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You have just been hired as a loan officer at Fairfield State Bank. Your supervisor has given you a file containing a request from Hedrick Company, a manufacturer of auto components, for a $1,000,000 five-year loan. Financial statement data on the company for the last two years are given below:

Hedrick Company
Comparative Balance Sheet

This Year Last Year
  Assets



  Current assets:



     Cash $ 320,000     $ 420,000    
     Marketable securities
0    
100,000    
     Accounts receivable, net
900,000    
600,000    
     Inventory
1,300,000
800,000    
     Prepaid expenses
80,000    
60,000    





  Total current assets
2,600,000    
1,980,000    
  Plant and equipment, net
3,100,000    
2,980,000    





  Total assets $ 5,700,000     $ 4,960,000    





Liabilities and Stockholders' Equity



  Liabilities:



     Current liabilities $ 1,300,000     $ 920,000    
     Bonds payable, 10%
1,200,000    
1,000,000    





  Total liabilities
2,500,000    
1,920,000    





  Stockholders' equity:



      Preferred stock, 8%, $30 par value
600,000    
600,000    
      Common stock, $40 par value
2,000,000    
2,000,000    
      Retained earnings
600,000    
440,000    





  Total stockholders' equity
3,200,000    
3,040,000    





  Total liabilities and stockholders' equity $ 5,700,000     $ 4,960,000    






Hedrick Company
Comparative Income Statement and Reconciliation

This Year Last Year
  Sales (all on account) $ 5,250,000    $ 4,160,000   
  Cost of goods sold
4,200,000   
3,300,000   





  Gross margin
1,050,000   
860,000   
  Selling and administrative expenses
530,000   
520,000   





  Net operating income
520,000   
340,000   
  Interest expense
120,000   
100,000   





  Net income before taxes
400,000   
240,000   
  Income taxes (30%)
120,000   
72,000   





  Net income
280,000   
168,000   





  Dividends paid:



     Preferred stock
48,000   
48,000   
     Common stock
72,000   
36,000   





  Total dividends paid
120,000   
84,000   





  Net income retained
160,000   
84,000   
  Retained earnings, beginning of year
440,000   
356,000   





  Retained earnings, end of year $ 600,000    $ 440,000






Marva Rossen, who just two years ago was appointed president of Hedrick Company, admits that the company has been "inconsistent" in its performance over the past several years. But Rossen argues that the company has its costs under control and is now experiencing strong sales growth, as evidenced by the more than 25% increase in sales over the last year. Rossen also argues that investors have recognized the improving situation at Hedrick Company, as shown by the jump in the price of its common stock from $20 per share last year to $36 per share this year. Rossen believes that with strong leadership and with the modernized equipment that the $1,000,000 loan will enable the company to buy, profits will be even stronger in the future.

Anxious to impress your supervisor, you decide to generate all the information you can about the company. You determine that the following ratios are typical of companies in Hedrick's industry:



  Current ratio 2.3   
  Acid-test ratio 1.2   
  Average collection period 31 days     
  Average sale period 60 days     
  Return on assets 9.5 %          
  Debt-to-equity ratio 0.65
  Times interest earned ratio 5.7
  Price-earnings ratio 10

Required:
1.

Present the balance sheet in common-size format. (Leave no cells blank - be certain to enter "0" wherever required. Round your answers to 1 decimal place. Due to rounding, figures may not fully reconcile down a column. Omit the "%" sign in your response.)
Hedrick Company
Comparative Balance Sheet

This Year Last Year
  Assets



  Current assets:



     Cash
%
%
     Marketable securities



     Accounts receivable, net



     Inventory



     Prepaid expenses








  Total current assets



  Plant and equipment, net








  Total assets
%
%





Liabilities and Stockholders' Equity



  Liabilities:



     Current liabilities
%
%
     Bonds payable, 10%








  Total liabilities








  Stockholders' equity:



      Preferred stock, 8%, $30 par value



      Common stock, $40 par value



      Retained earnings








  Total stockholders' equity








  Total liabilities and stockholders' equity
%
%






2.

Present the income statement in common-size format down through net income. (Input all amounts as positive values. Round your answers to 1 decimal place. Due to rounding, figures may not fully reconcile down a column. Omit the "%" sign in your response.)
Hedrick Company
Comparative Income Statements

This Year Last Year
  Sales % %   
  Cost of goods sold             



  Gross margin             
  Selling and administrative expenses             



  Net operating income             
  Interest expense             



  Net income before taxes             
  Income taxes (30%)             



  Net income   %   %




Accounting Basics, Accounting

  • Category:- Accounting Basics
  • Reference No.:- M9950036

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