Question

Problem 3-26 The Protek Company is a large manufacturer and distributor of electronic components. Because of some successful new products marketed to manufacturers of computers and mobile electronic devises, the firm has recently undergone a period of explosive growth, more than doubling its revenues during the last two years. However, the growth has been accompanied by a marked decline in profitability and a precipitous drop in the company's stock price. You are a financial consultant who has been retained to analyze the company's performance and find out what's going wrong. Your investigative plan involves conducting a series of in-depth interviews withknanagement and doing some independent research on the industry. However, before starting, you want to focus your thinking to be sure you can ask the right questions. You'll begin by analyzing the firm's financial statements over the last three years, which are shown below. The following additional information is provided with the financial statements. Depreciation for 20X1, 20x2, and 20X3 was $200, $250, and $275 million respectively. No stock was sold or repurchased, and like many fast-growing companies, Protek paid no dividends. Assume the tax rate is a flat 34% and the firm pays 10% interest on its debt. Protek Company Income Statements For the periods ended 12/31 (so00,000) 20x1 20x2 20X3 $ 1524 $ 3231 $ 2090 Sales 1502 COGS 631 906 $ 1729 $ 893 $ 1184 Gross margin Expenses $ 316 $ 495 $ 882 Marketing 327 211 158 DED Check My Work Save and Exit Submit Assignment for Grading Email Instructor

Answer 1

a)
PROTEK COMPANY
INCOME STATEMENTS
For The Periods ended 12/31
(000,000)
	20X1	%	20X2	%	20X3	%
Sales	$1,524	100.0%	$2,090	100.00%	$3,231	100.00%
COGS	631	41.4%	906	43.35%	1,502	46.49%
Gross Margin	$893	58.6%	$1,184	56.65%	$1,729	53.51%
Expenses		0.0%		0.00%		0.00%
Marketing	$316	20.7%	$495	23.68%	$882	27.30%
R & D	158	10.4%	211	10.10%	327	10.12%
Admin.	126	8.3%	179	8.56%	294	9.10%
Total Expenses	$600	39.4%	$885	42.34%	$1,503	46.52%
EBIT	$293	19.2%	$299	14.31%	$226	6.99%
Interest	63	4.1%	95	4.55%	143	4.43%
EBT	$230	15.1%	$204	9.76%	$83	2.57%
Tax	78	5.1%	69	3.30%	28	0.87%
EAT	$152	10.0%	$135	6.46%	$55	1.70%
b)
PROTEK COMPANY
Changes in Working Capital Accounts
For the years ended 12/31 20X2 and 20X3
($000,000)
	20X2           20X3
Accounts Receivable	-176	-239
Inventory	-61	-149
Accounts Payable	25	53
Accruals	5	10
Net change in current Accounts	-207	-325
The Statement of Cash Flows then follows directly.
PROTEK COMPANY
Statement of Cash Flows
For the years ended 12/31 20X2 and 20X3
($000,000)
	20X2	20X3
OPERATING ACTIVITIES:
Net Income	$     135.00	$       55.00
Depreciation	$     250.00	$     275.00
Change in WC	$   (207.00)	$   (325.00)
Cash from Operating Activities	$178	$5
INVESTING ACTIVITIES:
Increase in Fixed Assets	$   (798.00)	$   (323.00)
Cash from Investing Activities	$   (798.00)	$   (323.00)
FINANCING ACTIVITIES:
Increase in Debt	630	340
Cash from Financing Activities	630	340
NET CASH FLOW	$10.00	$22.00
Reconciliation
Beginning Cash	$       30.00	$       40.00
Net Cash Flow	$10.00	$22.00
Ending Cash	$40.00	$62.00
c) Ratio Analysis
	20X1	20X2	20X3
ASSETS
Cash	$30	$40	$62
Accounts Receivable	175	351	590
Inventory	90	151	300
Current Assets	$295	$542	$952
Fixed Assets
Gross	$1,590	$2,388	$2,711
Accum. Depreciation	-610	-860	-1,135
Net	$980	$1,528	$1,576
Total Assets	$1,275	$2,070	$2,528
LIABILITIES
Accounts Payable	$56	$81	$134
Accruals	15	20	30
Current Liabilities	$71	$101	$164
Capital
Long-Term Debt	$630	$1,260	$1,600
Equity	574	709	764
Total Liability & Equity	$1,275	$2,070	$2,528
	Industry Average	20X1		20X2		20X3
Current Ratio = Current Assets/ Current Liabilities	4.5	4.2		5.4		5.8
Quick Ratio = (CA - Inventory) / CL	3.2	2.9		3.9		4.0
ACP =  ACP = [Accts Rec / Sales] / 360	42 days	41	Days	60	Days	66	Days
Inventory Turnover  = COGS / Inventory	7.5X	7.0	X	6.0	X	5.0	X
Fixed Asset Turnover = Sales / Fixed Assets	1.6X	1.6	X	1.4	X	2.1	X
Total Asset Turnover = Sales / Toal Assets	1.2X	1.2	X	1.0	X	1.3	X
Debt Ratio = Total Debt/ Total Assets	53%	55%		66%		70%
Debt:Equity = Total long term Debt/ Equity	1:01	$1.1	:1	1.8	:1	$2.1	:1
TIE = EBIT/ Interest	4.5X	$4.65	X	$3.15	X	$1.58	X
ROS = NET income/Sales	9.00%	9.97%		6.46%		1.70%
ROA = Net Income/ Total Assets	10.80%	11.92%		6.52%		2.18%
ROE = = Net Income/ Equity	22.80%	26.48%		19.04%		7.20%
Equity Multiplier = total Assets/Equity	2.1	2.22		2.92		3.31