US Republic Corporation balance sheet, December 31, 20X3

US Republic Corporation balance sheet, December 31, 20X3

ASSETS		LIABILITIES AND SHAREHOLDERS’ EQUITY
Cash	$ 1,000,000	Notes payable, bank	$ 4,000,000
Accounts receivable	5,000,000	Accounts payable	2,000,000
Inventory	7,000,000	Accrued wages and taxes	2,000,000
Fixed assets, net	17,000,000	Long-term debt	12,000,000
		Preferred stock	4,000,000
		Common stock	2,000,000
		Retained earnings	4,000,000
Total assets	$30,000,000	Total liabilities and shareholders’ equity	$30,000,000

 

US Republic Corporation statement of income and retained earnings, year ended December 31, 20X3

 

Net sales
Credit		$16,000,000
Cash		4,000,000
Total		$20,000,000
Cost and Expenses
Cost of goods sold	$12,000,000
Selling, general, and administrative expenses	2,200,000
Depreciation	1,400,000
Interest	1,200,000	$16,800,000
Net income before taxes		$ 3,200,000
Taxes on income		1,200,000
Net income after taxes		$ 2,000,000
Less: Dividends on preferred stock		240,000
Net income available to common shareholders		$ 1,760,000
Add: Retained earnings at 1/1/X3		2,600,000
Subtotal		$ 4,360,000
Less: Dividends paid on common stock		360,000
Retained earnings 12/31/X3		$ 4,000,000

a. Fill in the 20X3 column in the table that follows.

US Republic Corporation
RATIO	20X1	20X2	20X3	INDUSTRY NORMS
1. Current ratio	250%	200%	225%
2. Acid-test ratio	100%	90%	110%
3. Receivable turnover	5.0×	4.5×	6.0×
4. Inventory turnover	4.0×	3.0×	4.0×
5. Long-term debt/total capitalization	35%	40%	33%
6. Gross profit margin	39%	41%	40%
7. Net profit margin	17%	15%	15%
8. Return on equity	15%	20%	20%
9. Return on investment	15%	12%	12%
10. Total asset turnover	0.9×	0.8×	1.0×
11. Interest coverage ratio	5.5×	4.5×	5.0×

b. Evaluate the position of the company using information from the table. Cite specific ratio levels and trends as evidence.

c. Indicate which ratios would be of most interest to you and what your decision would be in each of the following situations:

(i) US Republic wants to buy $500,000 worth of merchandise inventory from you, with payment due in 90 days.

(ii) US Republic wants you, a large insurance company, to pay off its note at the bank and assume it on a 10-year maturity basis at a current rate of 14 percent.

(iii) There are 100,000 shares outstanding, and the stock is selling for $80 a share. The company offers you 50,000 additional shares at this price.

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