You have just been hired as a loan officer at Westmount Bank. Your supervisor has given you a file containing a request from Hill Company, a manufacturer of computer components, for a $2,000,000 five-year loan. Financial statement data on the company for the past two years are given below: HILL COMPANY Comparative Balance Sheet This Year Last Year Assets Current assets: Cash Temporary investments Accounts receivable, net Inventory Prepaid expenses Total current assets Plant and equipment, net Total assets Liabilities and Shareholders' Equity Liabilities: Current liabilities Bonds payable, 10% Total liabilities Shareholders' equity: Preferred shares, 20,000, $2.40 no par value Common shares, 50,000 Retained earnings Total shareholders equity Total liabilities and shareholders' equity Sales (all on account) $ 210,000 $ 285,000 0 75,000 695,000 470,000 945,000 570,000 40,000 25,000 1,890,000 1,425,000 2,405,000 2,315,000 $4,295,000 $3,740,000 $ 878,000 $ 670,000 800,000 650,000 1,678,000 1,320,000 450,000 1,500,000 667,000 2,617,000 $4,295,000 450,000 1,500,000 470,000 2,420,000 $3,740,000 HILL COMPANY Comparative Income Statement and Reconciliation of Retained Earnings This Year Last Year $4,120,000 $3,240,000 Cost of goods sold Gross margin Selling and administrative expenses Operating income Interest expense Net income before taxes Income taxes (30%) Net income Dividends paid: Preferred shares Common shares Total dividends paid Net income retained Retained earnings, beginning of year Retained earnings, end of year 3,190,000 2,520,000 930,000 720,000 440,000 370,000 490,000 350,000 80,000 65,000 410,000 285,000 123,000 85,500 287,000 199,500 36,000 36,000 54,000 27,000 90,000 63,000 197,000 136,500 470,000 333,500 $ 667,000 $ 470,000 Pat Smith, who just three years ago was appointed president of Hill Company, admits that the company has been inconsistent in its performance over the past several years. But Smith argues that the company has its costs under control and is now experiencing strong sales growth, as evidenced by the more than 25% Increase in sales over the past year. Smith also arques that Investors have recognized the Pat Smith, who just three years ago was appointed president of Hill Company, admits that the company has been inconsistent in its performance over the past several years. But Smith argues that the company has its costs under control and is now experiencing strong sales growth, as evidenced by the more than 25% increase in sales over the past year. Smith also argues that investors have recognized the improving situation at Hill Company, as shown by the jump in the price of its common shares from $17 per share last year to $29 per share this year. Smith believes that with strong leadership and with the modernized equipment that the $2,000,000 loan will permit 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 Hill Company's industry: Current ratio Acid-test ratio Average collection period Average sale period Return on assets. Debt-to-equity ratio Times interest earned ratio Price-earnings ratio 2.18 1.11 30 days 55 days 11.2% 0.51 7.5 8 Required: 1. You decide to assess the rate of return that the company is generating first. a. Compute the return on total assets for both this year and last year. (Total assets at the beginning of last year were $3,260,000.) (Round your answers to 1 decimal place.) Answer is complete but not entirely correct. Return on total assets This Year Last Year 10.2 % 5.3 % b. Compute the return on common shareholders' equity for both this year and last year. (Shareholders' equity at the beginning of last year totalled $2,357,000. There has been no change in preferred or common shares over the past two years.) (Round your answers to 1 decimal place.) > Answer is complete but not entirely correct. Return on common shareholders' equity This Year Last Year 12.1 % 8.5 % c-1. Is the company's financial leverage positive or negative? Answer is complete and correct. This Year Last Year Leverage Positive Positive a. The earnings per share. (Round your answers to 2 decimal places.) Answer is complete but not entirely correct. Earnings per share $ This Year 3.94 Last Year $ 3.99 b. The dividend yield ratio for common shares. (Round your Intermediate calculations and final answers to 1 decimal place.) Answer is complete and correct. This Year Dividend yield ratio 3.7 % Last Year 3.2 % c. The dividend payout ratio for common shares. (Round your Intermediate calculations and final answers to 1 decimal place.) Answer is complete but not entirely correct. Dividend payout ratio This Year 18.8 % Last Year 13.5 % d-f. The price-earnings ratio. (Round your Intermed late calculations and final answers to 1 decimal place.) Answer is complete but not entirely correct. Price-earnings ratio This Year Last Year 505.2 426.1 d. The average collection period. (The accounts receivable at the beginning of last year totalled $410,000.) (Use 365 days In a year. Do not round Intermediate calculations. Round final answers to nearest whole number.) Average collection period This Year days Last Year days e. The average sale period. (The Inventory at the beginning of last year totalled $450,000.) (Use 365 days In a year. Do not round Intermediate calculations. Round final answers to nearest whole number.) This Year Last Year Average sales period days days 1. The debt-to-equity ratio. (Round your answers to 2 decimal places.) This Year Last Year |Debt-to-equity ratio g. The times Interest earned. (Round your answers to 1 decimal place.) This Year Last Year Times interest earned