SERIAL PROBLEM: KATE\'S CARDS (Noe: Ths is a contimam: Kane\'s Card from Chagner
ID: 2535110 • Letter: S
Question
SERIAL PROBLEM: KATE'S CARDS (Noe: Ths is a contimam: Kane's Card from Chagner I fhrwugh Chaper 12) SP13. Kate is very pleased with the results of the first year of operations for Kate's Cards. She ended the year on a high note, with the company's reputation for producing quality cards leading to more busi- ness than she can currently manage. Kate is considering expanding and bringing in several employ- ees. In order to do this, she will need to find a larger location and also purchase more equipment. All this means additional financing. Kate has asked you to look at her year-end financial statements as if you were a banker considering giving Kate a loan. Comment on your findings and provide calcula- tions to support your comments.Explanation / Answer
To Provide Loan to Kate, as a banker we need to evaluate the following Ratios:
= 24,350 ÷ 30,200
= .81
Debt-Equity ratio is considered as one of the most important tool to measure the solvency of a company. A greater degree to which operations are funded by borrowed money means a greater risk of bankruptcy if business declines.
The ratio of 0.81 indicates that Company has 0.81 debt for every dollar of equity, which seems to be favorable to the bank.
2. Current Ratio: Current Assets ÷ Current Liabilities
= 40,300 ÷ 9,350
= 4.31
The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations.
The ratio of 4.31 indicates that for every $ 1 of current debt company has $ 4.31 available to pay its debt, which seems to be a good ratio.
3. Quick Ratio or Acid Test Ratio: (Current Assets – Inventories) ÷ Current Liabilities
= (40,300 – 16,000) ÷ 9,350
= 2.60
The quick ratio is an indicator of a company’s short-term liquidity, and measures a company’s ability to meet its short-term obligations with its most liquid assets. Because we're only concerned with the most liquid assets, the ratio excludes inventories from current assets.
The ratio of 2.60 indicates that the company has $ 2.60 of liquid assets available to cover each of $ 1 of current Liabilities, which seems favorable to the bank.
4. Operating Cash Flow Ratio: Cash Flow from Operations ÷ Current Liabilities
= 1,100 ÷ 9,350
= 0.12
The operating cash flow ratio is a measure of the number of times a company can pay off current debts with cash generated in the same time period. A higher number means a company can cover its current debts more times, which is a good thing.
The ratio of 0.12 indicates that the company is not able to pay off its current debts even one time, which is a adverse sign for the banker.
5. Interest Coverage Ratio: EBIT ÷ Interest Expense
= 26,300 ÷ 900
= 29.22
The interest coverage ratio measures how many times over a company could pay its current interest payment with its available earnings. In other words, it measures the margin of safety a company has for paying interest during a given period.
The ratio of 29.22 indicates that the company has 29 times earnings available to pay its current interest expense, which seems to be favorable to the bank.
6. Return of Equity or Return on Net Worth: (Net Income – Preference Dividend) ÷ Shareholders’ Equity
= (16,500 – 300) ÷ 25,200
= 0.64 i.e. 64 %
The ROE States how effective the company is at turning the cash put into the business into greater gains and growth for the company and investors. The higher the return on equity, the more efficient the company's operations are making use of those funds.
The ratio of .64 or 64 % indicates that the company is earning 64 % on shareholders’ funds, which is favorable to the bank.
7. Profit Margin: Net Income ÷ Net Sales
= 16,500 ÷ 135,000
= 12.22 %
The ratio of 12 % indicates that the company is earning $ 12 for every $ 100 sold.
8. Assets Turnover Ratio: Net Sales ÷ Average Total Assets
= 135,000 ÷ 54,550*
= 2.47* Closing Value of Assets has been used since the co. has no opening assets.
The asset turnover ratio is a general efficiency ratio that measures how efficiently a company uses all of its assets. This gives investors and creditors an idea of how a company is managed and uses its assets to produce products and sales.
The ratio of 2.47 indicates that for every dollar in assets the company generates $ 2.47, which seems favorable to the bank.
Conclusion: Based on the above calculations, we can conclude that most of the ratios are favorable to the bank. Hence, we can grant the loan to the company.
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