Ratio Analysis Case

Ratio Analysis Case

Cache Valley Bank has recently hired you as a loan officer. Stephens Company, a manufacturer of steel component parts, has applied for a $500,000, five-year loan, so a major expansion can be made in their business. Financial statement data for the most recent fiscal year follow:
Assets
Current assets: Cash
$200,000 $320,000 $650,000 $30,000 $1,200,000 $2,000,000
$3,200,000 ========
$700,000 $1,100,000 $1,800,000
$300,000 $800,000 $300,000 $1,400,000
$3,200,000 ========
Accounts receivable (net) Inventory
Prepaid expenses
Total current assets
Plant and equipment (net)
Total assets
Liabilities and Stockholders’ Equity
Liabilities:
Current liabilities
Bonds payable, 8% Total liabilities
Stockholders’ equity:
Preferred stock, 8%, $30 par value Common stock, $40 par value Retained earnings
Total stockholders equity
Total liabilities and stockholders’ equity
Stephens Company Comparative Balance Sheet
??????
Sales (all on account)
Cost of goods sold
Gross margin
Selling and administrative expenses Net operating income
Interest expense
Net income before taxes Income taxes (30%)
Net income
Dividends paid:
Preferred stock
Common stock Total dividends paid Net income retained
Retained earnings, beginning of year Retained earnings, end of year
Market price per share of common stock: $70/share
$3,000,000 $2,100,000 $900,000 $492,000 $408,000 $88,000 $320,000 $96,000 $224,000
$24,000 $30,000 $54,000 $170,000 $130,000 $300,000 =======
Stephens Company
Income Statement and Retained Earnings
????????After doing some diligent research, you determine that the following ratios are typical of companies in Stephens’ industry:
Current ratio
Acid-test ratio
Gross margin percentage Average collection period Average sale period Return on total assets Debt-to-equity
Times interest earned Price-earnings ratio
2.1
1.2 28.5% 30 days 95 days 11.5% 0.8
4.0 10
You paper should include your calculations/analysis for these four sections and be approximately two to three pages, type-written and double-spaced.
Section 1:
You decide to assess the rate of return that the company is generating. Calculate and analyze the following ratios:
a. Return on total assets. (Total assets at the beginning of the year were $2,700,000.)
b. Return on common stockholders’ equity. (Stockholders’ equity at the beginning of the year
totaled $1,140,000. There has been no change in preferred or common stock during the year.) c. Is the company’s financial leverage positive or negative? Explain.
Section 2:
You decide to assess the well-being of the common stockholders. Calculate and analyze the following ratios:
a. The earnings per share.
b. The dividend payout ratio for common stock.
c. The dividend yield ratio for common stock.
d. The price-earnings ratio. How do investors regard Stephens Company as compared to other
companies in the industry? Explain.
e. The book value per share of common stock. f. The gross margin percentage.
Section 3:
You decide to assess creditor ratios to determine both short-term and long-term debt paying ability. Calculate and analyze the following ratios:
a. The current ratio.
b. The acid-test ratio.
c. The average collection period. (The accounts receivable at the beginning of the year was $240,000.)
d. The average sale period. (The inventory at the beginning of the year was $590,000.) e. The debt-to-equity ratio.
f. The times interest earned.
Section 4:
Make a recommendation as to whether the loan should be approved. (Note: The following grading sheet will be attached/returned with your paper. Fifteen of the twenty-five points will be based on correctly calculating the ratios. The other ten points possible will be based on the quality of your analysis and recommendation made. There is no right or wrong answer as to whether the loan should be made but you should be able to explain your recommendation.
Accounting 2020
Calculation of ratios
Analysis of ratios
Total points possible
Ratio Analysis Assignment _______________________ Spring 2012

 
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