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Steve Sullivan was recently promoted to loan officer at the first national bank. He has authority to issue loans up to $50,000 without approval from

Steve Sullivan was recently promoted to loan officer at the first national bank. He has authority to issue loans up to $50,000 without approval from a higher bank official. this week two small companies, Handy Harvey, Inc. and Sheilas fashion, Inc, have each submitted a proposal for a six-month $50,000 loan. In order to prepare a financial analysis of the two companies Steve has obtained the information summarized below.

Handy Harvey, Inc. is a local lumber and home improvement company. Because sales have increased so much during the past two years, Handy Harvey has had to raise additional working capital, especially as represented by receivables and inventory. The $50,000 loan is needed to assure the company of enough working capital for next year. Handy Harvey began the year with total assets of $740,000 and stockholders equity of $260,000 and during the past year the company had a net income of $40,000 on sales of $760,000. The companys current unclassified balance sheet appears as follows:

Assets

$

Liability and stockholders equity

$

Cash

30,000

Account payable

200,000

Account receivable (net)

150,000

Note payable

100,000

Inventory

250,000

Mortage payable

200,000

Land

50,000

Common stock

250,000

Buildings (net)

250,000

Retained earnings

50,000

Equipment (net)

70,000

Totatal liability and stockholder equity

800,000

Total assets

800,000

Sheilas Fashions, Inc. has for three years been a successful clothing store for young professional women. The leased store is located in the downtown financial district. Sheilas loan proposal ask for $50,000 to pay for stocking a new line professional suits for working women during the coming season. At the beginning of the year, the company had total assets of $200,000 and total stockholders equity of $114,000. Over the past year, the company earned a income of $36,000 on sales of $480,000. The firms unclassified balance sheet the current date appears as follows

Assets

$

Liability and stockholders equity

$

Cash

10,000

Account payable

80,000

Account receivable (net)

50,000

Accrued liabilities

10,000

Inventory

135,000

Common stock

50,000

Prepaid expenses

5,000

Retained earnings

100,000

Equipment (net)

40,000

Totatal liability and stockholder equity

240,000

Total assets

240,000

Required

  1. Prepare a financial analysis of both companies liquidity and after receiving the proposed loan. Also, compute profitability ratios before and after as appropriate. Write a brief summary of the effect if the proposed loan on each companys financial position.
  2. To which company do you suppose Steve would be most willing to make a $50,000 loan? What are the positive and negative factors related to each companys ability to pay back the loan in the next year? What other information of a financial or non-financial nature would be helpful before making a financial decision?

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