Banking Assignment

Hamna Rizwan
18U00355
SECTION A
Q1. From the data given in the following table, please construct as many of the financial
ratios discussed in this chapter as you can and then indicate the dimension of a business
firm’s performance each ratio represents.

Business Assets Annual Revenue and Expense Items

Cash account 50 Net sales 650
Accounts receivable 155 Cost of goods sold 485
Inventories 128 Wages and salaries 58
Fixed assets 286 Interest expense 28
Miscellaneous assets 96 Overhead expenses 29
715 Depreciation expenses 12
Liabilities and Equity Selling, administrative,
Short-term debt: and other expenses 28
Accounts payable 108 Before-tax net income 10
Notes payable 107* Taxes owed 3
Long-term debt (bonds) 325* After-tax net income 7
Miscellaneous liabilities 15
Equity capital 160
715
* Annual principal payments on bonds and notes payable total $55. The firm’s marginal
tax rate is 35 percent.

Among the many financial ratios that could be computed given the data in this problem
are the following:

Expense Control Ratios Operating Efficiency Measures

Wages and salaries = 58 = .0892 Inventory turnover ratio = 485 = 3.79

Net Sales 650 128

Overhead expenses = 29 = .0446 Net sales/ = 650 = .909 x

Net sales 650 Total assets 715

Depreciation expenses = 12 = .0185 Net sales/= 650 = 2.27 x

 Net sales 650 Fixed assets 286

Interest expense= 28 = .0431 Net sales/Accounts= 650 = 4.194

Net sales 650 receivable 155
Cost of goods sold/net sales = 485/650 = .7462 Average = (155) / (650 /360)
collection period= 85/85 days

Taxes/Net sales= 3 / 650 = .0046

Selling, administrative,
and other expenses/Net
sales=28/650 = .0431

Coverage Ratios Marketability Indicators

GPM = 650 – 485/650 = .2538

Interest coverage= 38 = 1.36x NPM = 7/650 =.0108

Coverage of principal and

interest payments = 28

Profitability Measures Liquidity Indicators

Before-tax net income/ = 10 = .014 Current ratio = $333 = 1.549 x

Total assets 715 $215

After-tax net income/ = 7/715 = .0098 Acid-test ratio =$333 - $128/215 = .95 x
Total assets

Before-tax net income/ = 10 = .0625 Net liquid assets = $333 - $128 -$215
Net worth or equity 160 = - 10
capital
Net working capital= $333 - $215= $118
After-tax net income/= 7/160 = .0438
Net worth or equity
capital
Leverage Ratios

Before-tax net income/ = 10/650 = .0154 Total liabilities/Total= 555/715 = 0.7762

Net sales assets

After-tax net income/ = 7 = .0108 Long-term debt = 325 = .6701

Net sales 650 Long-term liabilities 485

Total liabilities/net sales= 555/650= 0.8538

 Q2. Pecon Corporation has placed a term loan request with its lender and submitted the
following balance sheet entries for the year just concluded and the pro forma balance
sheet expected by the end of the current year. Construct a pro forma Statement of Cash
Flows for the current year using the consecutive balance sheets and some additional
needed information. The forecast net income for the current year is $225 million with $50
million being paid out in dividends. The depreciation expense for the year will be $100
million and planned expansions will require the acquisition of $300 million in fixed
assets at the end of the current year. As you examine the pro forma Statement of Cash
Flows, do you detect any changes that might be of concern either to the lender’s credit
analyst, loan officer, or both?

Pecon Corporation
(all amounts in millions of dollars)

Assets Liabilities Liabilities

Asstes at Projected and Equity and Equity
the End of for the End at the End for the End
the Most of the of the most of the
Recent Curreny recent Current
Year Year Year Year
Cash $ 532 $ 624 Accounts payable $ 970 $ 1,279
Accounts receivable 1,018 1,210 Notes payable 2,733 2,950
Inventories 894 973 Taxes payable 327 216

Net fixed assets 2,740 2,940 Long-term debt obligations 872 931
Other assets 66 87 Common stock 85 85
Undivided profits 263 373
Total assets $ 5,250 $ 5,834 Total liabilities and equity capital $ 5,250 $ 5,834
Cash Flows from Operations
Net income 225
Add: Depreciation 100
Subtract: increase in acc/rec (192)
Subtract: increase in inventory (79)
Subtract: increase in other assets (21)
Add: increase in accounts payable 309
Subtract: decrease in taxes payable (111)
Net cash flow from operations 231

Cash Flows from Investment Activities

Acquisition of fixed assets (300)
Net cash flow from investment activities (300)

Cash Flows from Financing Activities

Increase in notes payable 217
Increase in long term debt 59
Dividends paid (50)
Net Cash Flows from Financing Activities 226

Increase (Decrease) in Cash 157

There are several areas of possible concern for a bank loan officer viewing Pecon's
projected figures. First, the firm is relying heavily upon increasing debt of all kinds to
finance its growth in assets. The increase in notes payable of $217 million indicates
growing reliance on bank debt supplemented by sizable increases in supplier-provided
credit (accounts payable) and long-term debt obligations (most likely, bonds) with no
change in funds provided by issuing stock. The bank could experience a serious
weakening in the strength of its claim against the firm as other creditors post a more
substantial claim against Conway's assets.

Pecon is projecting a sizable increase in its retained earnings (undivided profits) which
suggests that management is counting on a year of strong earnings. However, both
accounts receivable and inventories (as well as net fixed assets) are growing rapidly,
perhaps reflecting troubles in collecting from the firm's customers and in marketing
Pecon's products and services. The bank's loan officer would want to explore with the
company the bases for its projected jump in net income and why accounts receivable and
inventories are expected to rise in such large amounts.