Tootsie Roll Industries Inc. Loan Package

Abstract

Tootsie Roll Loan Industries Inc. Loan Package is a team assignment for University of Phoenix course ACC/561. Tootsie Roll Loan Industries Inc. Loan Package contains the discussion for a small business loan for Tootsie Roll. The content of the paper includes the introduction, the rational for the loan, intended use of the loan, ratio analysis indicating the financial health of the company, and concluding remarks.

Tootsie Roll Industries Inc. Loan Package

The financial stability of a company is important to loan offices when trying to secure a loan. A company should computeits financial ratios from its financial statements. Securing a loan for a companyrequires the demonstration of financial health and performance of the company. Three categories of ratio analysis provide credible financial metrics about a company. The first category is related to the company??™s liquidity or the capacity of the company to meet its obligations (i.e. payroll, pay rent) to debtors. Second, the company??™s solvency is related to its ability to pay interest. Third, the company??™s profitably in which the computed ratios measure the income of the company. Below is an outline of Tootsie Roll Industries ratio analysis, loan purpose, and financial information to secure a loan.

Ratio Analysis

Ratio Analysis is an effective method for measuring the financial health and performance of a company (Kimmel, Weygandt&Kieso, 2009). Accurate and up-to-date financial statements are required to compute reliable ratios. According to Lial, Hestwood, Hornsby, and McGinnis (2010), ???A ratio compares two quantities??? (p. 428).Ratio analysis uses data values from a company??™s financial statements. One data value is placed in the numerator and one data value is placed in the denominator. The resulting ratio can assist with determining the financial health and performance of a company. Liquidity ratios, solvency ratios, and profitability issues are three categories of ratio analysis (Kimmel, Weygandt&Kieso, 2009).

According to Kimmel, Weygandt, and Kieso (2009), ???Liquidity ratios(Illustration 13-16) measure the short-term ability of the companyto pay its maturing obligations and to meet unexpected needs for cash??? (p. 673). Liquidity is an important financial measure for bankers, suppliers, and other short term creditors (Kimmel, Weygandt&Kieso, 2009). Working capital, the current ratio, and the current cash debt coverage ratio are example of equations used in liquidity ratio analysis (Kimmel, Weygandt&Kieso, 2009). The 2007 financial statements for Tootsie Roll contain the data values for computing liquidity ratios. Appendix A contains the computations for working capital, current ratio, and the current cash debt coverage ratio for Tootsie Roll Industries Inc. based on data values retrieved from the company??™s 2006 and2007 financial statements.

According to Kimmel, Weygandt, and Kieso (2009), ???Solvency ratios(Illustration 13-17) measure the ability of the company to survive over a long period of time??? (p. 673).Stakeholders (e.g. long term creditors and stockholders) are interested in computing solvency ratios and understanding quantitatively the company??™s ability to pay its debt and interest over the long term (Kimmel, Weygandt, and Kieso, 2009). Debt to total assets ratio, cash debt coverage ratio, and free cash flow are examples of ratios used in solvency ratio analysis (Kimmel, Weygandt&Kieso, 2009). Appendix B contains the computations for debt to total assets ratio, cash debt coverage ratio, and free cash flow for Tootsie Roll Industries Inc. based on data values retrieved from the company??™s 2006 and 2007 financial statements.

According to Kimmel, Weygandt, and Kieso (2009), ???Profitability ratios(Illustration 13-18) measure the income or operating successof a company for a given period of time??? (p. 674).Stakeholders (e.g. investors, creditors) place significant importance on profitability ratios because it is a strong indicator of the company??™s operating effectiveness ((Kimmel, Weygandt, and Kieso, 2009). Price-earnings ratio, earnings per share, and profit margin ratio are examples of ratios used in profitability ratio analysis(Kimmel, Weygandt&Kieso, 2009). Appendix C contains the computations for the profit margin ratio, return on assets ratio, and asset turnover ratio for Tootsie Roll based on data values retrieved from the company??™s 2006 and2007 financial statements.

Loan Purpose

Pressure from political figures and the reduction in public school systems allowing candy consumption on school campuses is creating an opportunity for innovative candy companies. Tootsie Roll Industries Inc. sees an opportunity for an investment to improve its future earnings. Tootsie Roll Industries Inc. has created a strategic approach to produce lower calorie candy while maintaining the quality and taste of existing products. However, the research required to create a quality low calorie candy that tastes exactly like current products requires significant financial investment. Tootsie Roll Industries, Inc. requests a loan for the amount of $17,495,000.

