Question: Bradburn Corporation was formed 5 years ago
Bradburn 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 Bradburn and is its current president. The company has been successful, but it currently is experiencing a shortage of funds. On June 10, 2014, Daniel Brown approached the Topeka National Bank, asking for a 24-month extension on two $35,000 notes, which are due on June 30, 2015, and September 30, 2015. Another note of $6,000 is due on March 31, 2016, but he expects no difficulty in paying this note on its due date. Brown explained that Bradburn’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 the following financial reports for the last 2 fiscal years.
aDepreciation charges on the plant and equipment of $100,000 and $102,500 for fiscal years ended March 31, 2014 and 2015, respectively, are included in cost of goods sold.
Instructions
(a) Compute the following items for Bradburn Corporation.
(1) Current ratio for fiscal years 2014 and 2015.
(2) Acid-test (quick) ratio for fiscal years 2014 and 2015.
(3) Inventory turnover for fiscal year 2015.
(4) Return on assets for fiscal years 2014 and 2015. (Assume total assets were $1,688,500 at 3/31/13.)
(5) Percentage change in sales, cost of goods sold, gross margin, and net income after taxes from fiscal year 2014 to 2015.
(b) Identify and explain what other financial reports and/or financial analyses might be helpful to the commercial loan officer of Topeka National Bank in evaluating Daniel Brown’s request for a time extension on Bradburn’s notes.
(c) Assume that the percentage changes experienced in fiscal year 2015 as compared with fiscal year 2014 for sales and cost of goods sold will be repeated in each of the next 2 years. Is Bradburn’s desire to finance the plant expansion from internally generated funds realistic? Discuss.
(d) Should Topeka National Bank grant the extension on Bradburn’s notes considering Daniel Brown’s statement about financing the plant expansion through internally generated funds? Discuss.
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BRADBURN CORPORATION BALANCE SHEET МАВCH 31 Assets 2015 2014 18,200 148,000 131,800 105,000 1,449,000 Cash 2$ $ 12,500 Notes receivable Accounts receivable (net) Inventories (at cost) Plant & equipment (net of depreciation) 132,000 125,500 50,000 1,420,500 Total assets $1,852,000 $1,740,500 Liabilities and Stockholders' Equity Accounts payable Notes payable $ $ 79,000 76,000 91,000 61,500 6,000 1,300,000 9,000 1,300,000 Accrued liabilities Common stock (130,000 shares, $10 par) Retained earnings Total liabilities and Stockholders' Equity 388.000 282,000 $1,852,000 $1,740,500 "Cash dividends were paid at the rate of $1 per share in fiscal year 2014 and $2 per share in fiscal year 2015. BRADBURN CORPORATION INCOME STATEMENT FOR THE FISCAL YEARS ENDED MARCH 31 2015 2014 $3,000,000 1,530,000 Sales revenue $2.700.000 Cost of goods sold Gross margin Operating expenses 1,425,000 1,470,000 860,000 1,275,000 780,000 Income before income taxes Income taxes (40%) 495,000 198,000 610.000 244.000 Net income $ 366,000 $ 297,000
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