Question

I am having a problem getting my memo right for this math done already class, I have the math done. Heres the directions and Ill post the memo outline they gave us and the math I have doneI have to tell them yes on the loan as you will see in my answer to Part 3

Precision company wishes to expand but needs a $300,000 loan. The bank requests that Precision prepare a balance sheet and key financial ratios. Precision has kept formal records and is able to provide financial statements as of December 31, 2017. The industry debt ratio averages 45.00%. The industry return on assets is 2.0%.          

You represent Ideal Bank and will present your findings in a memo to report the ratios for Precision, and identify the conclusion of your opinion reached from your analysis of the company’s financials. The memo is to be copied and distributed to the VP of Ideal Bank, so a well-written and detailed memo is crucial. Your memo will be crucial to bank leaders’ decision to lend Precision the $300,000.

Make sure you use complete sentences. Check your work for proper spelling, grammar and punctuation.

Part 1(a) - Return on Total assets

Return on Total Assets = (Earning Before Income And Taxes)/Total Assets*100

Total Assets = $1684000

Earning before Interest and Taxes = $185000

Return on Total Assets = ($185000/$1684000)*100 = 10.99%

Part 1(b) - Its Building Block is Profitability. Profitability ratios measure the how effectively company uses its assets in generating revenue. The ratio explain the relationship between income and Resources.

Company is generating more return on total assets than the industry average. Industry average is 2% and company's return on total assets is 10.99%

Also company is having the very high profit Margin, High Return on Equity. Hence overall Position regarding Profitability is Higher than Industry's average

Part 2(a) - Debt Ratio = Total Debts/Shareholders Equity

Total Debts = $400000

Shareholders Equity = $1019000

Debt Ratio = ($400000/$1019000)*100 = 39.25%

Part 2(b) - Its Building Block is Solvency. Solvency ratio determines the ability of company to meet the liabilities of long term debts. It analyses that whether company has sufficient cash flows to repay the long term debts.

Company debt ratio is 39% which is lesser than Industry Average ratio. It says that company better manages its long term debt financing. Lower debt equity ratio is better. And debt equity ratio of more than 50% is considered unhealthy. Hence company is very much performing better than its Industries sector.

Part 3- Yes, Company is highly able to get the loan of $300000. Company is performing better than Industry averages in terms of profitability and Solvency. Also Company has current ratio of more than 2.0 which says that company has high liquidity. Hence company is Growing in business and has strong financials better than industry average. Hence Company can get the loan of $300000 for expansion

Precision Company

Memorandum

To: Recipient Name

From: Your Name

CC: CC Name

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Answer 1

Memorandum

To: Vice President, Ideal Bank

From: Mention your name

CC: Precision Company

Subject : Grant of Loan for $ 300000 to Precision Comapny.

With refernce to the above mentioned subject I "your name" on behalf of the Precison Company would like to put forward the following key points:

1. Precision comapny is a well establish organisation having a reputable market share in the industry. Now, it wishes to expand its business for which it requires a financial assistance in the form of grant of loan of $ 3,00,000 from Ideal Bank.

2. Precision company is having a return to total assets ratio of 10.99 % which is far better than the industry average of 2%. A high return to total assets ratio indicate comapany's ability to generate revenue by effectively using its assets (resources).

I high return to total assets is an indicator that company is able to manage its resources efficiently and in long run it will not have any repayment issues of loan due to the efficient usage of resources.

3. With a Debt Equity ratio of 39.25% Precision Company estabishes that it will be able to manage its long term finances easily. Industry Average for Debt Equity Ratio is 45% which is much higher than the applicant company.

A low Debt Equity ratio is a proof that company will be able to pay its debts on time and it will not have cash flow deficiencies in the future.

Debt Equity Ratio is of importance while granting loan because its defines the company's ability to pay off its debts in long run.

4. With a Current ratio of more than 2 time Precision Company shows the high liquidity of its business , Which will only have the positive impact on the expansion of business.

5. Moreover, its profit margins are high and consistent over a period of time. and in every sceneraio it is performing better than the industry's average.

6. So, on the basis of the above points it can be said that loan to the Precision comapny should be granted.

Enclosed:

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