ADMS 3541 Lecture Notes - Lecture 7: Down Payment, Effective Interest Rate, Overdraft

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peachsalmon65

7 Nov 2017

School

York University

Department

Administrative Studies

Course

ADMS 3541

Professor

Kwok Sum Ho

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Document Summary

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Related Questions

I am having a problem getting my memo right for this math done already class, I have the math done. Heres the directions and Ill post the memo outline they gave us and the math I have doneI have to tell them yes on the loan as you will see in my answer to Part 3

Precision company wishes to expand but needs a $300,000 loan. The bank requests that Precision prepare a balance sheet and key financial ratios. Precision has kept formal records and is able to provide financial statements as of December 31, 2017. The industry debt ratio averages 45.00%. The industry return on assets is 2.0%.

You represent Ideal Bank and will present your findings in a memo to report the ratios for Precision, and identify the conclusion of your opinion reached from your analysis of the companyâs financials. The memo is to be copied and distributed to the VP of Ideal Bank, so a well-written and detailed memo is crucial. Your memo will be crucial to bank leadersâ decision to lend Precision the $300,000.

Make sure you use complete sentences. Check your work for proper spelling, grammar and punctuation.

Part 1(a) - Return on Total assets

Return on Total Assets = (Earning Before Income And Taxes)/Total Assets*100

Total Assets = $1684000

Earning before Interest and Taxes = $185000

Return on Total Assets = ($185000/$1684000)*100 = 10.99%

Part 1(b) - Its Building Block is Profitability. Profitability ratios measure the how effectively company uses its assets in generating revenue. The ratio explain the relationship between income and Resources.

Company is generating more return on total assets than the industry average. Industry average is 2% and company's return on total assets is 10.99%

Also company is having the very high profit Margin, High Return on Equity. Hence overall Position regarding Profitability is Higher than Industry's average

Part 2(a) - Debt Ratio = Total Debts/Shareholders Equity

Total Debts = $400000

Shareholders Equity = $1019000

Debt Ratio = ($400000/$1019000)*100 = 39.25%

Part 2(b) - Its Building Block is Solvency. Solvency ratio determines the ability of company to meet the liabilities of long term debts. It analyses that whether company has sufficient cash flows to repay the long term debts.

Company debt ratio is 39% which is lesser than Industry Average ratio. It says that company better manages its long term debt financing. Lower debt equity ratio is better. And debt equity ratio of more than 50% is considered unhealthy. Hence company is very much performing better than its Industries sector.

Part 3- Yes, Company is highly able to get the loan of $300000. Company is performing better than Industry averages in terms of profitability and Solvency. Also Company has current ratio of more than 2.0 which says that company has high liquidity. Hence company is Growing in business and has strong financials better than industry average. Hence Company can get the loan of $300000 for expansion

Precision Company

Memorandum

To: Recipient Name

From: Your Name

CC: CC Name

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rosecoyote597

Integrative Problem Presented here are a statement of income and retained earnings and comparative balance sheets for Gallagher, Inc., which operates a national chain of sporting goods stores. Gallagher, Inc. Statement of Income and Retained Earnings For the Year Ended December 31, 2016 (all amounts in thousands of dollars)

Net sales $48,000

Cost of goods sold 36,000

Gross profit $12,000

Selling, general, and administrative expense 6,000

Operating income $6,000

Interest expense 280

Income before tax $5,720

Income tax expense 2,280

Net income $3,440

Preferred dividends 100 Income available to common $3,340

Common dividends 500 To retained earnings $2,840

Retained earnings, 1/1 12,000

Retained earnings, 12/31 $14,840

Gallagher, Inc. Comparative Balance Sheets December 31, 2016 and 2015 (all amounts in thousands of dollars) December 31 2016 2015

Cash $840 $2,700

Accounts receivable 12,500 9,000

Inventory 8,000 5,500

Prepaid insurance 100 400

Total current assets $21,440 $17,600

Land $4,000 $4,000

Buildings and equipment 12,000 9,000

Accumulated depreciation (3,700) (3,000)

Total long-term assets $12,300 $10,000

Total assets $33,740 $27,600

Accounts payable $7,300 $5,000

Taxes payable 4,600 4,200

Notes payable 2,400 1,600

Current portion of bonds 200 200

Total current liabilities $14,500 $11,000

Bonds payable 1,400 1,600

Total liabilities $15,900 $12,600

Preferred stock, $5 par $1,000 $1,000

Common stock, $1 par 2,000 2,000

Retained earnings 14,840 12,000

Total stockholdersâ equity $17,840 $15,000

Total liabilities and stockholdersâ equity $33,740 $27,600

Required: 1. Prepare a statement of cash flows for Gallagher, Inc., for the year ended December 31, 2016, using the indirect method in the Operating Activities section of the statement. If an answer is zero, please enter zero ("0"). Use the minus sign to indicate cash outflows, a decrease in cash, or cash payments. Gallagher, Inc. Statement of Cash Flows For The Year Ended December 31, 2016 (In Thousands of Dollars)

Cash flows from operating activities $

Adjustments to reconcile net income to net cash provided by operating activities:

Net cash provided by operating activities $

Cash flows from investing activities $

Net cash used by investing activities $

Cash flows from financing activities $

Net cash provided by financing activities $

Cash balance, December 31, 2015

Cash balance, December 31, 2016 $

2. Gallagher's management is concerned with its short-term liquidity and its solvency over the long run. To help management evaluate these, compute the following ratios, rounding all answers to two decimal points. For percentages, round to two decimal places before converting to a percentage. For example, 0.881 would be entered as 88. Assume 360 days per year.

