Question

Data for Barry Computer Co. and its industry averages follow. The firm's debt is priced at par, so the market value of its debt equals its book value. Since dollars are in thousands, number of shares are shown in thousands too. Barry Computer Company: Balance Sheet as of December 31, 2019 (In Thousands) Cash $ 84,000 Accounts payable $ 119,000 Receivables 252,000 Other current liabilities 105,000 Inventories 196,000 Notes payable to bank 84,000    Total current assets $ 532,000    Total current liabilities $ 308,000 Long-term debt 182,000 Net fixed assets 168,000 Common equity (21,000 shares) 210,000 Total assets $ 700,000 Total liabilities and equity $ 700,000 Barry Computer Company: Income Statement for Year Ended December 31, 2019 (In Thousands) Sales $ 1,000,000 Cost of goods sold    Materials $450,000    Labor 300,000    Heat, light, and power 50,000    Indirect labor 60,000    Depreciation 30,000 890,000 Gross profit $ 110,000 Selling expenses 50,000 General and administrative expenses 20,000    Earnings before interest and taxes (EBIT) $ 40,000 Interest expense 18,200    Earnings before taxes (EBT) $ 21,800 Federal and state income taxes (25%) 5,450 Net income $ 16,350 Earnings per share $ 0.7786 Price per share on December 31, 2019 $ 12.00 Calculate the indicated ratios for Barry. Do not round intermediate calculations. Round your answers to two decimal places. Ratio Barry              Industry Average Current × 1.68 × Quick × 1.03 × Days sales outstandinga days 43 days Inventory turnover × 5.57 × Total assets turnover × 1.61 × Profit margin   % 1.53 % ROA   % 2.46 % ROE   % 8.28 % ROIC   % 7.00 % TIE × 2.13 × Debt/Total capital   % 55.28 % M/B    3.20 P/E    17.79 EV/EBITDA    8.42 aCalculation is based on a 365-day year. Construct the DuPont equation for both Barry and the industry. Do not round intermediate calculations. Round your answers to two decimal places. FIRM INDUSTRY Profit margin   % 1.53% Total assets turnover × 1.61× Equity multiplier × × Select the correct option based on Barry's strengths and weaknesses as revealed by your analysis. The firm's days sales outstanding ratio is more than the industry average, indicating that the firm should tighten credit or enforce a more stringent collection policy. The total assets turnover ratio is well above the industry average so sales should be increased, assets increased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity, assets, and invested capital. However, the company seems to be in an above average liquidity position and financial leverage is similar to others in the industry. The firm's days sales outstanding ratio is comparable to the industry average, indicating that the firm should neither tighten credit nor enforce a more stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets increased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity, assets, and invested capital. However, the company seems to be in a below average liquidity position and financial leverage is similar to others in the industry. The firm's days sales outstanding ratio is more than twice as long as the industry average, indicating that the firm should tighten credit or enforce a more stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets decreased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity, assets, and invested capital. Finally, it's market value ratios are also below industry averages. However, the company seems to be in an average liquidity position and financial leverage is similar to others in the industry. The firm's days sales outstanding ratio is more than twice as long as the industry average, indicating that the firm should loosen credit or apply a less stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets increased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity, assets, and invested capital. However, the company seems to be in an average liquidity position and financial leverage is similar to others in the industry. The firm's days sales outstanding ratio is less than the industry average, indicating that the firm should tighten credit or enforce a more stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets decreased, or both. While the company's profit margin is lower than the industry average, its other profitability ratios are high compared to the industry - net income should be higher given the amount of equity, assets, and invested capital. However, the company seems to be in an average liquidity position and financial leverage is similar to others in the industry. -Select-IIIIIIIVVItem 19 Suppose Barry had doubled its sales as well as its inventories, accounts receivable, and common equity during 2019. How would that information affect the validity of your ratio analysis? (Hint: Think about averages and the effects of rapid growth on ratios if averages are not used. No calculations are needed.) If 2019 represents a period of supernormal growth for the firm, ratios based on this year will be accurate and a comparison between them and industry averages will have substantial meaning. Potential investors need only look at 2019 ratios to be well informed, and a return to normal conditions in 2020 could help the firm's stock price. If 2019 represents a period of normal growth for the firm, ratios based on this year will be distorted and a comparison between them and industry averages will have little meaning. Potential investors who look only at 2019 ratios will be misled, and a continuation of normal conditions in 2020 could hurt the firm's stock price. If 2019 represents a period of normal growth for the firm, ratios based on this year will be accurate and a comparison between them and industry averages will have substantial meaning. Potential investors who look only at 2019 ratios will be misled, and a return to supernormal conditions in 2020 could hurt the firm's stock price. If 2019 represents a period of supernormal growth for the firm, ratios based on this year will be distorted and a comparison between them and industry averages will have substantial meaning. Potential investors who look only at 2019 ratios will be well informed, and a return to normal conditions in 2020 could hurt the firm's stock price. If 2019 represents a period of supernormal growth for the firm, ratios based on this year will be distorted and a comparison between them and industry averages will have little meaning. Potential investors who look only at 2019 ratios will be misled, and a return to normal conditions in 2020 could hurt the firm's stock price. -Select-IIIIIIIVVItem 20

Answer 1

a & b .

