Question

You have just been hired as a financial analyst for Lydex Company, a manufacturer of safety helmets. Your boss has asked you to perform a comprehensive analysis of the company's financial statements, including comparing Lydex's performance to its major competitors. The company's financial statements for the last two years are as follows: Last Year Lydex Company Comparative Balance Sheet This Year Assets Current assets: Cash $ 970,000 Marketable securities Accounts receivable, net 2,740,000 Inventory 3,610,000 Prepaid expenses 260,000 Total current assets 7,580,000 Plant and equipment, net 9.540,000 Total assets $17, 120,000 Liabilities and Stockholders' Equity Liabilities: Current liabilities $ 4,020,000 Note payable, 10% 3,680,000 Total liabilities 7,700,000 Stockholders' equity: Common stock, $70 par value 7.000.000 Retained earnings 2.420.000 Total stockholders' equity 9,420,000 Total liabilities and stockholders' equity $17,120,000 $1,210,000 300,000 1,840.000 2,100,000 200,000 5,650,000 9,060,000 $14,710,000 $3,000,000 3,080,000 6,080,000 7,000,000 1.630,000 8,630,000 $14,710,000 Lydex Company Comparative Income Statement and Reconciliation This Year Last Year Sales (all on account) $15,870,000 $13,680,000 Cost of goods sold 12,696,000 10,260,000 Gross margin 3,174,000 3,420,000 Selling and administrative expenses 1,106,000 1,608,000 Net operating income 2,068,000 1.812.000 Interest expense 368,000 308,000 Net income before taxes 1,700,000 1.504,000 Income taxes (30%) 510.000 451,200 Net income 1,190,000 1,052,800 Common dividends 400.000 526,400 Net income retained 790,000 526,400 Beginning retained earnings 1,630,000 1,103,600 Ending retained earnings $ 2,420,000 $ 1,630,000 To begin your assignment you gather the following financial data and ratios that are typical of companies in Lydex Company's industry: 2.4 1.1 40 days 60 days Current ratio Acid-test ratio Average collection period Average sale period Return on assets Debt-to-equity ratio Times interest earned ratio Price-earnings ratio 9.43 0.7 5.7

Answer 1

(A)

number of common stocks = $7000000/$70 = 100000

earning per share = net income/common shares outstanding

for this year,

= $1190000/100000 = $11.90

for last year,

= $1052800/100000 = $10.53

dividend per share = common dividends/common shares outstanding

for this year,

$400000/100000 = $4

for last year,

$526400/100000 = $5.26

therefore,

Dividend payout ratio = dividend per share/earning per share

for this year,

= $4/$11.90 = 33.6%

for last year,

= $5.26/$10.53 = 50.0% (49.95% rounded to 1 place after decimal)

(B)

Price-earning ratio = market price per share/earning per share

for this year,

= $96/$11.90 = 8.07 times

for last year,

= $64/$10.53 = 6.08 times