24 hours to complete assigment, must understand Finance and guarnatee an A.
Credit Decision Problem
You are called to the office of David West, the senior commercial lender for your employer, Western Bank & Trust. Mr. West informs you that due to an emergency, he will be away for several days. Mr. Stevens asks that that you review the loan application of Sanders Sales Company and make a recommendation to him, in memo form, to approve or reject the loan request. The recommendation should have attachments with appropriate financial ratio information on Sanders Sales existing financial statements, should include NPV–style evaluation of the future cash flows resulting from investment in Jackson Inc. (see below), and other financial data you deem necessary to support your recommendation.
Sanders Sales Company is requesting a $450,000 loan to help them buy the stock of Jackson Inc., a competitor in the same line of business as Sanders Sales. Sanders Sales Company will use $150,000 of its own cash and investments, in addition to the loan proceeds, to pay the purchase price of $600,000. The loan would be repaid with ten annual payments including principal and interest at an 8% APR. The loan would be collateralized by the stock purchased. Sanders Sales would be a new account for Western Bank & Trust. Sanders Sales is looking for a new banker as they have outgrown the resources of their current banker. Credit reports indicate that Sanders Sales has a good credit history.
Mr. West provides you the file containing the loan request, financial statements for Sanders Sales Company for the three preceding years, and financial information regarding investment cash flow information for Jackson Inc.
Prospective Financial Information – Jackson Inc.
Jackson’s sales in the first year following acquisition are expected to be $625,000. Sales are expected to increase by 12% per year for years 2 & 3, by 9% per year for years 4 & 5, and then decrease by 13% per year for years 6-10. Sales for years 11-13 are expected to decrease by 17% each year. (All increases and decreases are based on the previous year’s sales). It is anticipated that there will be no further sales or other cash flows after 13 years.
Cost of goods sold is expected to be 62% of sales each year and operating expenses are expected to be 12% of sales. Future cash flows are expected to be materially the same as sales, cost of goods sold and expenses. Income tax is expected to be 35% of income for all years.
Presume that net income approximates annual cash inflows. Complete the projected income statement and use the net present value method to support the investment decision. The company uses an 8% cost of capital to evaluate investment decisions, using NPV as the tool to evaluate investments.
Expected Outcomes
1) Compute the appropriate financial ratio information for the financial statements of Sanders Sales Company.
2) Perform the Financial Statement Projections, Net Present Value, & IRR computations for Jackson Inc.
3)
Compose a memo to Mr. West, making a recommendation to approve or reject the loan request. Use the outcomes from your NPV, IRR and ratio analysis and any other pertinent financial information to support your decision. (Complete the memo in Microsoft Word and upload all parts to Moodle).
>Projections
& )
2 , , and 2012 2011 2010 2012 2011 2010 23.0 23.0 24% 24% 9.00% 9.00% %
12.00% 12.00% 2.00 15.87
Liquidity Current Ratio Current Assets Quick Ratio Current Assets – Inventory Average Collection Period 365 / Accounts Receivable Turnover Accounts Receivable Turnover Credit Sales Inventory Turnover Cost of Goods Sold Operating Profitability Profit Margin Net Income Return on Total Assets Net Income Fixed Assets Turnover Sales Total Asset Turnover Sales Return on Equity Net Income Debt Debt Ratio Total Liabilities
Presume all sales are credit sales.
Customers are given credit terms of 2/10, n/30.
>Problem
50,000 to expand their business and add a dealership in Hatton, ND.
00,000
900,000 600,000 ,000
100,000 30,000 40,000 4,000
)
2009 2010 2011 54,000 $75,000 $75,000 300,000 300,000 300,000 $375,000 $375,000 ,600
3 2 21 41 48 10 7 7 11 35%
Jackson Inc.
Complete the project income statement and (
NPV
IRR
Projected Income Statement
Years
1
3
4
5
6
7
8
9
10
11
12
13
Sales
COGS
Gross profit
Operating expenses
Operating income
Tax at 35%
Net income
NPV
IRR
P & L
Sanders Sales Company
Profit & Loss Statement
For the Years Ended December 31,
2012
2011
2010
2012 2011 2010
Net Sales
$ 3,985,266
$ 4,395,877
$ 4,657,880
Cost of Goods Sold
3,228,065
3,560,660
3,772,883
Gross Profit on Sales
$757,201
$835,217
$884,997
Operating Expenses:
General and Administrative
$310,966
$299,550
$219,815
Selling
234,550
203,240
156,340
Total Operating Expenses
$545,516
$502,790
$376,155
Operating Income
$211,685
$332,427
$508,842
Other Income (Expense):
Interest Income
$11,320