a. Current ratio to 1

b. Acid-test ratio to 1

c. Cash flow from operations to current liabilities ratio %

d. Accounts receivable turnover ratio times

e. Number of days' sales in receivables days

f. Inventory turnover ratio times

g. Number of days' sales in inventory days

h. Debt-to-equity ratio to 1

i. Debt service coverage ratio to 1

j. Cash flow from operations to capital expenditures ratio % 3.

tealtrout582

You have just been hired as a loan officer at San Diego StateBank. Your supervisor has given you a file containing a requestfrom Mobile Company, a manufacturer of auto components, for a$1,000,000 five-year loan. Financial statement data on the companyfor the last two years are given below:

Mobile Company
Comparative Balance Sheet
	This Year		Last Year
Assets
Current assets:
Cash	$	289,600	$	369,400
Marketablesecurities		0		111,000
Accounts receivable,net		928,000		631,000
Inventory		1,348,000		748,000
Prepaid expenses		95,800		80,800

Total currentassets		2,661,400		1,940,200
Plant and equipment,net		3,447,800		3,103,400

Total assets	$	6,109,200	$	5,043,600

Liabilitiesand Stockholdersâ Equity
Liabilities:
Current liabilities	$	1,269,200	$	759,600
Bonds payable		1,304,000		1,104,000

Totalliabilities		2,573,200		1,863,600

Stockholders'equity:
Preferred stock, 8%, $30par value		600,000		600,000
Common stock, $40 parvalue		2,000,000		2,000,000
Retained earnings		936,000		580,000

Total stockholders'equity		3,536,000		3,180,000

Total liabilitiesand stockholders' equity	$	6,109,200	$	5,043,600

Mobile Company
Comparative Income Statement and Reconciliation
	This Year		Last Year
Sales	$	5,472,000	$	4,292,000
Cost of goodssold		4,106,000		3,196,000

Gross margin		1,366,000		1,096,000
Selling andadministrative expenses		542,000		522,000

Net operatingincome		824,000		574,000
Interestexpense		134,000		114,000

Net income beforetaxes		690,000		460,000
Income taxes(30%)		207,000		138,000

Net income		483,000		322,000

Dividends paid:
Preferred stock		48,000		48,000
Common stock		79,000		55,000

Total dividendspaid		127,000		103,000

Net incomeretained		356,000		219,000
Retained earnings,beginning of year		580,000		361,000

Retained earnings,end of year	$	936,000	$	580,000

Loretta Young, who just two yearsago was appointed president of Mobile Company, admits that thecompany has been âinconsistentâ in its performance over the pastseveral years. But Young argues that the company has its costsunder control and is now experiencing strong sales growth, asevidenced by the more than 27% increase in sales over the lastyear. Young also argues that investors have recognized theimproving situation at Mobile Company, as shown by the jump in theprice of its common stock from $50.00 per share last year to $54.00per share this year. Young believes that with strong leadership andwith the modernized equipment that the $1,000,000 loan will enablethe company to buy, profits will be even stronger in thefuture.

Anxious to impress yoursupervisor, you decide to generate all the information you canabout the company. You determine that the following ratios aretypical of companies in Mobileâs industry:


Current ratio	2.3
Acid-test ratio	1.2
Average collectionperiod	31	days
Average saleperiod	60	days
Return onassets	9.5	%
Debt-to-equityratio	0.65
Times interestearned	5.7
Price-earningsratio	10

Required:

1.	You decide first to assess the rate of return that the companyis generating. Compute the following for both this year and lastyear:

a.	The return on total assets. (Total assets at the beginning oflast year were $4,384,000.) (Round your percentage answersto 1 decimal place i.e., 0.123 is considered as 12.3.)

b.	The return on common stockholdersâ equity. (Stockholders' equityat the beginning of last year totaled $4,519,185. There has been nochange in preferred or common stock over the last two years.)(Do not round your intermediate calculations. Round yourpercentage answers to 1 decimal place i.e., 0.123 is considered as12.3.)

c.	Is the companyâs financial leverage positive or negative?

2.	You decide next to assess the well-being of the commonstockholders. For both this year and last year, compute:

a.	The earnings per share. (Round your answers to 2 decimalplaces.)

b.	The dividend yield ratio for common stock. (Round yourintermediate calculations to 2 decimal places and and yourpercentage answers to 1 decimal place i.e., 0.123 is considered as12.3.)

d.	The price-earnings ratio. (Round your intermediatecalculations to 2 decimal places and final answers to 1 decimalplace.)

e.	The book value per share of common stock. (Round youranswers to 2 decimal places.)

f.	The gross margin percentage. (Round your percentageanswers to 1 decimal place i.e., 0.123 is considered as12.3.)

3.	You decide, finally, to assess creditor ratios to determine bothshort-term and long-term debt paying ability. For both this yearand last year, compute:

a.	Working capital.

b.	The current ratio.(Round your answers to 2 decimal places.)

c.	The acid-test ratio.(Round your answers to 2 decimal places.)

e.	The average sale period. (The inventory at the beginning of lastyear totaled $650,000.) (Use 365 days in a year. Round yourintermediate calculations to 2 decimal and final answers to thenearest whole number.)

f.	The debt-to-equity ratio.(Round your answers to 2 decimal places.)

g.	The times interest earned.(Round your answers to 1 decimal place.)

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ADMS 3541 Lecture Notes - Lecture 7: Down Payment, Effective Interest Rate, Overdraft

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