Business Analysis Somerfeld Company is a manufacturer of auto parts having the following financial statements for 2009-2010.
Additional financial information, including industry averages for 2010, where appropriate:
Balance Sheet December 31, 2010 and 2009 | ||
| 2010 | 2009 |
Cash | $ 395,000 | $ 125,000 |
Accounts receivable | 350,000 | 275,000 |
Inventory | 200,000 | 175,000 |
Total current assets | 945,000 | 575,000 |
Long-lived assets | 1,440,000 | 1,500,000 |
Total assets | $2,385,000 | $2,075,000 |
Current liabilities | $ 200,000 | $ 250,000 |
Long-term debt | 900,000 | 800,000 |
Shareholders’ Equity | 1,285,000 | 1,025,000 |
Total liabilities and equity | $2,385,000 | $2,075,000 |
Income Statement For years ended December 31, 2010 and 2009 | ||
| 2010 | 2009 |
Sales | $3,500,000 | $3,600,000 |
Cost of sales | 2,500,000 | 2,600,000 |
Gross margin | 1,000,000 | 1,000,000 |
Operating expense* | 500,000 | 450,000 |
Operating income | 500,000 | 550,000 |
Tax expense (40%) | 200,000 | 220,000 |
Net income | $ 300,000 | $ 330,000 |
* Operating expense includes depreciation expense.
Cash Flow from operations | ||
| 2010 | 2009 |
Net income | $300,000 | $330,000 |
Plus depreciation expense | 60,000 | 50,000 |
+Decrease (-inc) in Accounts |
|
|
receivable and Inventory | (100,000) | — |
+Increase (-dec) in Current Liabilities | (50,000) | — |
Cash flowfrom operations | $210,000 | $380,000 |
Additional financial information, including industry averages for 2010, where appropriate:
| 2010 | 2009 | Industry 2010 |
Income tax rate | 40% | 40% | 40.0% |
Capital expenditures | $ 0 | $ 0 |
|
Dividends | $40,000 | — |
|
Year-end stock price | $2.25 | $2.75 |
|
| 2010 | 2009 | Industry 2010 |
Number of outstanding shares | 1,800,000 | 1,800,000 |
|
Sales multiplier |
|
| 1.5 |
Free cash flow multiplier |
|
| 18.00 |
Earnings multiplier |
|
| 9.00 |
Cost of capital | 6.0% | 6.0% |
|
Accounts receivable turnover |
|
| 11.1 |
Inventory turnover |
|
| 11.30 |
Current ratio |
|
| 2.80 |
Quick ratio |
|
| 2.00 |
Cash flowfrom operations ratio |
|
| 1.20 |
Free cash flow ratio |
|
| 1.10 |
Gross margin percentage |
|
| 30.0% |
Return on assets (net bookvalue) |
|
| 20.0% |
Return on equity |
|
| 30.0% |
Required Calculate and interpret the financial ratios (per Exhibit 20.9) for Somerfeld for 2009 and 2010. Since the calculation of many ratios requires the average balance in an account (e.g., average receivables is required in calculating receivables turnover) you may assume that the balances in these accounts in 2009 are the same as those in 2008.
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