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[The following information applies to the questions displayed below.]
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 |
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This Year | Last Year | |||
Assets | ||||
Current assets: | ||||
Cash | $ | 1,020,000 | $ | 1,260,000 |
Marketable securities | 0 | 300,000 | ||
Accounts receivable, net | 2,940,000 | 2,040,000 | ||
Inventory | 3,660,000 | 2,100,000 | ||
Prepaid expenses | 270,000 | 210,000 | ||
Total current assets | 7,890,000 | 5,910,000 | ||
Plant and equipment, net | 9,640,000 | 9,110,000 | ||
Total assets | $ | 17,530,000 | $ | 15,020,000 |
Liabilities and Stockholders' Equity | ||||
Liabilities: | ||||
Current liabilities | $ | 4,070,000 | $ | 3,100,000 |
Note payable, 10% | 3,700,000 | 3,100,000 | ||
Total liabilities | 7,770,000 | 6,200,000 | ||
Stockholders' equity: | ||||
Common stock, $75 par value | 7,500,000 | 7,500,000 | ||
Retained earnings | 2,260,000 | 1,320,000 | ||
Total stockholders' equity | 9,760,000 | 8,820,000 | ||
Total liabilities and stockholders' equity | $ | 17,530,000 | $ | 15,020,000 |
Lydex Company Comparative Income Statement and Reconciliation |
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This Year | Last Year | |||
Sales (all on account) | $ | 15,920,000 | $ | 14,180,000 |
Cost of goods sold | 12,736,000 | 10,635,000 | ||
Gross margin | 3,184,000 | 3,545,000 | ||
Selling and administrative expenses | 1,014,000 | 1,628,000 | ||
Net operating income | 2,170,000 | 1,917,000 | ||
Interest expense | 370,000 | 310,000 | ||
Net income before taxes | 1,800,000 | 1,607,000 | ||
Income taxes (30%) | 540,000 | 482,100 | ||
Net income | 1,260,000 | 1,124,900 | ||
Common dividends | 320,000 | 562,450 | ||
Net income retained | 940,000 | 562,450 | ||
Beginning retained earnings | 1,320,000 | 757,550 | ||
Ending retained earnings | $ | 2,260,000 | $ | 1,320,000 |
To begin your assignment you gather the following financial data and ratios that are typical of companies in Lydex Company’s industry:
Current ratio | 2.3 | |
Acid-test ratio | 1.1 | |
Average collection period | 32 | days |
Average sale period | 60 | days |
Return on assets | 9.9 | % |
Debt-to-equity ratio | 0.7 | |
Times interest earned ratio | 5.9 | |
Price-earnings ratio | 10 | |
Required:
1. You decide first to assess the company’s performance in terms of debt management and profitability. Compute the following for both this year and last year: (Round your "Percentage" answers to 1 decimal place and other answers to 2 decimal places.)
a. The times interest earned ratio.
b. The debt-to-equity ratio.
c. The gross margin percentage.
d. The return on total assets. (Total assets at the beginning of last year were $13,130,000.)
e. The return on equity. (Stockholders’ equity at the beginning of last year totaled $8,257,550. There has been no change in common stock over the last two years.)
f. Is the company’s financial leverage positive or negative?
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2. You decide next to assess the company’s stock market performance. Assume that Lydex’s stock price at the end of this year is $106 per share and that at the end of last year it was $74. For both this year and last year, compute: (Round your "Percentage" answers to 1 decimal place and other intermediate and final answers to 2 decimal places.)
a. The earnings per share.
b. The dividend yield ratio.
c. The dividend payout ratio.
d. The price-earnings ratio.
e. The book value per share of common stock.
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3. You decide, finally, to assess the company’s liquidity and asset management. For both this year and last year, compute:
a. Working capital.
b. The current ratio. (Round your final answers to 2 decimal places.)
c. The acid-test ratio. (Round your final answers to 2 decimal places.)
d. The average collection period. (The accounts receivable at the beginning of last year totaled $1,730,000.) (Use 365 days in a year. Round your intermediate calculations and final answer to 2 decimal place.)
e. The average sale period. (The inventory at the beginning of last year totaled $2,090,000.) (Use 365 days in a year. Round your intermediate calculations and final answer to 2 decimal place.)
f. The operating cycle. (Round your intermediate calculations and final answer to 2 decimal place.)
g. The total asset turnover. (The total assets at the beginning of last year totaled $14,670,000.) (Round your final answers to 2 decimal places.)
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Answer:
Requirement 1
a. The times interest earned ratio. = Net operating income / Interest Expense
This Year = 2170000 / 370000 = 5.86
Last Year = 1917000 / 310000 = 6.18
b. The debt-to-equity ratio.= Total Liabilities / Total Equity
This Year = 7770000 / 9760000 = 0.796
Last Year = 6200000 / 8820000 = 0.703
c. The gross margin percentage. = Gross Profit / Sales
This Year = 3184000 / 15920000 = 20%
Last Year = 3545000 / 14180000 = 25%
d. The return on total assets. = Net Income / Avg.Total Assets
This Year = 1260000 / ( 17530000 + 15020000 ) / 2 = 1260000 / 16275000 = 7.74%
Last Year = 1124900 / ( 15020000 + 13130000 ) / 2 = 1124900 / 7316000 = 15.37%
e. The return on equity.= Net Income / Avg.Total Equity
This Year = 1260000 / ( 9760000 + 8820000 ) / 2 = 1260000 / 9290000 = 13.56%
Last Year = 1124900 / ( 8820000 + 8257550 ) /2 = 1124900 / 8538775 = 13.17%
Requirement 2
a. The earnings per share. = Net Income / Outstanding Shares
This Year = 1260000 / 100000 = $12.60
Last Year = 1124900 / 100000 = $11.25
b. The dividend yield ratio. = Dividend per share / Market Price per share
This Year = ( 320000 / 100000 ) / 106 = 3.02%
Last Year = (562450 /100000 ) / 74 = 1.9%
c. The dividend payout ratio. = Dividend / Net Income
This Year = 320000 / 1260000 = 25.4%
Last Year = 562450 / 1124900 = 50%
d. The price-earnings ratio. = Market Price / EPS
This Year = 106 / 12.60 = 8.41
Last Year = 74 / 11.25 = 6.58
e. The book value per share of common stock.
This Year = 9760000 / 100000 = 97.60
Last Year = 8820000 / 100000 = 88.20
Requirement 3
a. Working capital. = Current Assets - Current Liabilities
This Year = 7890000 - 4070000 = 3820000
Last Year = 5910000 - 3100000 = 2810000
b. The current ratio. = Current Assets /Current Liabilities
This Year = 7890000 / 4070000 = 1.94
Last Year = 5910000 / 3100000 = 1.91
c. The acid-test ratio = Quick Assets /Current Liabilities
This Year = 3960000 / 4070000 = 0.972
Last Year = 3600000 / 3100000 = 1.16
d. The average collection period. = 365 / (Sales / Avg. Receivables)
This Year = 365 / (15920000 / ( 2940000 + 2040000 ) / 2) = 365 / 6.39 = 57.12 Days
Last Year = 365 / (14180000 / ( 2040000 + 2090000 ) /2) = 365 / 6.87 = 53.13 Days
e. The average sale period. = 365 / (Cost of goods sold / Avg. Inventory )
This Year = 365 / (12736000 / ( 3660000 + 2100000 ) /2 = 365 / 4.42 = 82.58 Days
Last Year = 365 / (10635000 / ( 2100000 + 2090000 _ / 2 = 365 / 5.076 = 71.91 Days
f. The operating cycle. = average collection period + average sale period
This Year = 57.12 Days + 82.58 Days = 139.7 Days
Last Year = 53.13 Days + 71.91 Days = 125.04 Days
g. The total asset turnover. = Sales / Avg.Total Assets
This Year = 15920000 / ( 17530000 + 15020000 ) /2 = 15920000 / 16275000 = 0.978
Last Year = 14,180,000 / (15020000 + 14670000 ) / 2 = 14180000 / 14845000 = 0.956
Required information [The following information applies to the questions displayed below.] You have just been hired...
Required information [The following information applies to the questions displayed below.] 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 Assets Current assets: Cash $ 970,000 $ 1,210,000...
Required information [The following information applies to the questions displayed below.] 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 Assets Current assets: Cash $ 930,000 $ 1,170,000...
Required information [The following information applies to the questions displayed below.] 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 Assets Current assets: Cash $ 880,000 $ 1,120,000...
Required information [The following information applies to the questions displayed below.] 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 $ 980,000 0 2,780,000 3,620,000 260,000 7,640,000 9,560,000...
Required information [The following information applies to the questions displayed below.] 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 $ 1,040,000 0 3,020,000 3,680,000 270,000 8,010,000 9,680,000...
Required information [The following information applies to the questions displayed below.] 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 $ 1,040,000 0 3,020,000 3,680,000 270,000 8,010,000 9,680,000...
Required information [The following information applies to the questions displayed below.] 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 $ 900,000 Marketable securities...
Required information (The following information applies to the questions displayed below.) 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 Lydex Company Comparative Balance Sheet This Year Assets Current assets: Cash $ 1,040,000 Marketable securities Accounts...
Required information [The following information applies to the questions displayed below.] 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 $ 940,000 2,620,000 3,580,000 250,000 7,390,000 9,480,000 $...
[The following information applies to the questions displayed below.] 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 0 Lydex Company Comparative Balance Sheet This Year Assets Current assets: Cash $ 890,000 Marketable securities Accounts...