Ratio Computations and Additional Analysis
Bradburn Corporation was formed 5 years ago through a public subscription of common stock. Daniel Brown, who owns 15% of the common stock, was one of the organizers of Bradburn and is its current president. The company has been successful, but it currently is experiencing a shortage of funds. On June 10, 2014, Daniel Brown approached the Topeka National Bank, asking for a 24-month extension on two $35,000 notes, which are due on June 30, 2015, and September 30, 2015. Another note of $6,000 is due on March 31, 2016, but he expects no difficulty in paying this note on its due date. Brown explained that Bradburn's cash flow problems are due primarily to the company's desire to finance a $300,000 plant expansion over the next 2 fiscal years through internally generated funds.
The commercial loan officer of Topeka National Bank requested the following financial reports for the last 2 fiscal years.
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BRADBURN CORPORATION
BALANCE SHEET
MARCH 31
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Assets
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2015
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2014
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Cash
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$ 18,200
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$ 12,500
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Notes receivable
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148,000
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132,000
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Accounts receivable (net)
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131,800
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125,500
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Inventories (at cost)
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105,000
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50.000
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Plant & equipment (net of depreciation)
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1,449,000
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1,420.500
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Total assets
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$1,852,000
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$1,740,500
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Liabilities and Stockholders' Equity
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Accounts payable
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$ 79,000
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$ 91.000
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Notes payable
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76,000
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61.500
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Accrued liabilities
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9,000
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6.000
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Common stock (130,000 shares, $10 par)
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1,300,000
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1,300.000
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Retained earningsa
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388,000
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282.000
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Total liabilities and stockholders' equity
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$1,852,000
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$1,740,500
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aCash dividends were paid at the rate of $1 per share in fiscal year 2014 and $2 per share in fiscal year 2015.
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BRADBURN CORPORATION
INCOME STATEMENT
FOR THE FISCAL YEARS ENDED MARCH 31
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2015
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2014
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Sales revenue
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$3,000,000
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$2,700,000
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Cost of goods solda
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1.530,000
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1,425,000
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Gross margin
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1,470,000
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1,275,000
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Operating expenses
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860,000
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780,000
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Income before income taxes
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610,000
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495,000
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Income taxes (40%)
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244,000
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198,000
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Net income
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$ 366,000
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$ 297,000
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aDepreciation charges on the plant and equipment of S100.000 and $102.500 for fiscal years ended March 31, 2014 and 2015. respectively. are included in cost of goods sold.
Instructions
(c) Assume that the percentage changes experienced in fiscal year 2015 as compared with fiscal year 2014 for sales and cost of goods sold will be repeated in each of the next 2 years. Is Bradburn's desire to finance the plant expansion from internally generated funds realistic? Discuss.
(d) Should Topeka National Bank grant the extension on Bradburn's notes considering Daniel Brown's statement about financing the plant expansion through internally generated funds? Discuss.