Maurice Tutor
$15/per page/Negotiable
Arrowbell Company is a growing company. Two years ago, it decided to expand in order to increase its production capacity. The company anticipates that the expansion program can be completed in another two years. Financial information for Arrowbell is as follows.
|
ARROWBELL COMPANY |
||
|
Year |
Sales |
Net  Income |
|
2005 |
$2,568,660 Â |
$145,800 Â |
|
2006 |
2,660,455 |
101,600 |
|
2007 |
2,550,180 |
52,650 |
|
2008 |
2,625,280 |
86,800 |
|
2009 |
3,680,650 |
151,490 |
Â
|
ARROWBELL COMPANY |
||
| Â |
2009 |
2008 |
|
Assets |
 |  |
|
Current  assets: |
 |  |
|
Cash |
$250,480 |
$260,155 |
|
Accounts  receivable (net) |
760,950 |
690,550 |
|
Inventories  at lower-of-cost-or-market |
725,318 |
628,238 |
|
Prepaid  expenses |
18,555 |
20,250 |
|
Total  current assets |
1,755,303 |
1,599,193 |
|
Plant  and equipment: |
 |  |
|
Land, Â buildings, machinery, and equipment |
3,150,165 |
2,646,070 |
|
Less: Â Accumulated depreciation |
650,180 |
525,650 |
|
Net  plant and equipment |
2,499,985 |
2,120,420 |
|
Other  assets: |
 |  |
|
Cash  surrender value of life insurance |
20,650 |
18,180 |
|
Other |
40,660 |
38,918 |
|
Total  other assets |
61,310 |
57,098 |
|
Total  assets |
$4,316,598 |
$3,776,711 |
|
Liabilities  and Stockholders’ Equity |
 |  |
|
Current  liabilities: |
 |  |
|
Notes  and mortgages payable, current portion |
$915,180 |
$550,155 |
|
Accounts  payable and accrued liabilities |
1,160,111 |
851,080 |
|
Total  current liabilities |
2,075,291 |
1,401,235 |
|
Long-term  notes and mortgages payable, less current portion above |
550,000 |
775,659 |
|
Total  liabilities |
2,625,291 |
2,176,894 |
|
Stockholders’  equity: |
 |  |
|
Capital  stock, par value $1.00; authorized, 800,000; issued and outstanding, 600,000 (2009  and 2008) |
600,000 |
600,000 |
|
Paid in  excess of par |
890,000 |
890,000 |
|
Retained  earnings |
201,307 |
109,817 |
|
Total  stockholders’ equity |
1,691,307 |
1,599,817 |
|
Total  liabilities and stockholders’ equity |
$4,316,598 |
$3,776,711 |
Â
|
ARROWBELL COMPANY |
||
| Â |
2009 |
2008 |
|
Cash  flows from operating activities: |
 |  |
|
Net  income |
$151,490 |
$86,800 |
|
Noncash  expenses, revenues, losses, and gains included in income: |
 |  |
|
Depreciation |
134,755 |
102,180 |
|
Increase  in accounts receivable |
70,400 |
10,180 |
|
Increase  in inventories |
97,080 |
15,349 |
|
Decrease  in prepaid expenses in 2009, increase in 2008 |
1,695 |
1,058 |
|
Increase  in accounts payable and accrued liabilities |
309,031 |
15,265 |
|
Net cash  provided by operating activities |
429,491 |
177,658 |
|
Cash  flows from investing activities: |
 |  |
|
Proceeds  from retirement of property, plant, and equipment |
10,115 |
3,865 |
|
Purchases  of property, plant, and equipment |
524,435 |
-218,650 |
|
Increase  in cash surrender value of life insurance |
2,470 |
1,848 |
|
Other |
1,742 |
1,630 |
|
Net cash  used for investing activities |
518,532 |
218,263 |
|
Cash  flows from financing activities: |
 |  |
|
Retirement  of long-term debt |
225,659 |
50,000 |
|
Increase  in notes and mortgages payable |
365,025 |
159,155 |
|
Cash  dividends |
60,000 |
60,000 |
|
Net cash  provided by financing activities |
79,366 |
49,155 |
|
Net  increase (decrease) in cash |
($9,675) |
$8,550 |
Required
a. Comment on the short-term debt position, including computations of current ratio, acid-test ratio, cash ratio, and operating cash flow/current maturities of long-term debt and current notes payable.
b. If you were a supplier to this company, what would you be concerned about?
c. Comment on the long-term debt position, including computations of the debt ratio, debt/equity, debt to tangible net worth, and operating cash flow/total debt. Review the statement of operating cash flows.
d. If you were a banker, what would you be concerned about if this company approached you for a long-term loan to continue its expansion program?
e. What should management consider doing at this point with regard to the company’s expansion program?