Ratio Analysis in Granting a Bank Loan
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(Ratio Computation and Analysis; Liquidity)
As loan analyst for Madison Bank, you have been presented the following information.
Plunkett Co. Herring Co.
Assets
Cash $ 120,000 $ 320,000
Receivables 220,000 302,000
Inventories
570,000
518,000
Total current assets 910,000 1,140,000
Other assets
500,000
612,000
Total assets
$1,410,000
$1,752,000
Liabilities and Stockholders Equity
Current liabilities $ 300,000 350,000
Long-term liabilities 400,000 500,000
Capital stock and retained earnings
710,000
902,000
Total liabilities and stockholders' equity
$1,410,000
$1,752,000
Annual sales $ 930,000 $1,500,000
Rate of gross profit on sales 30% 40%
Each of these companies has requested a loan of $50,000 for 6 months with no collateral offered. Inasmuch as your bank has reached its quota for loans of this type, only one of these requests is to be granted.
Instructions
Which of the two companies, as judged by the information given above, would you recommend as the better risk and why? Assume that the ending account balances are representative of the entire year.
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Solution Summary
As loan analyst for Madison Bank, you have been presented the following information.
Plunkett Co. Herring Co.
Assets
Cash $ 120,000 $ 320,000
Receivables 220,000 302,000
Inventories 570,000 518,000
Total current assets 910,000 1,140,000
Other assets 500,000 612,000
Total assets $1,410,000 $1,752,000
Liabilities and Stockholders Equity
Current liabilities $ 300,000 350,000
Long-term liabilities 400,000 500,000
Capital stock and retained earnings 710,000 902,000
Total liabilities and stockholders' equity $1,410,000 $1,752,000
Annual sales $ 930,000 $1,500,000
Rate of gross profit on sales 30% 40%
Each of these companies has requested a loan of $50,000 for 6 months with no collateral offered. Inasmuch as your bank has reached its quota for loans of this type, only one of these requests is to be granted.
Instructions
Which of the two companies, as judged by the information given above, would you recommend as the better risk and why? Assume that the ending account balances are representative of the entire year.
Solution Preview
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Because the loan is for a short period of time (only 60 days), the bank is most interested in each company's liquidity (i.e., its ability to pay its short-term debts). It may have a secondary interest in each ...
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