Pelican Paper, Inc., and Timberland Forest, Inc., are rivals in the manufacture of craft papers. Some financial statement values for each company follow. Use them in a ratio analysis that compares the firm$$s debt and the firms$$ profitability.

Item

Pelican Paper, Inc.

Timberland Forest, Inc.

Total assets

$10,000,000$

$10,000,000$

Total equity $($all common$)$

$9,000,000$

$5,000,000$

Total debt

$1,000,000$

$5,000,000$

Annual interest

$100,000$

$500,000$

Total sales

$25,000,000$

$25,000,000$

Gross profit

$9,000,000$

$9,000,000$

Earning before interest and tax $($EBIT$)$

$6,250,000$

$6,250,000$

Earning available for common stockholders

$3,690,000$

$3,450,000$

Calculate the following debt ratios for the two companies. Discuss their profitability relative to each other.

Debt ratio

Times interest earned ratio

Calculate the following profitability ratios for the two companies. Discuss their profitability relative to each other.

Gross profit margin

Net profit margin

Return on total assets

Return on common equity

$($c$).$ In what way has the larger debt of Timberland Forest made it more profitable than Pelican Paper? What are the risks that Timberland$$s investors undertake when they choose to purchase its stock instead of Pelican$$s$?$

The actual sales and purchases for Xenocore, Inc., for September and October $2015,$ along with its forecast sales and purchases for the period November $2015$ through April $2016,$ follow. The firm makes $20\%$ of all sales for cash and collects on $40\%$ of its sales in each of the $2$ months following the sale. Other cash inflows are expected to be $$12,000$ in September and April, $$15,000$ in January and March, and $$27,000$ in February. The firm pays cash for $10\%$ of its purchases. It pays for $50\%$ of its purchases in the following month and for $40\%$ of its purchases $2$ months later.

Year

Month

Sales $($$$)$

Purchases $($$$)$

$2015$

September

$210,000$

$120,00$

$2015$

October

$250,000$

$150,000$

$2015$

November

$170,000$

$140,000$

$2015$

December

$160,000$

$100,000$

$2016$

January

$140,000$

$80,000$

$2016$

February

$180,000$

$110,000$

$2016$

March

$200,000$

$100,000$

$2016$

April

$250,000$

$90,000$

Wages and salaries amount to $20\%$ of the preceding month$$s sales. Rent of $$20,000$ per month must be paid. Interest payments of $$10,000$ are due in January and April. A principal payment of $$30,000$ is also due in April. The firm expects to pay cash dividends of $$20,000$ in January and April. Taxes of $$80,000$ are due in April. The firm also intends to make a $$25,000$ cash purchase of fixed assets in December.

Assuming that the firm has a cash balance of $$22,000$ at the beginning of November, determine the end$-$of$-$month cash balances for each month, November through April.

Assuming that the firm wishes to maintain a $$15,000$ minimum cash balance, determine the required total financing or excess cash balance for each month, November through April.

If the firm was requesting a line of credit to cover needed financing for the period November to April, how large would this line have to be$?$ Explain your answer.