Question

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 Owners’ 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 earningsa 388,000 282,000     Total liabilities and stockholders’ equity $1,852,000 $1,740,500 aCash dividends were paid at the rate of $1 per share in fiscal year 2017 and $2 per share in 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 solda 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 aDepreciation 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 cost of goods sold.

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. Link to Text

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. Link to Text

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.

Answer 1

1. The commercial loan office of the Topeka National Bank can ask for Cash Flow Statements.

• .Cash flow statement which includes the sources of cash and usage of cash for acquiring long term assets and debt requirements.
• Financial statement forecasted for the next year which includes projected cash flows.
• Comprehensive budget analysis.
• Liquidity ratio analysis such as sales receivable and accounts receivable ratio analysis.
• Examining how the fixed cost and debt are used in the company for effective decision making.

Assumptions: Sales revenue increases at a rate of 11.11%. The cost of goods sold increases at a rate of 7.37%, despite depreciation remaining constant. Other operating expenses increase at the same rate experienced from 2017 to 2018; i.e., at 10.26% ($80,000 ÷ $780,000). Depreciation remains constant at $102,500. Dividends remain at $2 per share. The plant expansion is financed equally over the two years ($150,000 each year). A loan extension is granted.

в с т р 3000 1530 1470 860 610 1 2 2 Sales revenue 3 Cost of goods sold 4 Gross Margin 5 Operating Expenses 6 Income before Income taxes 7 Income tax 40% 8 Net Income 9 Add Depreciation 10 Less: Dividends 11 Note Repayment 12 Funds available for plant expansion 13 Plant expansion 14 Excess Funds 244 366 3,333.30 3,703.60 1642.81,763.80 1690. 5 1939.8 948.21 1045.5 742.3 894.3 296.91 357.7 445 536.6 102.5 102.5 -260 -260 -6 281.91 379.1 -150 -150 139.91 229.1

3

From above case 2, it is clear that the company will be in a condition of paying off notes to the bank 1.94 times (1,47,850/76,000).

Further, the amount of notes receivable for the company amounts to $148,000 in 2018. This will take care of shortages of cash in 2019 and 2020, which in turn means that the company will still be in a position to pay off notes amount to the bank.

Further, if there is a case of a rise in inventories and bad debts for the company, the company will still be in a position to pay off notes from its retained earning which will amount to $3,88,000 in 2018. In such a scenario, the company can also decrease the dividend amount and pay off notes amount to the bank.

Taking into consideration all the above factors, the bank should grant an extension on notes.