Question

You have just been hired as a loan officer at Fairfield State Bank. Your supervisor has given you a file

containing a request from Hedrick Company, a manufacturer of auto components, for a $1,000,000

five-year loan. Financial statement data on the company for the last two years are given below:

Hedrick Company

Comparative Balance Sheet

This Year Last Year

Assets

Current assets:

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 320,000 $ 420,000

Marketable securities . . . . . . . . . . . . . . . . 0 100,000

Accounts receivable, net . . . . . . . . . . . . . . 900,000 600,000

Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . 1,300,000 800,000

Prepaid expenses . . . . . . . . . . . . . . . . . . . 80,000 60,000

Total current assets . . . . . . . . . . . . . . . . . . . 2,600,000 1,980,000

Plant and equipment, net . . . . . . . . . . . . . . . 3,100,000 2,980,000

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . $5,700,000 $4,960,000

Liabilities and Stockholders' Equity

Liabilities:

Current liabilities . . . . . . . . . . . . . . . . . . . . $1,300,000 $ 920,000

Bonds payable, 10% . . . . . . . . . . . . . . . . . 1,200,000 1,000,000

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . 2,500,000 1,920,000

Stockholders' equity:

Preferred stock, 8%, $30 par value . . . . . . 600,000 600,000

Common stock, $40 par value . . . . . . . . . 2,000,000 2,000,000

Retained earnings . . . . . . . . . . . . . . . . . . . 600,000 440,000

Total stockholders' equity . . . . . . . . . . . . . . . 3,200,000 3,040,000

Total liabilities and stockholders' equity . . . . $5,700,000 $4,960,000

Hedrick Company

Comparative Income Statement and Reconciliation

This Year Last Year

Sales (all on account) . . . . . . . . . . . . . . . . . . $5,250,000 $4,160,000

Cost of goods sold . . . . . . . . . . . . . . . . . . . . 4,200,000 3,300,000

Gross margin . . . . . . . . . . . . . . . . . . . . . . . . 1,050,000 860,000

Selling and administrative expenses . . . . . . 530,000 520,000

Net operating income . . . . . . . . . . . . . . . . . . 520,000 340,000

Interest expense . . . . . . . . . . . . . . . . . . . . . . 120,000 100,000

Net income before taxes . . . . . . . . . . . . . . . . 400,000 240,000

Income taxes (30%) . . . . . . . . . . . . . . . . . . . 120,000 72,000

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . 280,000 168,000

Dividends paid:

Preferred stock . . . . . . . . . . . . . . . . . . . . . 48,000 48,000

Common stock . . . . . . . . . . . . . . . . . . . . . 72,000 36,000

Total dividends paid . . . . . . . . . . . . . . . . . . . 120,000 84,000

Net income retained . . . . . . . . . . . . . . . . . . . 160,000 84,000

Retained earnings, beginning of year . . . . . . 440,000 356,000

Retained earnings, end of year . . . . . . . . . . $ 600,000 $ 440,000

Marva Rossen, who just two years ago was appointed president of Hedrick Company, admits

that the company has been "inconsistent" in its performance over the past several years. But

Rossen argues that the company has its costs under control and is now experiencing strong sales

710 Chapter 15

growth, as evidenced by the more than 25% increase in sales over the last year. Rossen also argues

that investors have recognized the improving situation at Hedrick Company, as shown by the jump

in the price of its common stock from $20 per share last year to $36 per share this year. Rossen

believes that with strong leadership and with the modernized equipment that the $1,000,000 loan

will enable the company to buy, profits will be even stronger in the future.

Anxious to impress your supervisor, you decide to generate all the information you can

about the company. You determine that the following ratios are typical of companies in Hedrick's

industry:

Current ratio . . . . . . . . . . . . . . 2.3

Acid-test ratio . . . . . . . . . . . . . 1.2

Average collection period . . . . 31 days

Average sale period . . . . . . . . 60 days

Return on assets . . . . . . . . . . 9.5%

Debt-to-equity ratio . . . . . . . . . 0.65

For both years, calculate the following: What would be the Average accounts Receivable balance, Average Collections turnover

What would be the Dividends per share, Market price per share, Dividend yield ratio, and dividend payout ratio.