Question

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 Stockholders’ 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 “inconsistent” 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 Mobile’s 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 stockholders’ 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 company’s 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.)