Question
The T.P Company manufactures and sels a line of exclusive sportswear. The firms's sales were $600,000 for the year just ended, and its total assets
The T.P Company manufactures and sels a line of exclusive sportswear. The firms's sales were $600,000 for the year just ended, and its total assets exceeded $400,000. THe company was started just 10 years ago and has been profitable every year since its inception. The CFO has decided to seel a line of credit from the firm's bank totaling $80,000. In the past, the company has relied on its suppliers to finance a large part of its needs for the inventory. However, in recent months tight monye conditions have led the firm's suppliers to offer sizable cash discounts to speed up payments for purchases. The CFO wants to use the line of credit to replace a large portion of the firm's payables during the summer, which is the firm's peak seasonal sales period.
The firm's 2 most recent balance sheets were presented to the bank in support of its loan request. In addition, the firm's income statement for the year just eneded was provided. These statements are found in the following tables.
2009 2010
Cash $15,000 $14,000
Marketable securities 6,000 6,200
accounts receivable 42,000 33,000
Inventory51,000 84,000
prepaid rent 1,2001,100
total current assets$115,200$138,300
Net plant and equip 286,000 270,000
Total assets $401,200$480,300
Accounts payable $ 48,000$ 57,000
Notes payable 15,00013,000
accruals 6,0005,000
Total current liabilities$ 69,000 $ 75,000
Long-term debt160,000150,000
Common stockholder's equity 172,200 183,300
Total liabilities and equity$ 401,200 $ 408,300
Income statement for the year ending 12/31/2010
sales (all credit) $600,000
Less cost of goods sold 460,000
Gross profit$140,000
less operating & interest expense
General & administrative $30,000
interest 10,000
depreciation 30,000
total $70,000
earnings before taxes 70,000
less taxes 27,100
net income available to stockholders$42,900
less cash dividends 31,800
Change in retained earnings $11,100
An associate credit analysis was assigned the task of analyzing the loan request
a. Calculate the financial ratios for 2010 corresponding to the industry norms below
ratio norm
current ratio 1.8
acid-test ratio 0.9
debt ratio0.5
times interest earned 10.0
avg. collection period20.0
inventory turnover 7.0
return on common equity 12.0%
operating return on assets 16.8%
operating profit margin14.0%
total asst turnover 1.20
fixed asset turnover 1.80
b. Which of the ratios reported in the industry norm do you feel should be most crucial in determining whether the bank should extend the line of credit and why?
d. Use the information provided by the financial ratios and the cash flow statement to decide if you would support making the loan
THATS it....thanks!!
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