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 $ 210,506 $ 285, 900 Temporary investments 75, 090 Accounts receivable, net 695, 905 475, 900 Inventory 945, 060 570, 090 prepaid expenses 40 , 060 25, 090 Total current assets 1, 890, 600 1, 425, 060 Plant and equipment, net 2, 405, 506 2, 315,606 Total assets $ 4, 295, 060 $ 3, 740,606 Liabilities and Shareholders' Equity Liabilities: current liabilities 878,600 $ 670,606 Bonds payable, 10% 800 , 060 650, 090 Total liabilities 1, 678, 090 1, 320, 606 Shareholders' equity: Preferred shares, 20,090, $2.40 no par value 450, 090 450, 906 Common shares, 50,060 1, 500, 906 1, 500, 090 ined earnings 667,050 470 , 090 Total shareholders equity 2, 617, 90 2,420 , 906 Total liabilities and shareholders' equity $ 4, 295, 500 $ 3, 740,606 HILL COMPANY Comparative Income Statement and Reconciliation of Retained Earnings This Year Last Year Sales (all on account) $ 4, 120, 060 $ 3, 240, 090 cost of goods sold 3, 190, GG 2, 520,090 Gross margin 930, 500 720, 606 Selling and administrative expenses 140, 060 375,060 Operating income 190, 606 350, 606 Interest expense 80 , 606 65 , 606 Net income before taxes 410 , 606 185 , GGG Income taxes (30%) 123 , 606 85 , 500 Net income 287,609 199, 506 Dividends paid: Preferred shares 36,605 Common shares 54,90 27,905 Total dividends paid 20, 900 63,090 Net income retained 197, 090 136, 500 Retained earnings, beginning of year 470, 606 333, 500 Retained earnings, end of year 667, 060 $ 470,090 Pat Smith, who just three years agowas 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 vear. Smith also argues that Investors have recognized thePat Smith, whojust three years ago was appointed president of Hill Company, admits that the company has been inconsistent in its performance over the past several years. strong sales growth, as evidenced by the recognized the improving situation at Hill year to $29 per share this year. Smith bel loan will permit the company to buy, profi 3ut Smith argues that the company has its costs under control and is now experiencing "nore than 25% increase in sales over the past year. Smith also argues that investors have Company, as shown by thejump in the price of its common shares from $17 per share last 'eves that with strong leadership and with the modernized equipment that the $2,000,000 s 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 cidtest ratio Average collection period Average sale period Return on assets Debttoequity ratio Times interest earned ratio Priceearnings ratio Required: 2.18 1.11 36 days 55 days 11.2% 0.51 ?.5 1. You decide to assess the rate of return that the company is generating first. 3. 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.) 0 Answer is complete but not entirely correct. This Year Last Ye ar Qeturn on total assets 10.20 % 5.39 % 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.) 9 Answer is complete but not entirely correct. Return on common shareholders' equity 12.1 a % 8.5 a % c-'f. Is the company's financial leverage positive or negative? 0 Answer is complete and correct. Leverage Positive 0 Positive 0 4. The earnings per share. (Round your answers to 2 decimal places.) * Answer is complete but not entirely correct. This Last Year Year Earnings per share 3.94 * $ 3.99 x b. The dividend yield ratio for common shares. (Round your Intermedlate calculations and final answers to 1 decimal place.) Answer is complete and correct. This Year Last Year Dividend yield ratio 3.7% 3.2 % c. The dividend payout ratio for common shares. (Round your Intermediate calculations and final answers to 1 decimal place.) x Answer is complete but not entirely correct. This Year Last Year Dividend payout ratio 18.8 * %% 13.5 * % @-f The price earnings ratio. (Round your Intermediate calculations and final answers to 1 decimal place.) * Answer is complete but not entirely correct. This Last Year Year Price-earnings 505.2 x 426.1 x ratio. 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 Intermed late calculations. Round final answers to nearest whole number.) This Year Last Year Average collection period days 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 Intermed late calculations. Round final answers to nearest whole number.) This Year Last Year Average sales period days days f. The debt-to-equity ratio. (Round your answers to 2 decimal places.) This Year Last Year Debt-to-equity ratio ". The times Interest earned. ( Round your answers to 1 decimal place.) This Year Last Year Times interest earned