Running head: TOOTSIE ROLL INDUSTRIES INC.

LOAN PACKAGE

Tootsie Roll Industries Inc. Loan Package

TOOTSIE ROLL INDUSTRIES INC. LOAN PACKAGE Tootsie Roll Industries Inc. Loan Package Tootsie Roll Industries, Incorporated has been around since 1896 (Tootsie, n.d.). The business has grown from creating the chocolate tootsie roll to several other types of candies. Tootsie Roll Industries has a mission of

becoming more innovative and productive. In order for Tootsie Roll Industries to accomplish this task the business has decided to expand to another building that offers upgraded robotics to increase the productivity and creation of the products. Halloween is just around the corner and Tootsie Roll Industries' goal is to make sure that the new building is fully operational and producing products before Halloween. The only predicament that Tootsie Roll Industry faces is the need for a loan that will increase the total companys liability by 10%. This loan package has been created that sole purpose. The package will conduct a ratio analysis of the financial statements for Tootsie Roll Industries Inc., including several types of liquidity, solvency, and profitability ratios and an explanation of each ratio. It will also provide a justification of the reason the company needs this loan; the purpose might be for expansion, inventory purchases, and the debt retirement. Lastly, it will include an explanation of how the company plans use the proceeds from the loan and of how loan approval might affect the company. Ratio Analysis of Financial Statement Solvency and Explanation Solvency for Tootsie Roll Industries is very optimistic. Tootsie Roll

TOOTSIE ROLL INDUSTRIES INC. LOAN PACKAGE Industries has little debt, and managed to have substantial assets to back its operations, financing, and investments. Only about 21% of Tootsie Roll Industries assets are in the form of debt. Shareholders own 79% of the

companys assets in 2007. Increasing debt by 10% would change this ratio to 31% with shareholders owning 69% of assets. A look at the companys 2007 cash debt coverage ratio indicates that cash from operations covered 54% of the liabilities in 2007. This indicates that there is low risk for creditors to lend to Tootsie Roll Industries. The abundance of assets and low long-term liabilities create a favorable environment for lending and growth on both parties. Solvency Debt to total assets Cash debt coverage ratio Profitability and Explanation Profitability for Tootsie Roll Industries has declined from 2005 to 2007. The profit margin rate fell from 16% to 10%. The Tootsie Roll Industries management believes this is high labor costs associated with economies of scale and mass production. Kimmel, Weygandt, and Kieso say that a decline in a
companys gross profit rate may have to do with the company selling products with a lower markup (2009). Because costs are high, net profit is lower. The companys asset turnover rate indicates that the business is still generating a steady return on assets of on average 122% over the three years. The earnings per share (EPS) have taken a loss of about 30% from 2005 to 2006 at the inconvenience of shareholders. Tootsie Roll Industries must

2007 0.21 0.54

2006 0.20 0.33

2005 NA 0.49

TOOTSIE ROLL INDUSTRIES INC. LOAN PACKAGE

increase net income to increase the EPS.

Profitability Earnings Per Share Gross profit rate Profit margin ratio Return on Assets ratio Asset turnover ratio Liquidity and Explanation

2007 0.94 0.33 0.10 0.13 1.22

2006 1.18 0.37 0.13 0.16 1.23

2005 1.36 0.39 0.16 0.19 1.21

Liquidity ratios "measure short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash" (Kimmel Weygandt, & Kieso, 2007, p. 74). The higher the ratio value the larger the margin of safety that the company possesses to cover short-term debts. The liquidity ratios we used in analyzing both Hershey and Tootsie Roll are the current ratio, current cash debt coverage ratio, accounts receivable turnover ratio, average collection period (average age of receivables), inventory turnover, and days in inventory (average age of inventory). The liquidity of Tootsie Roll Industries is very good from a lending standpoint because of a positive amount of working capital and a favoring current ratio in both 2006 and 2007. This indicates that there is a strong likelihood that the company will pay off its liabilities (Kimmel, Weygandt, & Kieso, 2009). The current ratio also says that for every dollar of liabilities in 2007, there was $3.45 worth of current assets. This is important for lenders to understand that there is a minimal risk that their loan will not be paid off. One problem with this ratio is that the current liabilities can be skewed considering excess inventory. The current cash debt ratio; this ratio indicates that income from operations outweighs current liabilities by $1.50 on the dollar in 2007.

TOOTSIE ROLL INDUSTRIES INC. LOAN PACKAGE This means, income from operations alone outweigh the average current liabilities. This ratio should give lenders even more confidence that the company is competent enough to pay short term debt. Liquidity Working Capital Current ratio Current cash debt coverage 2007 $141754 3.45 1.50 2006 $128706 3.07 0.93 2005 NA NA 1.37

Loan Proceeds and Effects to Tootsie Roll Tootsie Roll Industries will allocate the loan to the proper appendixes that encourage company growth. The company will purchase a building within a short period after receiving the funds. The new building will offer a location that will be beneficial to the majority of suppliers. The loan will permit the company to purchase new robotic equipment. Approval of the loan will affect the companys style of manufacturing. Purchasing robotics will allow for a decrease in wages/salaries because the equipment will serve as a placement of employees. New technology and improved management techniques will be enhanced through the funds. The loan will also be used for a new web-based marketing program. The web-based marketing will include natural search engine optimization, pay per click marketing, banner ads to run on specific web sites targeted towards demographic customers, and online video advertisements which will run on YouTube and Hulu. Approval of the loan will allow the company to purchase a new building, expand its growth, market

TOOTSIE ROLL INDUSTRIES INC. LOAN PACKAGE products in new markets and expand customer base, and introduce new technology to the manufacturing of the product. Conclusion As Tootsie Roll Industries is seeking new ways for increasing productivity, the company is anticipating receiving a loan for increasing the

workspace operations. A loan package has been prepared, which would cause the company to have an increase in liability by 10%. The team members of Team A have provided ratio analysis based on the financial statements of the company, provided a justification for the loan, and explained how the loan proceeds will effective the company. Looking at the history of Tootsie Roll Industries, it is clear the company will use the funding for assisting in the creation of novel products in the years to come.

TOOTSIE ROLL INDUSTRIES INC. LOAN PACKAGE