L5 ✓ fic RC G H I J 1 84,000 Accounts 1,19,000 Cash Receivables nazahla Other current 2.52.000 liabilities 1,05,000 Ratio Barry 2 3 Industry Average 1.73 1.68 x Profit Margin 1.53% 1.61 Inventories 84,000 Notes payable to 1,96,000 bank Total current 5,32,000 liabilities Current Total current assets 3,08,000 Quick 1.09 1.03 x Total Assets Turnover Equity Multiplier 3.160684564 Long-term debt 1,82,000 Days sales outstanding 91.98 43 days 6 Net fixed assets 168.000 Lommon equit 2,10,000 (21,000 shares) Inventory turnover 5.10 5.57 x 7 Total assets 7,00.000 Total liabilities 7,00,000 Total assets turnover 1.61 x and equity Profit margin ROA 1.428571429 1.64% 2.34% 7.79% 10,00,000 1.53 % 2.46 % 8.28 % ROE 4,50,000 3,00,000 ROIC TIE 12 2.197802198 2.13 x 9 Sales 10 Cost of goods sold 11 Materials Labor Heat, light, and 13 pover 14 Indirect labor 15 Depreciation 16 Gross profit 50,000 Debt/Total capital 46.43% 55.28 % 60,000 30,000 1,10,000 50,000 MIB PIE EVIEBITDA 15.41227845 3.2 17.79 8.42 17 Selling expenses General and administrative expenses 20,000 Book Value Per Share 18 Earnings before interest and taxes (EBIT) 40,000 Market Value of Equity 19 252000 Interest expense 18,200 Debt 182000 Earnings before 21 tazes (EBT) 21,800 Cash 84000 5,450 22 Federal and state income taxes (257) Net income 16,350 EBITDA Receivables Turnover Ratio 350000 70,000 3.96825397 24 Earnings per share Price per share on nasambar 31 2010

K4 - ; X fx =F10/(K2*K3) K. Cash 84000 Accounts payable 119000 2 Receivables 252000 Other current liabilities 105000 Ratio Barry Industry Average 10.0153 Inventories 196000 Notes payable to bank 84000 Current -B4/04 1.68 Profit Margin Total Assets Turnover Equity Multiplier 1161 Total current assets 532000 Total current liabilities Quick 1.03 I=F10/1K2 K3) 308000 182000 - (B4-B3)/D4 = 365/F24 Long-term debt Days sales outstanding days Net fixed assets 168000 Common equity (21,000 shares) 210000 Inventory turnover - B9/B3 5.57 Total assets 700000 Total liabilities and equity 700000 Total assets turnover -B9/B7 -B23/89 -B23/B7 | =B23/06 9 Profit margin ROA ROE ROIC 1000000 1.53 2.46 18.28 10 Cost of 11 12 Sales Cost of goods sold Materials Labor Heat, light, and pover Indirect labor Depreciation Gross profit Selling expenses 2.13 55.28 13 14 450000 300000 50000 60000 30000 110000 50000 Debt/Total capital MIB PIE EVIEBITDA -B19/B20 =D5/(D5-06) -B25/F18 =B25/B24 =F22/F23 17.79 8.42 16 17 18 General and administrative expenses 20000 Book Value Per Share Earnings before interest and taxes (EBIT) 40000 18200 Market Value of Equity Debt =D6/21000 =B25 21000 182000 20 Interest expense Earnings before taxes (EBT) 21800 Cash Federal and state income taxes (257) Net income Earnings per share 5450 16350 84000 =F19+F20-F21 =B19+B15 =B9B2 EBITDA 0.7786 Receivables Turnover Ratio Price per share on December 31, 2019

c.

Option 1 is correct . The Days sales Outstanding for Barrys is 91.98 days while industry average is 43 days.

d.

Oprion 5 is correct. If there is a condition of supernormal growth, the ratios will be inflated which may mislead the potential investors. When they return to normal , the stock prices may fall.