Reference no: EM131117099
1. Ratio Computations and Additional Analysis Brad burn 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 Brad burn and is its current president. The company has been successful, but it currently is experiencing a shortage of funds. On June 10, Daniel Brown approached the Topeka National Bank, asking for a 24-month extension on two $35,000 notes, which are due on June 30, 2011, and September 30, 2011. Another note of $6,000 is due on March 31, 2012, but he expects no difficulty in paying this note on its due date. Brown explained that Brad burn'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 financial reports for the last 2 fiscal years. These reports are reproduced on page 1369.
(a) Compute the following items for Brad burn Corporation.
(1) Current ratio for fiscal years 2010 and 2011.
(2) Acid-test (quick) ratio for fiscal years 2010 and 2011.
(3) Inventory turnover for fiscal year 2011.
(4) Return on assets for fiscal years 2010 and 2011. (Assume total assets were $1,688,500 at 3/31/09.)
(5) Percentage change in sales, cost of goods sold, gross margin, and net income after taxes from fiscal year 2010 to 2011.
(b) Identify and explain what other financial reports and/or financial analyses might be helpful to the commercial loan officer of Topeka National Bank in evaluating Daniel Brown's request for a time extension on Brad burn's notes.
(c) Assume that the percentage changes experienced in fiscal year 2011 as compared with fiscal year
2010 for sales and cost of goods sold will be repeated in each of the next 2 years. Is Brad burn's desire to finance the plant expansion from internally generated funds realistic? Discuss.
(d) Should Topeka National Bank grant the extension on Brad burn's notes considering Daniel Brown's statement about financing the plant expansion through internally generated funds?Discuss.
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