Selected Data from Previous Year Accounts Receivable, Net $35,000 77,000 154,000 770,000 196,000 $1,232,000 $168,000 266,000 672,000 70,000 56,000 $1,232,000 \begin{tabular}{r} $1,120,000 \\ 672,000 \\ 336,000 \\ \hline$112,000 \\ \hline \end{tabular} $13.20 $65,800 $32,000 28,000 30,000 192,000 68, 400 $350,400 $18,000 66,000 252,000 4,800 9,600 $350,400 $336,000 180,000 114,000$42,000 $19.60 $27,200 These two companies are in the same business and state but different cities. Each company has been in operation for about 10 years. Both companies received an unqualified audit opinion on the financial statements. Thor Company wants to borrow $105,000 and Gunnar Company is asking for $36,000. The loans will be for a two-year period. Neither company issued stock in the current year. Assume the end-of-year total assets and net equipment balances approximate the year's average and all sales are on account. Required: 1. Calculate the ratios in Exhibit 13.5 for which sufficient information is available. Round all calculations to two decimal places. 2. Assume that you work in the loan department of a local bank. You have been asked to analyze the situation and recommend which loan is preferable. Based on the data given, your analysis prepared in requirement 1 , and any other information, give your choice and the supporting explanation. Profitability Ratios (1) Net Profit Margin =RevenuesNetIncome (Ch. 3, p. 117) (2) Gross Profit Percentage =NetSalesNetSalesCostofGoodsSold (Ch. 6, p. 275) (3) Flxed Asset Turnover =AverageNetFixedAssetsNetRevenue (Ch. 9, p. 414) (4) Return on Equity (ROE)=AverageCommonStockholdersEquityNetIncomePreferredDividends (Ch. 11, p. 523) (5) Earnings per Share (EPS) =AverageNumberofCommonSharesOutstandingNetIncomePreferredDlvidends (Ch. 11, p. 523) (6) Price/Earnings Ratio =EarningsperShare(annual)StockPrice(pershare)+ (Ch. 11, p. 523) Liquidity Ratios (7) Receivables Turnover =AverageNetReceivablesNetSalesRevenue (Ch. 8, p. 364) Days to collect =ReceivablesTurnoverRatio365 (Ch. 8, p. 364) (8) Inventory Turnover =AverageInventoryCostofGoodsSold (Ch. 7, p. 318) Days to Sell =ImventoryTumoverRatio365 (Ch. 7, p. 318) (9) Current Ratio =CurrentLiabilitiesCurrentAssets (Ch. 2, p. 68) Solvency Ratios (10) Debt-to-Assets =TotalAssetsTotalLiabilities (Ch. 10, p. 462) (11) Times Interest Earned =InterestExpenseNetIncome+InterestExpense+IncomeTaxExpense (Ch. 10, p. 462)