Bob Builder Construction Company $($BBCC$)$ is a large firm for kitchen appliance manufacturers.

Peral, the finance manager of BBCC$,$ submitted a justification to support the application for a

short$-$term loan from the Queensville Interstate Bank $($QIB$)$ to finance increased sales. The

consolidated income statement and balance sheet of BBCC are as follows.

BBCC Income Statement for $2018$ and $2019($thousand dollars$)$

$20182019$

Sales $$40,90$

$9$

$$45,00$

$0$

Cost of Goods Sold $$20,90$

$9$

$$23,00$

$0$

Gross Profit $$20,00$

$0$

$$22,00$

$0$

Selling and Administrative

Expenses

$$11,81$

$8$

$$13,00$

$0$

Depreciation Expense $$2,000$ $$3,000$

Operating Income $($EBIT$)$ $$6,182$ $$6,000$

Interest Expense $$400$ $$412$

Earnings before Taxes $($EBT$)$ $$5,782$ $$5,588$

Income Taxes $($@ $40\%)$ $$2,313$ $$2,235$

Net Income $($NI$)$ $$3,469$ $$3,353$

Dividends Paid $($@ $21\mathrm{.}86\%)$ $$758$ $$733$

BBCC Balance Sheet as of End of $2018$ and $2019($thousand dollars$)$

$20182019$

Assets:

Cash $$2,000$ $$1,800$

Accounts Receivable $($net$)$ $$6,000$ $$7,600$

Inventory $$5,000$ $$5,220$

Plant and Equipment

$($gross$)$

$$26,00$

$0$

$$31,00$

$0$

Less: Accumulated

Depreciation

$$10,00$

$0$

$$13,00$

$0$

Plant and Equipment $($net$)$ $$16,00$

$0$

$$18,00$

$0$

Land $$1,000$ $$1,000$

Liabilities:

Accounts Payable $$2,000$ $$2,600$

Notes Payable $$3,000$ $$3,300$

Accrued Expenses $$3,000$ $$3,100$

Bonds Payable $$4,000$ $$4,000$

Stockholders$$ Equity:

Common Stock $$4,000$ $$4,000$

Retained Earnings

$$14,00$

$0$

$$16,62$

$0$

You are the loan officer at QIB responsible for determining whether BBCC$$s business is strong

enough to be able to repay the loan. To do so$,$ accomplish the following:

$1.$ Calculate the following profitability ratios for $2018$ and $2019,$ compare with the industry

averages shown in parentheses, and indicate if the company is doing better or worse than the

industry and whether the performance is improving or deteriorating in $2019$ as compared to

$2018.$

a$.$ Gross profit margin $(50$ percent$)$

b$.$ Operating profit margin $(15$ percent$)$

c$.$ Net profit margin $(8$ percent$)$

d$.$ Return on assets $(10$ percent$)$

e$.$ Return on equity $(20$ percent$)$

f$.$ Current ratio $(1\mathrm{.}5)$

g$.$ Quick ratio $(1\mathrm{.}0)$

h$.$ Debt to total asset ratio $(0\mathrm{.}5)$

i$.$ Times interest earned $(25)$

j$.$ Average collection period $(45$ days$)$

k$.$ Inventory turnover $(8)$

l$.$ Total asset turnover $(1\mathrm{.}6)$

$2.$ Calculate the EVA and MVA for BBCC$,$ assuming that the firm$$s income tax rate is $40$

percent, the weighted average rate of return expected by the suppliers of the firm$$s capital is $10$

percent, and the market price of the firm$$s stock is $$20.$ There are $1\mathrm{.}2$ million shares outstanding.

$3.$ Determine the sources and uses of funds and prepare a statement of cash flows for $2019.$

$4.$ Discuss the financial strengths and weaknesses of BBCC based on the financial condition as

evident from the ratio analysis and the cash flow statement.

$5.$ Which ratios should you analyze more critically before recommending granting of the loan

and what is your recommendation?