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 $ 240,000 $ 315,000 0 75,000 675,000 450,000 975,000 600,000 60,000 45,000 1,950,000 1,485,000 2,325,000 2,235,000 $4,275,000 $3,720,000 $ 975,000 $690,000 900,000 1,875,000 450,000 750,000 1,440,000 450,000 1,500,000 1,500,000 450,000 330,000 2,400,000 2,280,000 $4,275,000 $3,720,000 Sales (all on account) Cost of goods sold Gross margin HILL COMPANY Comparative Income Statement and Reconciliation of Retained Earnings 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 This Year Last Year $3,937,500 $3,120,000 3,150,000 2,475,000 787,500 645,000 397,500 390,000 390,000 255,000 90,000 75,000 300,000 180,000 90,000 54,000 210,000 126,000 36,000 36,000 54,000 27,000 90,000 63,000 120,000 63,000 330,000 267,000 $ 450,000 $ 330,000 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 argues that investors have recognized the improving situation at Hill Company, as shown by the jump in the price of its common shares from $15 per share last year to $27 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 2.3 1.2 31 days Average sale period 60 days Return on assets 9.5% Debt-to-equity ratio 0.65 Times interest earned ratio 5.7 Price-earnings ratio 10 a. Compute the return on total assets for both this year and last year. (Total assets at the beginning of last year were $3,240,000.) (Round your answers to 1 decimal place.) Return on total assets This Year 6.8 % Last Year 5.1 % b. Compute the return on common shareholders' equity for both this year and last year. (Shareholders' equity at the beginning of last year totalled $2,217,000. There has been no change in preferred or common shares over the past two years.) (Round your answers to 1 decimal place.) This Year Last Year Return on common shareholders' equity % % c-1. Is the company's financial leverage positive or negative? Leverage This Year Last Year