The 2013 financial statements for Royale and Cavalier companies are summarized here:

These two companies are in the same business and state but different cities. One-half of

Royale’s sales and one-quarter of Cavalier’s sales are on credit. Each company has been in operation for about 10 years. Both companies received an unqualified audit opinion on the financial statements. Royale Company wants to borrow $75,000 cash, and Cavalier Company is asking for $30,000. The loans will be for a two-year period. Both companies estimate bad debts based on an aging analysis, but Cavalier has estimated slightly higher uncollectible rates than Royale. Neither company issued stock in 2013. Assume the end-of-year total assets and net property and equipment balances approximate the year’s average.

Required:

1. Calculate the ratios in Exhibit 13.5 for which sufficient information is available. Round all calculations to two decimal places.

2. Assume that you work in the loan department of a local bank. You have been asked to analyze the situation and recommend which loan is preferable. Based on the data given, your analysis prepared in requirement 1, and any other information, give your choice and the sup-porting explanation.

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Royale Company Cavalier Company Balance Sheet as Accounts Receivable, Net Inventory Property and Equipment, Net Other Assets Total Assets $25,000 55,000 110,000 550,000 140,000 $880,000 45,000 5,000 25,000 160,000 57,000 $292,000 Current Liabilities Long-term Debt Capital Stock (par $20) Additional Paid-in Capital Retained Earninas Total Liabilities and Stockholders' Equity Income Statement Sales Revenue Cost of Goods Sold Other Expenses Net Income Selected Data from 2012 Statements Accounts Receivable, Net Long-term Debt Property and Equipment, Net Inventory Total Stockholders' Equity Other Data Per share price at end of 2013 $120,000 190,000 480,000 50,000 40,000 $880,000 $15,000 55,000 210,000 4,000 8,000 $292,000 $800,000 (480,000) (240,000) $80,000 $280,000 (150,000) (95,000) 35,000 47,000 190,000 550,000 95,000 570,000 11,000 55,000 160,000 38,000 202,000 $ 14.00 $ 11.00