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, Daniel Brown approached the Topeka National Bank, asking for a 24-month extension on two $35,000 notes, which are due on June 30, 2013, and September 30, 2013. Another note of $6,000 is due on March 31, 2014, 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 financial reports for the last 2 fiscal years. These reports are reproduced below and on page 1562.
Instructions
(a) Compute the following items for Bradburn Corporation.
(1) Current ratio for fiscal years 2012 and 2013.
(2) Acid-test (quick) ratio for fiscal years 2012 and 2013.
(3) Inventory turnover for fiscal year 2013.
(4) Return on assets for fiscal years 2012 and 2013. (Assume total assets were $1,688,500 at 3/31/11.)
(5) Percentage change in sales, cost of goods sold, gross margin, and net income after taxes from fiscal year 2012 to 2013.
(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 2013 as compared with fiscal year 2012 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.
Transcribed Image Text:
BRADBURN CORPORATION BALANCE SHEET MARCH 31 Assets 2013 2012 $ 12,500 $ 18,200 148,000 131,800 105,000 1,449,000 Cash $ Notes receivable Accounts receivable (net) Inventories (at cost) Plant & equipment (net of depreciation) 132,000 125,500 50,000 1,420,500 $1,740,500 Total assets $1,852,000 Liabilities and Stockholders' Equity $ 79,000 76,000 9,000 1,300,000 388,000 $ 91,000 61,500 6,000 1,300,000 282,000 Accounts payable Notes payable Accrued liabilities Common stock (130,000 shares, $10 par) Retained earnings Total liabilities and Stockholders' Equity $1,852,000 $1,740,500 "Cash dividends were paid at the rate of $1 per share in fiscal year 2012 and $2 per share in fiscal year 2013. BRADBURN CORPORATION INCOME STATEMENT FOR THE FISCAL YEARS ENDED MARCH 31 2013 2012 $3,000,000 1,530,000 $2,700,000 1,425,000 Sales revenue Cost of goods sold Gross margin Operating expenses 1,470,000 1,275,000 780,000 860,000 Income before income taxes 610,000 495,000 198,000 Income taxes (40%) 244,000 $ 366,000 $ 297,000 Net income "depreciation charges on the plant and equipment of $100,000 and $102,500 for fiscal years ended March 31, 2012 and 2013, respectively, are included in cost of goods sold.
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