Question

ARG Inc, is a manufacturer of dairy products that was formed three years ago by three sisters who, as directors, retain sole ownership of its ordinary share capital. One third of the initial share capital was provided by each sister. However, the company has managed to return a profit in each year of operation as shown in the financial statements.

ARG Inc. has an overdraft limit of $3.2 million and pays interest on its overdraft at a rate of 6 percent (6%) per year. The company currently has no long-term debt. Current liabilities consist of trade creditors and overdraft finance in each of the three years as follows:

Year	2017	2018	2019
Overdraft ($’000)	50	567	1,167
Trade creditors ($’000)	400	733	1,133
Interest	?	?	?

The industry averages for firms similar to ARG Inc. are

Net Profit Margin	9%		Creditor days	70 days
Interest cover	15 times		Current ratio	21 times
Stock days	85 days		Quick ratio	0.8 times
Debtor days	75 days		DEBT/Equity ratio	40% (using Book value)

ARG INC

Income Statement for the years ending December 31

2019 2018 2017

($’000) ($’000) ($’000)

Revenue 5,200 3400 2600

Cost of Goods sold 4570 2806 2104

Profit before interest & tax 630 594 496

Interest 70 34 3

Earnings before tax 560 560 493

Tax 140 140 123

Net Income 420 420 370

Dividends 20 20 20

Retained profit 400           400           350

ARG Inc

Balance Sheet as at December 31

2019 2018 2017

($’000) ($’000) ($’000)

Fixed Assets

Current Assets

1,600            1,200              800

Inventory

1,450 1,000 600

Accounts Receivable 1,400              850              400

2,850 1,850 1,000

Total Assets 4,450 3,050 1,800

Current Liabilities

Ordinary shares

Reserves

2,300            1,300              450

1,000 1,000 1,000

1,150 750 350

Total Liabilities & Owners Equity 4,450 3,050 1,800

Question:

As the newly-appointed Chief Financial Officer of ARG Inc. write a report of no more tan three pages which discusses whether the company is likely to be successful if it approached its bank for a loan to undertake a project at a cost of 2.5 million. Your discussion should include an analysis of the current financial position and recent financial performance of the company. The report should comment on whether the bank should provide ARG Inc. with the finance and on what basis. Annual interest should be clearly calculated as part of the leverage analysis.

Answer 1

о a е a Answero- Summarized the information provided in the question; ARG inco, is manufacturer of dairy products ® Yes, ARG Inco, should approach it's Bank FCIB for a loan to undertake a project at cost of $2.5 million. oBasis of Providing Loan by Bank: i) Good interest Coverage Ratio, which is a times (;) Good quick ratio (1:1), whereas ARG Inco have 1.08.1 115). Net profit Morigen ratio, which is 8.65*1. O last year. last year.

ARG Inco, financial position of the company A) Short term solvency position: Current ration 2019 - 1.24:1 2018 => 1:42: 1 2017 = 2:2:1 Quick ratio:> 2019 => 1.08:1 2018 =) 0:65:) 2017 = 0.8901 B) Leverage position; Intetest coverage tatio:- 2019 9 times 2018 = 17.4 times 2017. = 16503 times Commenti Noomally, an interest an interest coverage 6 to 7 times is considered appropriate. c) Activity ratio; i) Average age of inventory => 2019 - 98 days 2018 =) cou days 2017 =) 52 days 10) Average collection perid: -) 2019 => 79 days 2018 =) 67 days tatio of + 2017 → 128 days,

to a D toafitability position, 1 Cross profit margen 2019 = 8.65* 2018 = 27.47 1. 2017 => 19.08*1. ii) Net profit margin 2019 = 8.081/. 2018 12:35*% 2017 14.2301 .Conclusion/comment: 1) On the basis of above fact, ARG Inco) should approach its bank ECIB for a loan undertake a project at cost of $2.5 million. 2) the bank should provide ARG, Inc., with the finance of $2.5 million because our strong point is interest coverage ratio and net profit margin ratic. 3) Intetest coverage ratio of 6 to 7 times is considered appropriate, whore as the actual ratio for this company is a times in comparision of fixed interest charges. * This indicates that the from will be able to pay interest on long-trom loan tegularly. This ratio also indicate that the long-term solvency position of the company is quite satisfactory. Please - please kindly Up-vote. Thank you