Modern Services sells various components to maintain on-shorerigs and derricks. The company has just approached Linden StateBank requesting a $300,000 loan to strengthen the Cash account andto pay certain pressing short-term obligations. The company’sfinancial statements for the most recent two years follow:
MODERN SERVICES
Comparative Balance Sheet
Assets This Year       LastYear
Current assets:
   Cash . . . . . . . . . . . . . . . . . . . . . . . . .. . .    $ 90,000       $200,000
   Marketable Securities . . . . . . . . . . . . . . . .. .     0      50,000
   Accounts Receivable, net . . . . . . . . . . . . . . ..     650,000      400,000
   Inventory . . . . . . . . . . . . . . . . . . . . . .. . . 1,300,000       800,000
   Prepaid Expenses . . . . . . . . . . . . . . . . . . .. 20,000       20,000
Total Current Assets . . . . . . . . . . . . . . . . . . . . . . .2,060,000       1,470,000
Plant and equipment, net . . . . . . . . . . . . . . . . . . . .1,940,000       1,830,000
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . .. 4,000,000       3,300,000

Liabilities and Stockholders’ Equity
Liabilities:
   Current Liabilities . . . . . . . . . . . . . . . . .. . . $ 1,100,000       $ 600,000
   Bonds Payable, 12% . . . . . . . . . . . . . . . . . .750,000       750,000
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . .. 1,850,000      1,350,000  
Stockholders’ Equity:
   Preferred Stock, $50 par, 8% . . . . . . . . . . . . .200,000       200,000
   Common Stock, $10 par . . . . . . . . . . . . . . . .   500,000       500,000
   Retained Earnings . . . . . . . . . . . . . . . . . .. 1,450,000       1,250,000
Total Stockholders’ Equity . . . . . . . . . . . . . . . . . . .2,150,000       1,950,000
Total Liabilities and Stockholders’ Equity . . . . . . . . . . .4,000,000       3,300,000

MODERN SERVICES
Comparative Income Statement
Assets This Year       LastYear
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. $ 7,000,000   $ 6,000,000
Less cost of goods sold . . . . . . . . . . . . . . . . . . . . ..   5,400,000      4,800,000
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . ..   1,600,000      1,200,000
Less operating expenses . . . . . . . . . . . . . . . . . . . . .    970,000      710,000
Net Operating income . . . . . . . . . . . . . . . . . . . . . .    630,000      490,000
Less interest expense . . . . . . . . . . . . . . . . . . . . . . .    90,000      90,000
Net income before taxes . . . . . . . . . . . . . . . . . . . . .    540,000      400,000
Less income taxes (40%) . . . . . . . . . . . . . . . . . . . . .    216,000      160,000
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . .    324,000      240,000
Dividends paid:
   Preferred dividends . . . . . . . . . . . . . . . . .. .     16,000      16,000
   Common dividends . . . . . . . . . . . . . . . . . . ..   108,000       60,000
Total dividends paid . . . . . . . . . . . . . . . . . . . . . . ..     124,000      76,000
Net income retained . . . . . . . . . . . . . . . . . . . . . . . .    200,000      164,000
Retained earnings, beginning of year . . . . . . . . . . . . . ..   1,250,000      1,086,000
Retained earnings, end of year . . . . . . . . . . . . . . . . . .$ 1,450,000   $ 1,250,000

During the past year, the company has explained the number oflines that is carries in order to stimulate sales and increaseprofits. It has also moved aggressively to acquire new customers.Sales terms are 2/10, n/30/. All sales are on account.

               Assume that the following ratios are typical of firms in thebuilding supply industry:

                               Current ratio . . . . . . . . . . . . . . . . . ..       2.5 to 1

                               Acid-test ratio . . . . . . . . . . . . . . . . . .     1.2 to 1

                               Average age of receivables . . . . . . . . . . .    18 days

                               Inventory turnover in days . . . . . . . . . . .    50 days

                               Debt-to-equity ratio . . . . . . . . . . . . . ..     0.75 to 1

                               Times interest earned . . . . . . . . . . . . . .    6.0times

                               Return on total assets . . . . . . . . . . . . . .   10%

                               Price-earnings ratio . . . . . . . . . . . . . . .     9

                               Net income as a percentage of sales . . . . . . 4%

1. Linden State Bank is uncertain whether the loan should be made.To assist it in making a decision, you have been asked to computethe following ratios for both this year and last year:
   1. The amount of working capital
   2. The current ratio
   3. The acid-test ratio
   4. The average age of receivables. (The accounts receivable at thebeginning of last year totaled $350,000)
   5. The inventory turnover in days. (The inventory at the beginningof last year totaled $720,000)
   6. The debt-to-equity ratio
   7. The number of times interest was earned
2. For both this year and last year (carry computations to onedecimal place)
   1. Present the balance sheet in common-sizeform              
   2. Present the income statement in common-size form down throughnet income
3. From your analysis in (1) and (2) above, what problems orstrengths do you see existing in Modern Services? Make arecommendation as to whether the loan should be approved.