State Bank has hired you as a loan officer. You have been given a file containing a loan request from XYZ Company, a manufacturer of farm machinery components. The requested loan is in the amount of $1,000,000 with a term of five years. Financial statements and other pertinent data is given on the spreadsheet below:

The president of XYZ admits that the company's performance has been inconsistent over the past several years, yet argues that XYZ has its cost under control and is currently experiencing strong sales growth over the last year. The president says that the jump in the price of the company's common stock from $20 per share last year to $36 per share this year shows investors' confidence in the improving situation at XYZ.

The president believes that the $1,000,000, which will be used to purchase modernized equipment, would allow XYZ to strengthen profits in the future.

Other given data:

The inventory at the beginning of last year totaled $640,000.

Total assets at the beginning of last year were $4,320,000.

Stockholders' equity at the beginning of last year was $3,016,000.

There has been no change in preferred or common stock over the last two years.

Accounts receivable at the beginning of last year totaled $520,000.

Typical ratios for companies in XYZ's industry

Current ratio	2.3
Acid-test ratio	1.2
Average collection period	31	days
Average sale period	60	days
Return on assets	9.50%
Debt-to-equity ratio	0.65
Times interest earned	5.7
Price-earnings ratio	10

XYZ Company Comparative Income Statement

		This Year	Last Year
Sales (all on account)		$ 5,250,000	$ 4,160,000
Cost of goods sold		4,200,000	3,300,000
Gross margin		1,050,000	860,000
Selling and administrative expenses		530,000	520,000
Net operating income		520,000	340,000
Interest expense		120,000	100,000
Net income before taxes		400,000	240,000
Income taxes (30%)		120,000	72,000
Net income		$ 280,000	$ 168,000

XYZ Company Reconciliation of Retained Earnings

	This Year	Last Year
Net income	$ 280,000	$ 168,000
Dividends paid:
Preferred stock	48,000	48,000
Common stock	72,000	36,000
Total dividends paid	120,000	84,000
Net income retained	160,000	84,000
Retained earnings, beginning of year	440,000	356,000
Retained earnings, end of year	$ 600,000	$ 440,000

XYZ Company Comparative Balance Sheet

Current assets

Cash	$ 320,000	$ 420,000
Marketable securities	-	100,000
Accounts receivable, net	900,000	600,000
Inventory	1,300,000	800,000
Prepaid expenses	80,000	60,000
Total current assets	2,600,000	1,980,000
Plant and equipment, net	3,100,000	2,980,000
Total assets	$ 5,700,000	$ 4,960,000

Liabilities and stock holders' equity

Liabilities:

Current liabilities	$ 1,300,000	$ 920,000
Bonds payable, 10%	1,200,000	1,000,000
Total liabilities	2,500,000	1,920,000

Stockholders' equity

Preferred stock, 8%, $30 par value	600,000	600,000
Common stock, $40 parvalue	2,000,000	2,000,000
Retained earnings	600,000	440,000
Total stockholders' equity	3,200,000	3,040,000
Total liabilities and stockholders' equity	$ 5,700,000	$ 4,960,000

Required:

1. Begin by assessing the rate of return that the company is generating by

(a) Computing the return on total assets for both this year and last year

(b) Computing the return on common stockholders' equity for both this year and last year

(c) Determining if xyz's financial leverage is positive or negative. explain your answer.

2. Assess the well-being of the common stockholders for both this year and last year

a. Compute the earnings per share

b. Compute the dividend yield ratio for common stock

c. Compute the dividend payout ratio for common stock

d. Compute the price-earnings ratio

e. Compute the gross margin percentage

f. What does the difference between market value per share and book value per share suggest

3. Assess creditor ratios in order to determine debt paying ability for both this year and last year.

a. Compute working capital

b. Compute current ratio

c. Compute acid-test ratio

d. Compute the average collection period

Answer rating: 100% (QA)

1 a Return on Total Asset EBIT Total Net Asset this year 5200005700000 912 past year 3400004960000 6... View the full answer