Question

Steve Sullivan was recently promoted to loan officer at the first national bank. He has authority to issue loans up to $50,000 without approval from a higher bank official. this week two small companies, Handy Harvey, Inc. and Sheila’s fashion, Inc, have each submitted a proposal for a six-month $50,000 loan. In order to prepare a financial analysis of the two companies Steve has obtained the information summarized below.

Handy Harvey, Inc. is a local lumber and home improvement company. Because sales have increased so much during the past two years, Handy Harvey has had to raise additional working capital , especially as represented by receivables and inventory. The $50,000 loan is needed to assure the company of enough working capital for next year. Handy Harvey began the year with total assets of $740,000 and stockholders equity of $260,000 and during the past year the company had a net income of $40,000 on sales of $760,000. The company’s current unclassified balance sheet appears as follows:

Assets	$	Liability and stockholder’s equity	$
Cash	30,000	Account payable	200,000
Account receivable (net)	150,000	Note payable	100,000
Inventory	250,000	Mortage payable	200,000
Land	50,000	Common stock	250,000
Buildings (net)	250,000	Retained earnings	50,000
Equipment (net)	70,000	Totatal liability and stockholder equity	800,000
Total assets	800,000

Sheila’s Fashions, Inc. has for three years been a successful clothing store for young professional women. The leased store is located in the downtown financial district. Sheila’s loan proposal ask for $50,000 to pay for stocking a new line professional suilts for working women during the coming season. At the beginning of the year, the company had total assets of $200,000 and total stockholders’ equity of $114,000. Over the past year, the company earned a income of $36,000 on sales of $480,000. The firm’s unclassified balance sheet the current date appears as follows

Assets	$	Liability and stockholder’s equity	$
Cash	10,000	Account payable	80,000
Account receivable (net)	50,000	Accrued liabilities	10,000
Inventory	135,000	Common stock	50,000
Prepaid expenses	5,000	Retained earnings	100,000
Equipment (net)	40,000
		Totatal liability and stockholder equity	240,000
Total assets	240,000

Required

1. Prepare a financial analysis of both companies’ liquidity and after receiving the proposed loan. Also, compute profitability ratios before and after as appropriate. Write a brief summary of the effect if the proposed loan on each company’s financial position.
2. To which company do you suppose Steve would be most willing to make a $50,000 loan? What are the positive and negative factors related to each company’s ability to pay back the loan in the next year? What other information of a financial or non-financial nature would be helpful before making a financial decision?

Answer 1