Chapter 2 Modern Building Supply

Modern Building Supply sells various building materials to retail outlets. The company has just approached Linden State Bank requesting a $300,000 loan to strengthen the Cash account and to pay certain pressing short-term obligations. The company’s financial statements for the most recent two years follow:

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During the past year, the company has expanded the number of lines that it carries in order to stimulate sales and increase profits. It has also moved aggressively to acquire new customers. Sales terms are 2/10, n/30. All sales are on account.

Assume that the following ratios are typical of companies in the building supply industry:

Current ratio . . . . . . . . . . . . . . . . . . 2.5

Acid-test ratio . . . . . . . . . . . . . . . . . 1.2

Average collection period . . . . . . . . 18 days

Average sale period . . . . . . . . . . . . 50 days

Debt-to-equity ratio . . . . . . . . . . . . 0.75

Times interest earned . . . . . . . . . . 6.0

Return on total assets . . . . . . . . . . 10%

Price-earnings ratio . . . . . . . . . . . . 9

Required:

1. Linden State Bank is uncertain whether the loan should be made. To assist it in making a decision, you have been asked to compute the following amounts and ratios for both this year and last year:

a. Working capital.

b. Current ratio.

c. Acid-test ratio.

d. Average collection period. (The accounts receivable at the beginning of last year totaled $350,000.)

e. Average sale period. (The inventory at the beginning of last year totaled $720,000.)

f. Debt-to-equity ratio.

g. Times interest earned.

2. For both this year and last year (carry computations to one decimal place):

a. Present the balance sheet in common-size form.

b. Present the income statement in common-size form down through net income.

3. From your analysis in (1) and (2) above, what...