Question 5 (20 marks)

RPI, Inc. is a manufacturer and retailer of high-quality sports clothing and gear. The firm was started several years ago by a group of serious outdoor enthusiasts who felt there was a need for a firm that could provide quality products at reasonable prices. The result was RPI, Inc. Since its inception, the firm has been profitable with sales that last year totaled $700,000 and assets in excess of $400,000. The firm now finds its growing sales outstrip its ability to finance its inventory needs. The firm now estimates that it will need a line of credit of $100,000 during the coming year. To finance this funding requirement, the management plans to seek a line of credit with its bank. The firms most recent financial statements were provided to its bank as support for the firms loan request. Joanne Peebie, a loan analyst trainee for the Morristown Bank and Trust, has been assigned the task of analyzing the firms loan request. RPI, Inc. Balance Sheets for 12/31/18 and 12/31/19

Assets 2018 2019 Cash $16,000 $17,000 Marketable securities 7,000 7,200 Accounts receivable 42,000 38,000 Inventory 50,000 93,000 Prepaid rent 1,200 1,100 Total current assets $116,200 $156,300 Net plant and equipment 286,000 290,000 Total assets $402,200 $446,300

Liabilities and Stockholders Equity

2018 2019 Accounts payable $48,000 $55,000 Notes payable 16,000 13,000 Accruals 6,000 5,000 Total current liabilities $70,000 $73,000 Long-term debt $160,000 $150,000 Common stockholders equity $172,200 $223,300 Total liabilities and equity $402,200 $446,300

RPI, Inc. Income Statement For the Year Ended 12/31/2019

Sales (all credit) $700,000 Less: Cost of goods sold 500,000 Gross profits Less: Operating and interest expenses General and administrative $50,000 Depreciation 30,000 Total $200,000 80,000 Profit before Interest and taxes (EBIT) $120,000 Less: Interest 10,000 Profit before taxes $110,000 Less: Taxes 27,100 Net income available to common stockholders Less: Cash dividends $82,900 31,800 Change in retained earnings $51,100

a. Calculate the financial ratios for 2019 corresponding to the industry norms provided below: (13 Marks)

Ratio Norm Current ratio 1.80 Acid-test ratio 0.90 Debt ratio 0.50 Long-term debt to total capitalization 0.70 Times interest earned 10.00 Average collection period 20.00 Inventory turnover (based on COGS) 7.00 Return on total assets 8.40% Gross profit margin 25.0% Operating income return on investment 16.8% Operating profit margin 14.0% Total asset turnover 1.20 Fixed asset turnover 1.80

b. Which of the ratios reported above in the industry norms do you feel should be most crucial in determining whether the bank should extend the line of credit? Why? (4 Marks) (500 words)

c. Use the information provided by the financial ratios to decide if you would support making the loan. (3 Marks) (500 words

please specify the answers as below

a-answer

b-answer

c- answer