$13,220
$25,610
Interest Expense
(20,400)
(16,800)
(12,000)
Net Other Income
($9,080)
($3,580)
$13,610
Income Before
Provision For Income Taxes
$202,605
$328,847
$522,452
Provision For Income Taxes
70,912
115,096
182,858
Net Income
$131,693
$213,750
$339,594
Balance Sheet
Sanders Sales Company
Balance Sheet
At December 31, 2012, 2011, and 2010
Current Assets:
2012 2011 2010
Cash
$208,335
$228,242
$240,362
Short-term investments
234,455
237,700
261,000
Accounts Receivable
391,200
324,118
268,400
Inventories
334,400
295,600
190,400
Prepaid Expenses
88,000
64,300
36,600
Total Current Assets
$1,256,390
$1,149,960
$996,762
Property, Plant and Equipment
$6,920,000
$5,905,087
$4,810,750
Less Accumulated Depreciation
2,300,000
2,000,000
1,700,000
Net Property, Plant and Equipment
$4,620,000
$3,905,087
$3,110,750
Total Assets
$5,876,390
$5,055,047
$4,107,512
Current Liabilities:
Accounts Payable
$ 304,900
$ 203,322
$ 188,335
Accrued Expenses
218,102
189,265
179,477
Short Term Notes Payable
265,000
225,000
165,000
Current Portion On Long-term Debt
75,000
55,000
35,000
Total Current Liabilities
$ 863,002
$ 672,587
$ 567,812
Long-term Debt:
Net Long-term Debt
635,245
556,010
567,000
Total Liabilities
$ 1,498,247
$ 1,228,597
$ 1,134,812
Stockholders’ Equity
Paid-in Capital:
Common Stock
$2,350,000
$2,150,000
$1,800,000
Additional Paid In Excess of Par
1,340,000
1,120,000
830,000
Total Paid-in Capital
$3,690,000
$3,270,000
$2,630,000
Retained Earnings
688,143
556,450
342,700
Total Stockholders’ Equity
$4,378,143
$3,826,450
$2,972,700
Total Liabilities and Stockholders’ Equity
$ 5,876,390
$ 5,055,047
$ 4,107,512
Ratios
COMPLETE The Financial Ratios for 2012, 2011, & 2010:
Financial Ratios – Sanders Sales
Current ratio
Quick Ratio
Accounts Receivable Turnover
Inv Turnover
Debt ratio
Profit Margin
Return on Assets
Return on Equity
Fixed Asset Turnover
Average Collection Period
Industry Ratios
Industry Averages – Compare w/ Sanders calculations
Current ratio
1.92
1.90
1.83
Quick Ratio
1.22
1.19
1.15
A/R Turnover
24.0
23.0
Inv Turnover
23.5
22.0
Debt ratio
28%
27%
26%
Profit Margin
24%
Return on Assets
9.00%
Return on Equity
1
2.00
Fixed Asset Turnover
2.50
2.25
Avg Collection Period
15.21
15.87
FINANCIAL RATIOS
Current Liabilities
Current Liabilities
Accounts Receivable
Inventory
Sales
Total Assets
Net Fixed Assets (Property, Plant, & Equipment)
Total Assets
Stockholders’ Equity
Total assets
You are a young loan officer working for Goose River Bank in Mayville, ND.
Your boss, Mr. Jefferson, has handed you the file of a new customer for the bank, Mayville Motors Inc.
They are looking for a loan of $
3
Enclosed you will find the income statement and balance sheet for Mayville Motors for the past 3 years.
Conduct the necessary ratio analysis in order to determine whether to grant them a loan.
After conducting the analysis, write a memo to Mr. Jefferson detailing your decision.
Be sure to backup your decision using your ratios and industry averages.
Income Statements
2009
20
10
20
11
Sales Revenue
1,
900,000
1,
7
1,
600,000
COGS
1,000,000
1,
100,000
1,150,000
Gross Profit
450,000
Operating Expenses:
Selling
300,000
257,000
2
41
General & Admin.
69,000
72,000
Leases
40,000
25,000
30,000
Depreciation
35,000
Total Operating Expenses
470,000
386,000
383,000
Earnings Before Interest and Taxes
430,000
21
67,000
Interest Expense
24,000
29,000
34,000
Net Profit Before Taxes
406,000
185,000
33,000
Taxes (
35%
142,100
64,750
11,550
Net Profit After Taxes
263,900
120,250
21,450
Balance Sheet
Current Assets:
Cash
$135,000
$104,365
$85,650
Accounts Receivable
111,250
192,005
212,410
Inventories
98,850
157,330
175,830
Total Current Assets
$345,100
$453,700
$473,890
Property, Plant and Equipment
$778,150
$930,000
$1,0
54,000
Less Accumulated Depreciation
170,000
205,000
245,000
Net Property, Plant and Equipment
$608,150
$725,000
$809,000
Total Assets
$953,250
$1,178,700
$1,282,890
Current Liabilities:
Accounts Payable
$ 82,350
$ 103,550
$ 122,390
Accrued Expenses
37,000
64,300
Short Term Notes Payable
19,000
31,000
38,100
Current Portion On Long-term Debt
28,000
43,000
54,500
Total Current Liabilities
$ 166,350
$ 231,550
$ 279,290
Long-term Debt:
Net Long-term Debt
80,000
120,000
155,000
Total Liabilities
$ 246,350
$ 351,550
$ 434,290
Stockholders’ Equity
Paid-in Capital:
Common Stock (75,000 shares @ $1 per share)
$75,000
Additional Paid In Excess of Par
Total Paid-in Capital
$375,000
Retained Earnings
331,900
452,150
473,600
Total Stockholders’ Equity
$706,900
$827,150
$8
48
Total Liabilities and Stockholders’ Equity
$ 953,250
$ 1,178,700
$ 1,282,890
Ratios
2,009
2,010
2,011
Industry Avg.
Current ratio
2.07
1.96
1.70
Quick Ratio
1.48
1.28
1.07
Average Collection Period
22 days
Inv Turnover
Debt ratio
25.84%
29.83%
33.85%
Gross Profit Margin
47.37%
35.29%
28.13%
55%
Earnings Per Share
3.52
1.60
0.29
$2.25
Memo
Memo
To:
From:
Date:
Re: