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: Lydex Company Comparative Balance Sheet This Year Last Year $ 920,000 0 2,540,000 3,560,000 250,000 7,270,000 9,440,000 $ 16,710,000 $ 1,160,000 300,000 1,640,000 2,100,000 190,000 5,390,000 9,010,000 $14,400,000 Assets Current assets: Cash Marketable securities Accounts receivable, net Inventory Prepaid expenses Total current assets Plant and equipment, net Total assets Liabilities and Stockholders' Equity Liabilities: Current liabilities Note payable, 10% Total liabilities Stockholders' equity: Common stock, $75 par value Retained earnings Total stockholders' equity Total liabilities and stockholders' equity $ 3,970,000 3,640,000 7,610,000 $2,900,000 3,040,000 5,940,000 7,500,000 1,600,000 9,100,000 $ 16,710,000 7,500,000 960,000 8,460,000 $14,400,000

Answer 1

Ans. 1
Ans. A	Time interest earned = Net operating income / Interest expenses
	This year	$1,764,000 / $364,000	4.85	times
	Last year	$1,707,000 / $304,000	5.62	times
Ans. B	Debt to equity ratio   =   Total liabilities / Total stockholder's equity
	This year	$7,610,000 / $9,100,000	0.84
	Last year	$5,940,000 / $8,460,000	0.70
Ans. C	Gross margin percentage = Gross margin / Net sales * 100
	This year	$3,164,000 / $15,820,000 * 100	20.0%
	Last year	$3,295,000 / $13,180,000 * 100	25.0%
Ans. D	Return on assets =   Net income / Average assets * 100
	This year	$980,000 / $15,555,000 * 100	6.3%
	Last year	$982,100 / $13,715,000 * 100	7.2%
	*Average assets = (Beginning assets + Ending assets) / 2
	This year	($14,400,000 + $16,710,000) / 2	$15,555,000
	Last year	($13,030,000 + $14,400,000) / 2	$13,715,000
Ans. E	Return on Common stockholder's equity =   Net income / Average Common stockholder's equity * 100
	This year	$980,000 / $8,780,000 * 100	11.2%
	Last year	$982,100 / $8,214,475 * 100	12.0%
	* Average Stockholder's equity =   (Beginning equity + Ending equity) / 2
	This year	($8,460,000 + $9,100,000) / 2	$8,780,000
	Last year	($7,968,950 + $8,460,000) / 2	$8,214,475
Ans. F	This year	Positive
	Last year	Positive
	Explanations: The return on equity is greater than the return on assets, so the
	financial leverage is positive in both years.
	Return on equity > Return on assets = Positive financial leverage
	Return on equity < Return on assets = Negative financial leverage
Ans. 2
Ans. A	Earnings per share = Net income / Common stock outstanding
	This year	$980,000 / 100,000	$9.80	per share
	Last year	$982,100 / 100,000	$9.82	per share
	*Common stock outstanding =   Common stock / Par value
		$7,500,000 / $75	100000
Ans. B	Dividend yield ratio = Dividend per share / Stock price per share * 100
	This year	$3.20 / $108 * 100	3.0%
	Last year	$5.69 / $76 * 100	7.5%
	*Dividend per share = Common dividends / Common stock outstanding
	This year	$340,000 / 100,000	$3.40	per share
	Last year	$491,050 / 100,000	$4.91	per share
Ans. C	Payout ratio =   Total dividends / Net income
	This year	$340,000 / $980,000 * 100	34.7%
	Last year	$491,050 / $982,100 * 100	50.0%
Ans. D	Price earnings ratio = Stock price per share / Earnings per share
	This year	$86 / $9.80	8.78	times
	Last year	$54 / $9.82	5.50	times
Ans. E	Book value per share =    Total common stockholder's equity / no. of shares outstanding
	This year	$9,100,000 / 100,000	$91.00	per share
	Last year	$8,460,000 / 100,000	$84.60	per share
Ans. 3
Ans. A	Working capital =     Total current assets - Total current liabilities
	This year	$7,270,000 - $3,970,000	$3,300,000
	Last year	$5,390,000 - $2,900,000	$2,490,000
Ans. B	Current ratio   =   Total current assets / Total current liabilities
	This year	$7,270,000 / $3,970,000	1.83 : 1
	Last year	$5,390,000 / $2,900,000	1.86 : 1
Ans. C	Quick ratio   =   (Total current assets - Inventory - Prepaid expenses) / Total current liabilities
	This year	($7,270,000 - $3,560,000 - $250,000) / $3,970,000	0.87 : 1
	Last year	($5,390,000 - $2,100,000 - $190,000) / $2,900,000	1.07 : 1
Ans. D	Average collection period   =   No. of days in year / Net credit sales * Average accounts receivables
	This year	365 / $15,820,000 * $2,090,000	48.22	times
	Last year	365 / $13,180,000 * $1,635,000	45.28	times
	*Average receivable = (Beginning receivables + Ending receivables) / 2
	This year	($1,640,000 + $2,540,000) / 2	$2,090,000
	Last year	($1,630,000 + $1,640,000) / 2	$1,635,000
Ans. E	Average sales period   =   No. of days in year / Cost of goods sold * Average inventory
	This year	365 / $12,656,000 * $2,830,000	81.62	times
	Last year	365 / $9,885,000 * $2,045,000	75.51	times
	*Average inventory = (Beginning inventory + Ending inventory) / 2
	This year	($2,100,000 + $3,560,000) / 2	$2,830,000
	Last year	($1,990,000 + $2,100,000) / 2	$2,045,000
Ans. F	Operating cycle = Average collection period + Average sales period
	This year	48.22 + 81.62	129.84	days
	Last year	45.28 + 75.51	120.79	days
Ans. G	Total assets turnover = Sales / Average operating assets
	This year	$15,820,000 / $15,555,000	1.02	times
	Last year	$13,180,000 / $14,485,000	0.91	times
	*Average assets = (Beginning assets + Ending assets) / 2
	This year	($14,400,000 + $16,710,000) / 2	$15,555,000
	Last year	($14,570,000 + $14,400,000) / 2	$14,485,000