Problem

Business Analysis Somerfeld Company is a manufacturer of auto parts having the following f...

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.

Step-by-Step Solution

Request Professional Solution

Request Solution!

We need at least 10 more requests to produce the solution.

0 / 10 have requested this problem solution

The more requests, the faster the answer.

Request! (Login Required)


All students who have requested the solution will be notified once they are available.
Add your Solution
Textbook Solutions and Answers Search
Solutions For Problems in Chapter 20