PROBLEM 16-11 Common-Size Statements and Financial Ratios for Creditors [LO1. LO3, LO4] Modern Building Supply sells various building materials to retail outlets. The company has just ap proached Linden State Bank requesting a $300,000 loan to strengthen the Cash account and to pay certain pressing short-term obligations. The company's financial statements for the most recent two years follow: Modern Building Supply Comparative Balance Shoot This Year Last Your Assets Current assots: Cash . 90,000 200,000 Marketable securities 50.000 Accounts receivable, not 650.000 400.000 Inventory . 1.300.000 Prepaid expenses 20.000 20.000 Total current assets 2.060,000 1.470.000 Plant and equipment, not 1.940,000 1.830.000 Total assets $4,000.000 3.300.000 Liabilities and Stockholders Equity Liabilities: Current liabilities . $1. 100.000 600.000 Bonds payable. 750.000 750.000 Total liabilities 1.050.000 1.350.000 Stockholders' equity; Preferred stock. 350 par. 876 200,000 200.000 Common stock. $10 par 500,000 500,000 Retained earnings 1.450.000 1.250,000 Total stockholders' equity 2.150.000 1.950.000 Total liabilities and stockholders' $4,000.009 3.300.000 Modern Building supply Comparative Income Statement and Reconciliation This Year Last Year Sales $7.000,090 16.000,000 Cost of goods sold 5.400.000 4.800.900 Gross 1,600,900 -200.000 Soiling and administrative 970:000 710.000 Not operating income 630,000 190.900 interest expense . 90.DOO Income before taxes $40,00 100,000 income taxes #16.000 160.090 Net Income. 324.000 240.900 Dividends paid Preferred dividends 19.000 16.000 Common dividends 1011:000 60,000 Total dividends 124,000 76,000 Not income retained . 200,000 164.000 Retained earnings, beginning 1.260,000 1.086,000 Retained earnings. 1450.000 51.250.000 During the past year. the company has expanded the number of lines that it carries in order to stimulate sales and increase profits. It has also moved aggressively to acquire new customers. Sales terms are 2/10. n/30. All sales are on a Assume that the following ratios are typical of companies in the building supply industry: Current ratio 2.5 Acid test ratio . Average collection period 10 days Average salo period so days of-to equity ratio 0.75 Times interest earned 6.0 Return on total assets Price-earnings ratio Required: Linden State Bank is uncertain whether the loan should be made. To assist it in making a decision you have been asked to compute the following amounts and ratios for both this year and last year: Working capital Current ratio. Acid test ratio Average collection period (The accounts receivable at the beginning of last year totaled $350.0003 Average sale period. ( year totaled $720,000) Debt-to equity ratio Times interest earned For both this year and last year (carry computations to one decimal place) a. Present the bala Present the income statement in common-size form down through net income. From your analysis in (1) and (2) above. what problems or strengths do you see for Modern Building Supply? Make a recommendation as to whether the loan should be approved. PROBLEM 16-12 Financial Ratios for Common Stockholders [LO2] Refer to the financial statements and other data in Problem 16-11. Assume that you have just inherited several hundred shares of Modem Building Supply stock. Not being acquainted with the company, you decide to do some analytical work before making a decision about whether to retain or sell the stock you have inherited. Required You decide first to assess the well-being of the common stockholders. For both this year and last year, compute the following: a. The earnings per share. b. The dividend yield ratio for common stock. The company's common stock is currently sell- ing for $45 per share; last year it sold for $36 per share. C. The dividend payout ratio for common stock. d. The price-earnings ratio. How do investors regard Modern Building Supply as compared to other companies in the industry? Explain. e. The book value per share of common stock. Does the difference between market value and book value suggest that the stock at its current price is too high? Explain. 2. You decide next to assess the company's rate of return. Compute the following for both this year and last year. a. The return on total assets. (Total assets at the beginning of last year were $2,700,000.) b. The return on common stockholders' equity. (Stockholders equity at the beginning of last year was $1,786,000.) C. Is the company's financial leverage positive or negative? Explain. 3. Based on your analytical work (and assuming that you have no immediate need for cash), would you retain or sell the stock you have inherited? Explain. cation: GENERAL Classification: GENERAL