Question: Decision Makers' Perspective 9/18/24 Judgment Case 14-5 Analyzing financial statements; financial leverage; interest coverage AGF Foods Company is a large, primarily domestic, consumer foods company
Decision Makers' Perspective 9/18/24
Judgment Case 14-5 Analyzing financial statements; financial leverage; interest coverage
AGF Foods Company is a large, primarily domestic, consumer foods company involved in the
manufacture, distribution, and sale of a variety of food products. Industry averages are derived
from Troy's The Almanac of Business and Industrial Financial Ratios. Following are the 2024 and 2023 comparative income statements and balance sheets for AGF. (The financial data we use
are from actual financial statements of a well-known corporation, but the company name is
fictitious, and the numbers and dates have been modified slightly to disguise the company's
identity.)
Table Summary: The table shows years ended December 31, 2024, and 2023 for A G F Foods
Company in millions of dollars. The table contains 2 sections with 3 columns each. The heading
of the first section is entered in row 1 of column 1. The column headings in row 1 is as follows:
comparative income statements; 2024; 2023. Net sales is entered in row 2 of column 1 under
which is a single row with an entry. Gross profit is entered in row 4 of column 1 under which is a
single row with an entry. Operating income is entered in row 6 of column 1 under which is a
single row with an entry. Income from operations before tax is entered in row 8 of column 1
under which is a single row with an entry. Row 10 of column 1 contains an entry. Dollar values
are entered in columns 2 and 3. The heading of the second section in row 11 of column 1 is as
follows: comparative balance sheets. Assets is entered in row 12 of column 1 under which are 5
rows with entries. Liabilities and shareholders' equity is entered in row 18 of column 1 under
which are 4 rows with entries. Shareholders' equity is entered in row
...lar values.
AGF FOODS COMPANY
Years Ended December 31, 2024 and 2023
($ in millions)
Comparative Income Statements 2024 2025
Net sales $6,440 $5,800
Cost of goods sold (3,667 ) (3,389 )
Gross profit 2,773 2,411
Operating expenses (1,916 ) (1,629 )
Operating income 857 782
Interest expense (54 ) (53 )
Income from operations before tax 803 729
Income taxes (316 ) (287 )
Net income $ 487 $ 442
Comparative Balance Sheets
Assets
Total current assets $1,879 $1,490
Property, plant, and equipment (net) $2,592 $2,291
Intangibles (net) 800 843
Other assets 74 60
Total assets $5,345 $4,684
Liabilities and Shareholders' Equity
Total current liabilities $1,473 $ 941
Long-term debt 534 728
Deferred income taxes 407 344
Total liabilities 2,414 2,013
Shareholders' equity:
Common stock 180 180
Additional paid-in capital 21 63
Retained earnings 2,730 2,428
Total shareholders' equity 2,931 2,671
Total liabilities and shareholders' equity $5,345 $4,684
Long-term solvency refers to a company's ability to pay its long-term obligations. Financing
ratios provide investors and creditors with an indication of this element of risk.
Required:
- Calculate the debt to equity ratio for AGF for 2024.
- The average ratio for the stocks listed on the New York Stock Exchange in a comparable time period was 1.0. Other things being equal, does AGF appear to have higher or lower default risk than others in its industry?
- Is AGF experiencing favorable or unfavorable financial leverage?
- Calculate AGF's times interest earned ratio for 2024.
- The coverage for the stocks listed on the New York Stock Exchange in a comparable time period was 5.1. Other things being equal, does AGF appear to have higher or lower interest coverage than others in its industry?
Answer
1.). Debt Equity Ratio= Total debt/ Total Equity
Total Debt =Total outside Liabilities 2414
Total Equity = Total shareholders Equity 2931
Debt Equity Ratio (2414/2931) 0.82
2 As debt Equity ratio is lower than Industry i.e
1 company's Default risk is favorable
3 Computation of Financial leverage
(a) Total income before tax 803
Tax on income 316
Tax rate (316/803) 39.35%
Earnings before interest & tax 857
Tax @39.35% 337
Earning available on equity 520
rate of earning for on equity (520/2931) 17.74%
Debt interest % (54/534) 10.11%
As earning on equity is more than debt financing Hence Financial leverage is Favorable.
4 Time interest earn Ratio = Earnings before interest and tax/ Interest payable (857/54)=15.87
5 Interest coverage ratio = Time interest earns Ratio =15.87, which is higher than the industry ratio.
Please give me a full explanation. I need to answer in 500+ words.
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