Question

(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.

Instructions

d. 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.

Short answer

Topeka National should grant the extension on Bradburn’s notes if credit expansion is really needed.

Step-by-step solution

Meaning of Ratio Analysis

The comparison of a company's ratios to the industry's benchmarkis known as ratio analysis. Because it gives substantial insights from the financial statements, this form of financial research may be valuable to both internal management and external analysts of the organization.

Discussing Topeka National Bank grant the extension on Bradburn’s notes

If the credit expansion is really needed, Topeka National Bank should grant it, as expected cash flows for 2019 and 2020 show that operations will generate enough cash to fund plant expansions and repay loans.

Indeed, it is debatable whether Bradburn needs an expansion as the additional funds generated from its 2019 operations could be enough to repay the $70,000 loan. Bradburn, on the other hand, may need a loan extension to offer a buffer because its cash balance is low.

Bradburn has a strong financial structure as per financial ratios. If the bank wishes to be extra safe, it may demand that Bradburn limit the amount of the loan to reasonable retained earnings and/or cash dividends for the next two years to the $2.00 per share level from 2018.