Question

Bradburn Corporation was formed 5 years ago through a public subscription of ordinary shares. Daniel Brown, who owns 15% of the ordinary shares, was one of the organizers of Bradburn and is its current president. The company has been successful, but it currently is experiencing a shortage of funds. On June 10, Daniel Brown approached the Hibernia Bank, asking for a 24-month extension on two $35,000 notes, which are due on June 30, 2011, and September 30, 2011. Another note of $6,000 is due on March 31, 2012, but he expects no difficulty in paying this note on its due date. Brown explained that Bradburn’s cash flow problems are due primarily to the company’s desire to finance a $300,000 plant expansion over the next 2 fiscal years through internally generated funds. The commercial loan officer of Hibernia Bank requested financial reports for the last 2 fiscal years.
These reports are reproduced below.


*Cash dividends were paid at the rate of $1 per share in fiscal yeay 2010 and $2 per share in fiscal year 2011.


*Depreciation charges on the plant and equipment of $100,000 and $102,500 for fiscal years ended March 31, 2010 and 2011, respectively, are included in cost of goods sold.

Instructions
(a) Compute the following items for Bradburn Corporation.
(1) Current ratio for fiscal years 2010 and 2011.
(2) Acid-test (quick) ratio for fiscal years 2010 and 2011.
(3) Inventory turnover for fiscal year 2011.
(4) Return on assets for fiscal years 2010 and 2011. (Assume total assets were $1,688,500 at 3/31/09.)
(5) Percentage change in sales, cost of goods sold, gross margin, and net income after taxes from fiscal year 2010 to 2011.
(b) Identify and explain what other financial reports and/or financial analyses might be helpful to the commercial loan officer of Hibernia Bank in evaluating Daniel Brown’s request for a time extension on Bradburn’s notes.
(c) Assume that the percentage changes experienced in fiscal year 2011 as compared with fiscal year 2010 for sales and cost of goods sold will be repeated in each of the next 2 years. Is Bradburn’s desire to finance the plant expansion from internally generated funds realistic? Discuss.
(d) Should Hibernia Bank grant the extension on Bradburn’s notes considering Daniel Brown’s statement about financing the plant expansion through internally generated funds?Discuss.


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  • CreatedJune 17, 2013
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