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5-36. Bikini Bottom Construction Company (BBCC) manufactures various types of high-
quality punching and deep-drawing press tools for kitchen appliance manufacturers.
Pearl, the finance manager of BBCC, has submitted a justification to support the
application for a short-term loan from the Queensville Interstate Bank (DIB) to finance
increased sales. The consolidated income statement and balance sheet of BBCC,
submitted with the justification to QIB, follow
BBCC Income Statement for
2017 and 2018 (000 dollars)
2017 2018
Sales
$40,909 $45,000
Cost of Goods Sold
20,909 23,000
Gross Profit
20,000 22,000
Selling and Administrative Expenses
11,818 13,000
Depreciation Expense
2,000 3,000
Operating Income (EBIT)
6,182
6,000
Interest Expense
400
412
Earnings before Taxes (EBT)
5.782 5,588
Income Taxes (@ 2596)
1,446
1,397
Net Income (NI)
4,336 4,191
Dividends Pald (@ 20%)
694
671
BECC Balance Sheet
as of End of 2017 and 2018 (000 dollars)
2017
2018
Assets:
Cash
Accounts Receivable (net)
Inventory
Plant and Equipment (gross)
Less: Accumulated Depreciation
Plant and Equipment (net)
Land
$ 2,000
6,000
5,000
26,000
10,000
16,000
1,000
$ 1,800
7,600
5,220
31,000
13,000
18,000
1,000
BECC Balance Sheet
as of End of 2017 and 2018 (000 dollars)
2017
2018
Assets:
Cash
Accounts Receivable (net)
Inventory
Plant and Equipment (gross)
Less: Accumulated Depreciation
Plant and Equipment (net)
Land
$ 2,000
6,000
5,000
26,000
10,000
16,000
1,000
$ 1,800
7,600
5,220
31,000
13,000
18,000
1,000
Liabilities:
Accounts Payable
Notes Payable
Accrued Expenses
Bonds Payable
Stockholders' Equity;
Common Stock
Retained Eamings
2,000
3,000
3,000
4,000
2,600
3,300
3,100
4,000
4,000
14,000
4,000
16,620
cepts in Finance
V.
You are the loan officer at QIB responsible for determining whether BBCC's business is
strong enough to be able to repay the loan. To do so, accomplish the following:
a. Calculate the following ratios for 2017 and 2018, compare with the industry averages
shown in parentheses, and indicate if the company is doing better or worse than
the industry and whether the performance is improving or deteriorating in 2018 as
compared to 2017.
i. Gross profit margin (50 percent)
ii. Operating profit margin (15 percent)
iïi. Net profit margin (8 percent)
iv. Return on assets (10 percent)
Return on equity (20 percent)
vi. Current ratio (1.5)
vii. Quick ratio (1.0)
viii. Debt to total asset ratio (0.5)
ix. Times interest earned (25)
Average collection period (45 days)
xi. Inventory turnover (8)
xii. Total asset turnover (1.6)
b. Calculate the EVA and MVA for BBCC, assuming that the firm's income tax rate
is 40 percent, the weighted average rate of return expected by the suppliers of the
firm's capital is 10 percent, and the market price of the firm's stock is $20. There are
1.2 million shares outstanding.
c. Discuss the financial strengths and weaknesses of BBCC.
d. Determine the sources and uses of funds and prepare a statement of cash flows for 2018.
e. Compare and comment on the financial condition as evident from the ratio analysis
and the cash flow statement.
f. Which ratios should you analyze more critically before recommending granting of the
loan and what is your recommendation?
X.
See BBCC Case on pages 110 and 111 in your text (problem 5-36)
On page 111 complete items: ai – xii. ALSO, construct a Common Sized Income Statement for the two
years presented..
Complete part c (Discuss the financial strengths and weaknesses of BBCC).
NOTE: your “discussion” may NOT contain the words, “I think” or “I feel”.
Your final statement is your recommendation to approve or reject the loan. Begin this statement with:
“Based upon my analysis this loan should be (not be) made.” “I recommend this because ..."
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