Who Should Get a Holiday Loan?

You are head of the loan department at Wilshire National Bank and have been approached by two firms in the retail toy business. Each firm is requesting a nine-month term loan to purchase inventory for the holiday season. You must make your recommendations to the loan committee and have gathered the following data in order to make your analysis. Fun Toy Company was organized in early 2008. The first year of operations was fairly successful, as the firm earned net income of $45,000. Total sales for the year were $600,000, and total assets at year-end December 31, 2008, were $350,000. A condensed balance sheet at September 30, 2009, follows. The firm is requesting a $100,000 loan.

The Toy Store, the other firm, has been in business for many years. The firm’s net income was $100,000 on total sales of $2,000,000 in the most recent fiscal year. A balance sheet as of September 30, 2009, is given below. The firm is seeking a $200,000 loan.

Write a one-page memo to the loan committee containing your recommendation about making loans to Fun Toy Company and to The Toy Store. You should use selected financial ratios in making your recommendation. Remember, your memo is only one page, so you can’t just present a list of every possible ratio computation. Build your recommendation around a few key numbers.