2A2Z EASTON BANK HAS RECEIVED LOAN APPLICATIONS FROM THREE COMPANIES...

47.

CSO: 2A2b

LOS: 2A2z

Easton Bank has received loan applications from three companies in the computer service

business and will grant a loan to the company with the best prospect of fulfilling the loan

obligations. Specific data, shown below, has been selected from these applications for

review and comparison with industry averages.

CompGo

Astor

SysGen

Industry

Total sales (millions)

$4.27

$3.91

$4.86

$4.30

Net profit margin

9.55%

9.85%

10.05%

9.65%

Current ratio

1.82

2.02

1.96

1.95

Return on assets

12.0%

12.6%

11.4%

12.4%

Debt/equity ratio

52.5%

44.6%

49.6%

48.3%

Financial leverage

1.30

1.02

1.56

1.33

Based on the information above, select the strategy that would fulfill Easton’s objective.

a.

Easton should not grant any loans as none of these companies represents a good

credit risk.

b.

Grant the loan to CompGo as all the company’s data approximate the industry

average.

c.

Grant the loan to Astor as both the debt/equity ratio and degree of financial

leverage are below the industry average.

d.

Grant the loan to SysGen as the company has the highest net profit margin and

degree of financial leverage.