Question

The T. P. Jarmon Company manufactures and sells a line of exclusive sportswear. The firm’s sales were $600,000 for the year just ended, and its total assets exceeded $400,000. The company was started by Mr. Jarmon just 10 years ago and has been profitable every year since its inception. The chief financial officer for the firm, Brent Vehlim, has decided to seek 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 inventory. However, in recent months tight money conditions have led the firm’s suppliers to offer sizable cash discounts to speed up payments for purchases. Mr. Vehlim wants to use the line of credit to supplant a large portion of the firm’s payables during the summer, which is the firm’s peak seasonal sales period. The firm’s two 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 ended was provided. These statements are found in the following tables:
T. P. Jarmon Company Balance Sheets


T. P. Jarmon Company Balance Sheets
Income Statement for 2013


Jan Fama, associate credit analyst for the Merchants National Bank of Midland, Michigan, was assigned the task of analyzing Jarmon’s loan request.
a. Calculate the following financial ratios for 2013:
Ratio Norms
Current ratio ................... 1.8
Acid-test ratio .................. 0.9
Debt ratio ..................... 0.5
Times interest earned ............... 10.0
Average collection period ............. 20.0
Inventory turnover (based on cost of goods sold) ..... 7.0
Return on equity ................. 12.0%
Operating return on assets ............. 16.8%
Operating profit margin .............. 14.0%
Total asset turnover ............... 1.2
Fixed asset turnover ............... 1.8
b. Which of the ratios calculated in part a do you think should be most crucial in determining whether the bank should extend the line of credit?
c. Use the information provided by the financial ratios and industry-norm ratios to decide if you would support making the loan. Discuss the basis for yourrecommendation.


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  • CreatedOctober 31, 2014
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