had arranged a term loan, for the first time ever, and its initial repayment installment of $40,000is due in February 1, 2018. Mr. Glover hopes that the company’s strong results during 2017 will impress Ms. Carrie Lowe, the bank’s loan officer. He is confident that the approaching loan payment is within WPS’s financial capacity following its best year ever. He expects to send Ms.Lowe the company’s 2017 financial statements soon so that she can review them before the due date of the loan.
adjacent to the company’s main offices and existing storerooms. The new building meant that WPS no longer needed to rent warehouse space – – which represents a saving for the company.
zeroes to all numbers. The concepts employed will be the same regardless of the dollars involved.
MGMT 413, Fall 2019 West Point Supply, Inc. – 2
Based on these financial statements, on her conversations with Mr. Glover, and on her general knowledge of the building and building–supply business, Ms. Lowe and the bank agreed to loan $120,000 to WPS to help finance the proposed new facilities and the customary seasonal increase in sales that occurs during the spring and summer of each year. The loan was structured as a three–year loan, with repayments of principal of $40,000 due on February 1 of 2018, 2019,and 2020. The loan carries an interest rate of 12 percent per year.
Mr. Glover visited Ms. Lowe periodically throughout 2017 to update the bank on the company’s progress. The new warehouse was completed in May of 2017 and Ms. Lowe participated in the “grand opening” ceremonies. She had been informed in October of 2017 that an especially good sales record was expected for the full year.
Assignment:
a. Use key financial ratios to determine what events occurred during 2017 to affect the company’s financial position.
Ratios are presented in the case packet reading “Financial
Planning, Financial Ratios and Pro Forma Financial Statements” and in RWJ&J.
Be prepared to address at least the following questions:
• Is the company growing (i.e., calculate the year–to–year growth rate of sales)?
• Are receivables in control? (Calculate days sales outstanding (DSO) through
time.)
• Is inventory in control? (Calculate days of inventory through time.)
• Are payables being managed prudently (Note: See footnote a to the income
statements)?
• Is the company’s debt usage in control?
• Is cost of goods sold in control?
• Are operating and administrative expenses in control?
• Is the company profitable? Is profitability improving?
In addressing these questions, calculate the ratios for each year’s actual financial statements and for the forecast financial statements. In calculating ratios, use end–of–period balances except for profit ratios.
b. What implications do the deviations from plan and the general 2017 operating results have for the company and the bank? What financial strategies seem desirable during 2018?
c. If you were WPS’s banker, what would you do?