Loan Use

The loan equal to 10 percent of the total liabilities of Tootsie Roll Industries, Inc. is split among the following percentage breakdowns. The company will use 60% of the loan value to create a new low calorie product line. The research and creation of the new product line could take 18 to 24 months. The company will use 10% of the loan value to develop and execute a new product line marketing campaign to secure public school system acceptance. The marketing campaign creation will begin 12 months into the product creation. The market campaign will release within six months of the successful product creation. The company will use 20%of the loan value to create a new product manufacturing line and the remaining 10%of the loan value will train and inform employees of new product line and processes.

Conclusion

The loan and new product line will increase company sales. The liabilities of the company will increase and negatively influence the ratio analysis of the company.However, after the research and marketing require almost two years to finalize. The company will not begin to experience revenue from the loan investment for two years. This could affectinvestor confidence during production development.

The company??™s reputation of childhood legacy candy will evolve into a legacy candy of tomorrow??™s generation as well. The purpose of the loan is to create a new healthy product line that requires strong marketing and research. The use of the loan will maintain the quality and standards of Tootsie Roll Industries, Inc.

References

Lial, M., Hestwood, D., Hornsby, J., & McGinnis, T. (2010).Quantitative reasoning for business (custome e-text). Boston, MA: Pearson/Addison-Wesley.

Kimmel, P. D., Weygandt, J. J., &Kieso, D. E. (2009).Accounting: Tools for business decision making (3rd ed.). Hoboken, NJ: John Wiley & Sons.

Appendix A: Liquidity Ratios for Tootsie Roll(thousands of dollars)

(Kimmel, Weygandt, &Kieso, 2009).

Working Capital= Current Assets ??“ Current Liabilities

Working Capital= $199,726 – $57,972

Working Capital = $141,754

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Current Ratio = Current Assets Current Liabilities

Current Ratio = $199,726 $57,972

Current Ratio = 3.45:1

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Current Cash Debt Coverage Ratio = Cash Provided by Operations / Average Current Liabilities

Current Cash Debt Coverage Ratio = $90,064 / ($57,972 + $62,211) / 2

Current Cash Debt Coverage Ratio = $90,064 / ($120,183) / 2

Current Cash Debt Coverage Ratio = $90,064 / $60,092

Current Cash Debt Coverage Ratio = 1.5:1

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Appendix B: Solvency Ratios for Tootsie Roll (thousands of dollars)

(Kimmel, Weygandt, &Kieso, 2009).

Debt to Total Assets Ratio = Total Liabilities / Total Assets

Debt to Total Assets Ratio = $174,495 / $812,725

Debt to Total Assets Ratio = 21%

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Cash Debt Coverage Ratio = Cash Provided by Operations / Average Total Liabilities

Cash Debt Coverage Ratio = $90,064 / ($174,495 + 160,958) / 2

Cash Debt Coverage Ratio = $90,064 / ($335,453) / 2

Cash Debt Coverage Ratio = $90,064 /$167,727

Cash Debt Coverage Ratio = 0.54 times

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Free Cash Flow = Cash Provided by Operations ??“ Capital Expenditures ??“ Cash Dividends

Free Cash Flow = $90,064 ??“ ($14,767) ??“ ($17,542)

Free Cash Flow = $57,755

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Appendix C: Profitability Ratios for Tootsie Roll (thousands of dollars)

(Kimmel, Weygandt, &Kieso, 2009).

Profit Margin Ratio = Net Income / Net Sales

Profit Margin Ratio = $51,625 / $492,742

Profit Margin Ratio = 10.5%

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Return on Assets Ratio = Net Income / Average Total Assets

Return on Assets Ratio = $51,625 / ($812,725 + $791,639) / 2

Return on Assets Ratio = $51,625 / ($1,604,364) / 2

Return on Assets Ratio = $51,625 / $802,182

Return on Assets Ratio = 6.4%

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Asset Turnover Ratio= Net Sales / Average Total Assets

Asset Turnover Ratio = $492,742 / ($812,725 + $791,639) / 2

Asset Turnover Ratio = $492,742 / ($1,604,364) / 2

Asset Turnover Ratio = $492,742 / $802,182

Asset Turnover Ratio = 0.61