(Ratio Computations and Additional Analysis) 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, 2018, Daniel Brown approached the Topeka National Bank, asking for a 24-month extension on two \(35,000 notes, which are due on June 30, 2018, and September 30, 2018. Another note of \)6,000 is due on March 31, 2019, 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

BRADBURN CORPORATION BALANCE SHEET MARCH 31
Assets	2018	2017
Cash	\) 18,200	\( 12,500
Notes receivable	148,000	132,000
Accounts receivable (net)	131,800	125,500
Inventories (at cost)	105,000	50,000
Plant & Equipment (net of depreciation)	1,449,000	1,420,500
Total assets	\)1,852,000	\(1,740,500
Liabilities and Stockholders’ Equity
Accounts payable	\) 79,000	\( 91,000
Notes payable	76,000	61,500
Accrued liabilities	9,000	6,000
Common stock (130,000 shares, \)10 par)	1,300,000	1,300,000
Retained earnings*	388,000	282,000
Total liabilities and stockholders’ equity	\(1,852,000	\)1,740,500

*Cash dividends were paid at the rate of \(1 per share in the fiscal year 2017 and \)2 per share in the fiscal year 2018.

BRADBURN CORPORATION INCOME STATEMENT FOR THE FISCAL YEARS ENDED MARCH 31
	2018	2017
Sales revenue	\(3,000,000	\)2,700,000
Cost of goods sold*	1,530,000	1,425,000
Gross margin	1,470,000	1,275,000
Operating expenses	860,000	780,000
Income before income taxes	610,000	495,000
Income taxes (40%)	244,000	198,000
Net income	\( 366,000	\) 297,000

Depreciation charges on the plant and equipment of \(100,000 and \)102,500 for fiscal years ended March 31, 2017, and 2018, respectively, are included in the cost of goods sold.

c). Assume that the percentage changes experienced in fiscal year 2018 as compared with fiscal year 2017 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.

Step by step solution

01

Meaning of Ratio Analysis

The way by which an investor can analyze the data of two different companies to figure out which one is more preferable for investment is considered as ratio analysis.

02

Discussing Bradburn’s desire to finance the plant expansion from internally generated funds is realistic.

Bradburn Corporation should be able to finance the plant expansion from internally generated funds as shown in the calculations presented below

($000 omitted)
Sales revenue	$3,000.0	$ 3,333.3	$3,703.6
Cost of goods sold	1,530.0	1,642.8	1,763.8
Gross margin	1,470.0	1,690.5	1,939.8
Operating expenses	860.0	948.2	1,045.5
Income before income taxes	610.0	742.3	894.3
Income taxes (40%)	244.0	296.9	357.7
Net income	$ 366.0	$ 445.4	$ 536.6
Add: Depreciation		102.5	102.5
Deduct: Dividends Note repayment		(260.0) (6.0)	(260.0)
Funds available for plant expansion		281.9	379.1
Plant expansion		(150.0)	(150.0)
Excess funds		$ 131.9	$ 229.1

Assumptions:

1. Sales revenue increases at a rate of 11.11%.

2. The cost of goods sold increases at the rate of 7.37%, despite depreciation remaining constant.

3. Other operating expenses increase at the same rate experienced from 2017 to 2018; i.e., at 10.26%.

Working notes:

$$\begin{gathered} \mathrm{Percent}\mathrm{increase}=\frac{\mathrm{Difference}\mathrm{in}\mathrm{amount}\mathrm{of}\mathrm{operating}\mathrm{expense}\mathrm{of}2018\mathrm{and}2017}{\mathrm{Base}\mathrm{year}\mathrm{amount}} \\ =\frac{\$860,000-\$780,000}{\$780,000} \\ =\frac{\$80,000}{\$780,000} \\ =10·26\% \end{gathered}$$

4. Depreciation remains constant at $102,500.

5. Dividends remain at $2 per share

6. The plant expansion is financed equally over the two years ($150,000 each year).

7. A loan extension is granted.

Unlock Step-by-Step Solutions & Ace Your Exams!

• Full Textbook Solutions

  Get detailed explanations and key concepts

• Unlimited Al creation

  Al flashcards, explanations, exams and more...

• Ads-free access

  To over 500 millions flashcards

• Money-back guarantee

  We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!