Question

ARG Inc, is a manufacturer of dairy products that was formed three years ago by three sisters who, as directors, retain sole ownership of its ordinary share capital. One third of the initial share capital was provided by each sister. However, the company has managed to return a profit in each year of operation as shown in the financial statements. ARG Inc. has an overdraft limit of $3.2 million and pays interest on its overdraft at a rate of 6 percent (6%) per year. The company currently has no long-term debt. Current liabilities consist of trade creditors and overdraft finance in each of the three years as follows: 2017 50 Year Overdraft ($'000) Trade creditors ($'000) Interest 2018 567 733 ? 2019 1,167 1,133 ? 400 ? The industry averages for firms similar to ARG Inc. are Creditor days 70 days Net Profit 9% Margin Interest cover 15 times Stock days 85 days Debtor days 75 days Current ratio Quick ratio DEBT/Equity ratio 2.1 times 0.8 times 40% (using Book value) Required: As the newly-appointed Chief Financial Officer of ARG Inc. write a report of no more than three pages 1.5 line spaces to the board which discusses whether the company is likely to be successful if it approaches its bank FCIB for a loan to undertake a project at a cost of $2.5

Answer 1

Answert As per the given information about the; ARG inc, a manfactures of daily proclucts.- yes, ARC Inc, should approach it's bank FCIB for a loan to undertake a protect at a cost of $2.5 mon. Basis of providing loan loy Bank: i) Good interest Coverage ratio, which is a times last year. whereas ARG Inc, have 1.08.1 () Capod quick ratio (1:1), whereas Last year Net profit margin ratio, which is 8.654. ARG Inc, financial position of the company, short-term solvency position + current ratio : 1.24:1 2019 2018 ) 9-4211 2017 - 2.2:1 Qwch ratio 2019 2018 ) 2017 » 1.08:1 0.65: 1 0.89:1

® leverage position ; Interest Coverage ratio ? 2019 9 times 2018 17.4 times =165.3 times 2017 Comment. Normally, on interest Coverage ratio of 6 to 7 times is considered appropriate, Activity ratio + c) Average Average age of inventory =) 2019 98 days 2018 104 days 2017 52 days 00) Average collection period - 2019 79 days 2018 67 days 2017 28 days (D) profitability position, © Cooss profit margin 2019 = 8.65% 2018 -) 19.47 y. 2012 ) 19.08 y.

c) Net profit margin 2019 ) 8.08. 2018 12.35% 14.23% 2017 conclusion Comment + on the basis of above facti ARC Inc, should approach its bani FCBB for a loan to undertake a present at a cast of $2.5 million. 2) The book should provide ARG Inc, with the finance of $2.9 millon because Our strong point is interest coverage retio and not poofst Margin satil. 6 to 7 times is considered 3) Interest Coverage ratio of approprrate, where as the actual ratio for this Company is a times in comparision of sued interest charges, interest This indicator that the firm will be able to on long term loan regularly This ratio (uso indicate thart the long term solvency position of the company is quite Satisfactory,