Baker & Co. has applied for a loan from the Trust Us Bank in order to invest in several potential opportunities. In order to evaluate the firm as a potential debtor, the bank would like to compare Baker & Co. with the industry.Balance SheetDecember 31December 31 Income StatementFor the year ended Dec 31, 2021 20202021 Assets Sales (100% credit)1,330Cash305270 Less: Cost of goods sold760Accounts receivable275290 Gross profit570Inventory600580 Operating expenses30Current assets1,1801,140 Depreciation200Plant and equipment1,7001,940 Net operating income340Less: acc depr-500-600 Less: Interest expense57Net plant and equipment1,2001,340 Net income before taxes283Total assets2,3802,480 Less: Taxes96 Net income187Liab. and Owners' Equity Accounts payable150200 Notes payable125- Current liabilities275200 Bonds payable500500 Total liabilities775700 stockholder's equity Common stock165305 Paid-in-capital775775 Retained earnings665700 Total stockholders' Equity1,6051,780 Total Liab. and Owners' Equity2,3802,480 Questions:1. What are the firm's financial strengths? Explain your answers.2. What are the firm's financial weaknesses? Explain your answers.3. Should the bank grant the loan? Explain your answer. PROBLEM:Baker & Co. has applied for a loan from the Trust Us Bank in order to invest in several potentialopportunities. In order to evaluate the firm as a potential debtor, the bank would like tocompare Baker & Co. with the industry.Compute the following ratios:IndustryEvaluation2021average(Good or Bad)FormulaCurrent ratio5.0CA eoy / CL eoyAcid test ratio2.5(Cash eoy + MS eoy + AR eoy) / CL eoyCGS eoy / Inventory boyAR boy / Daily Sales eoyTL eoy / TA eoyOl eoy / IE eoySales eoy / TA boyEBIT eoy / Sales eoyNI eoy / Sales eoyInventory turnover2.2Average collection period90 daysDebt ratio0.33Times interest earned7.0Total asset turnover (use total assets, beg.)0.8Operating profit margin20.0%Net profit margin12.0%Return on total assets (tax rate = 35%)9.0%(After-tax IE eoy + NI eoy)/ TA boyReturn on equity10.4%NI eoy / Total equity boy

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EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter3: Evaluation Of Financial Performance

Section: Chapter Questions

Problem 10P

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Question

Baker & Co. has applied for a loan from the Trust Us Bank in order to invest in several potential opportunities. In order to evaluate the firm as a potential debtor, the bank would like to compare Baker & Co. with the industry.

Balance Sheet	December 31	December 31	Income Statement For the year ended Dec 31, 2021
	2020	2021
Assets			Sales (100% credit)	1,330
Cash	305	270	Less: Cost of goods sold	760
Accounts receivable	275	290	Gross profit	570
Inventory	600	580	Operating expenses	30
Current assets	1,180	1,140	Depreciation	200
Plant and equipment	1,700	1,940	Net operating income	340
Less: acc depr	-500	-600	Less: Interest expense	57
Net plant and equipment	1,200	1,340	Net income before taxes	283
Total assets	2,380	2,480	Less: Taxes	96
			Net income	187
Liab. and Owners' Equity
Accounts payable	150	200
Notes payable	125	-
Current liabilities	275	200
Bonds payable	500	500
Total liabilities	775	700
stockholder's equity
Common stock	165	305
Paid-in-capital	775	775
Retained earnings	665	700
Total stockholders' Equity	1,605	1,780
Total Liab. and Owners' Equity	2,380	2,480

Questions:
1. What are the firm's financial strengths? Explain your answers.
2. What are the firm's financial weaknesses? Explain your answers.
3. Should the bank grant the loan? Explain your answer.

PROBLEM:
Baker & Co. has applied for a loan from the Trust Us Bank in order to invest in several potential
opportunities. In order to evaluate the firm as a potential debtor, the bank would like to
compare Baker & Co. with the industry.
Compute the following ratios:
Industry
Evaluation
2021
average
(Good or Bad)
Formula
Current ratio
5.0
CA eoy / CL eoy
Acid test ratio
2.5
(Cash eoy + MS eoy + AR eoy) / CL eoy
CGS eoy / Inventory boy
AR boy / Daily Sales eoy
TL eoy / TA eoy
Ol eoy / IE eoy
Sales eoy / TA boy
EBIT eoy / Sales eoy
NI eoy / Sales eoy
Inventory turnover
2.2
Average collection period
90 days
Debt ratio
0.33
Times interest earned
7.0
Total asset turnover (use total assets, beg.)
0.8
Operating profit margin
20.0%
Net profit margin
12.0%
Return on total assets (tax rate = 35%)
9.0%
(After-tax IE eoy + NI eoy)/ TA boy
Return on equity
10.4%
NI eoy / Total equity boy

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