You are a loan officer for Lakeland Bank of Port Washington. Dennis Schwartz, president of D. Schwartz Corporation, has just left your office. He is interested in an 8 year loan to expand the company’s operations. The borrowed funds would be used to purchase new equipment. As evidence of the company’s debt worthiness, Schwartz provided you with the following facts.
|
2010 |
2009 |
|
|
Current ratio |
3.1 |
2.1 |
|
Asset turnover ratio |
2.8 |
2.2 |
|
Cash debt coverage ratio |
.1 |
.2 |
|
Net income |
Up 32% |
Down 8% |
|
Earnings per share |
$3.30 |
$2.50 |
Schwartz is a very insistent (some would say pushy) man. When you told him that you would need additional information before making your decision, he acted offended, and said, “What more could you possibly want to know?” You responded that, at a minimum, you would need complete, audited financial statements.
Instructions
With the class divided into groups, answer the following.
(a) Explain why you would want the financial statements to be audited. (b) Discuss the implications of the ratios provided for the lending decision you are to make. That is, does the information paint a favorable picture? Are these ratios relevant to the decision?
(c) List three other ratios that you would want to calculate for this company, and explain why you would use each.