Hudson Valley Realty Hudson Valley Realty owns a number of commercial properties in suburban towns north...
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Hudson Valley Realty Hudson Valley Realty owns a number of commercial properties in suburban towns north and east of New York City. The firm previously rented one of them to an upscale department store that was renowned for jewelry and fine china, but that also sold everything from chandeliers to bed linens to lawn furniture. The building became vacant two years ago when the tenant broke a ten-year lease after only three years of occupancy and unexpectedly filed for bankruptcy. Hudson Valley considered any effort to recover early termination penalties a waste of time and money. Interest expense, high real estate taxes, insurance, and security costs make it extremely expensive to hold vacant property in this area. Although Hudson Valley is obviously eager to find a new tenant, it does not want another unexpected vacancy to have a serious negative effect on its investment returns. Hudson Valley wants to be sure that the new tenant will be financially stable and will likely stay for at least the full term of the lease. Vermont Heritage, a well-known furniture chain that targets affluent customers with traditional tastes, has expressed interest in the location. Peter Cortland, Hudson Valley's rental manager, wants to take a close look at the potential tenant's financial statements before entering into more serious negotiations. Vermont Heritage has submitted the following audited income statements and balance sheets for the last three years in the popup window, LOADING... Questions 1. Look at Vermont Heritage's sales revenue, EBIT, and net income over the three-year period. Would you classify it as a growing, diminishing, or stable company? 2. Look at Vermont Heritage's expense accounts, cost of goods sold, and selling and administrative expenses. Do they seem to be roughly proportional to sales? Do any of these categories seem to be growing out of control? 3. Depreciation expense is the same for all three years. What does that tell you about Vermont Heritage's growth? 4. Look at Vermont Heritage's EBIT, interest expense, and debt accounts (current liabilities, long-term debt, and other liabilities) over the three-year period. Comparing debt to equity, do you think the company seems to have excessive debt? Would you expect the company to have any problems meeting its interest payments? 5. Dividends have increased as a percentage of net income. Why do you think the company decided to pay out more of its earnings to shareholders? 6. Compare current assets with current liabilities. Would you expect Vermont Heritage to have any problems meeting its short-term obligations? 7. Overall, do you think Vermont Heritage will be a relatively safe tenant for Hudson Valley's building? Vermont Heritage: Income Statement ($ in millions) 2017 2016 2015 Sales $949.00 $955.10 $907.30 Cost of goods sold $466.60 $472.80 $436.60 Gross profit $482.40 $482.30 $470.70 Selling and administrative expenses $332.30 $320.80 $315.60 Depreciation $21.30 $21.30 $21.30 Other income (expenses) $1.40 ($9.20) ($11.90) EBIT $130.20 $131.00 $121.90 Interest expense (net of interest income) $0.80 $0.60 $0.60 Taxable income $129.40 $130.40 $121.30 Taxes $49.20 $50.10 $45.90 Net income Dividends $80.20 $80.30 $75.40 $24.06 $20.08 $18.85 Vermont Heritage: Balance Sheet ($ in millions) ASSETS 2017 2016 2015 LIABILITIES 2017 2016 2015 Current assets Current liabilities Cash and Accounts $57.40 $61.60 $81.90 $20.40 $22.20 $26.10 cash items payable Accounts $28.02 $27.00 Short-term notes Other current $4.20 $4.70 $101.00 $26.40 $6.40 $7.37 $8.00 receivable liabilities Total current liabilities $56.52 $54.20 Inventory $187.13 $186.90 $198.20 Long-term debt Other current assets $31.00 $34.27 $135.10 $3.20 $4.50 $9.20 $53.80 Other long- term liabilities $5.50 $52.40 $50.20 Total current assets $329.07 $329.70 $360.30 Total liabilities $39.70 $91.17 $194.50 OWNERS' EQUITY Net fixed assets $275.20 $277.00 $289.40 Common stock $230.00 $230.00 $230.00 Retained earnings $423.37 $367.23 $307.00 Other assets $88.80 $81.70 $81.80 Total owners' equity $653.37 $597.23 $537.00 TOTAL LIABILITIES AND OWNERS' TOTAL ASSETS $693.07 $688.40 $731.50 EQUITY $693.07 $688.40 $731.50 Hudson Valley Realty Hudson Valley Realty owns a number of commercial properties in suburban towns north and east of New York City. The firm previously rented one of them to an upscale department store that was renowned for jewelry and fine china, but that also sold everything from chandeliers to bed linens to lawn furniture. The building became vacant two years ago when the tenant broke a ten-year lease after only three years of occupancy and unexpectedly filed for bankruptcy. Hudson Valley considered any effort to recover early termination penalties a waste of time and money. Interest expense, high real estate taxes, insurance, and security costs make it extremely expensive to hold vacant property in this area. Although Hudson Valley is obviously eager to find a new tenant, it does not want another unexpected vacancy to have a serious negative effect on its investment returns. Hudson Valley wants to be sure that the new tenant will be financially stable and will likely stay for at least the full term of the lease. Vermont Heritage, a well-known furniture chain that targets affluent customers with traditional tastes, has expressed interest in the location. Peter Cortland, Hudson Valley's rental manager, wants to take a close look at the potential tenant's financial statements before entering into more serious negotiations. Vermont Heritage has submitted the following audited income statements and balance sheets for the last three years in the popup window, LOADING... Questions 1. Look at Vermont Heritage's sales revenue, EBIT, and net income over the three-year period. Would you classify it as a growing, diminishing, or stable company? 2. Look at Vermont Heritage's expense accounts, cost of goods sold, and selling and administrative expenses. Do they seem to be roughly proportional to sales? Do any of these categories seem to be growing out of control? 3. Depreciation expense is the same for all three years. What does that tell you about Vermont Heritage's growth? 4. Look at Vermont Heritage's EBIT, interest expense, and debt accounts (current liabilities, long-term debt, and other liabilities) over the three-year period. Comparing debt to equity, do you think the company seems to have excessive debt? Would you expect the company to have any problems meeting its interest payments? 5. Dividends have increased as a percentage of net income. Why do you think the company decided to pay out more of its earnings to shareholders? 6. Compare current assets with current liabilities. Would you expect Vermont Heritage to have any problems meeting its short-term obligations? 7. Overall, do you think Vermont Heritage will be a relatively safe tenant for Hudson Valley's building? Vermont Heritage: Income Statement ($ in millions) 2017 2016 2015 Sales $949.00 $955.10 $907.30 Cost of goods sold $466.60 $472.80 $436.60 Gross profit $482.40 $482.30 $470.70 Selling and administrative expenses $332.30 $320.80 $315.60 Depreciation $21.30 $21.30 $21.30 Other income (expenses) $1.40 ($9.20) ($11.90) EBIT $130.20 $131.00 $121.90 Interest expense (net of interest income) $0.80 $0.60 $0.60 Taxable income $129.40 $130.40 $121.30 Taxes $49.20 $50.10 $45.90 Net income Dividends $80.20 $80.30 $75.40 $24.06 $20.08 $18.85 Vermont Heritage: Balance Sheet ($ in millions) ASSETS 2017 2016 2015 LIABILITIES 2017 2016 2015 Current assets Current liabilities Cash and Accounts $57.40 $61.60 $81.90 $20.40 $22.20 $26.10 cash items payable Accounts $28.02 $27.00 Short-term notes Other current $4.20 $4.70 $101.00 $26.40 $6.40 $7.37 $8.00 receivable liabilities Total current liabilities $56.52 $54.20 Inventory $187.13 $186.90 $198.20 Long-term debt Other current assets $31.00 $34.27 $135.10 $3.20 $4.50 $9.20 $53.80 Other long- term liabilities $5.50 $52.40 $50.20 Total current assets $329.07 $329.70 $360.30 Total liabilities $39.70 $91.17 $194.50 OWNERS' EQUITY Net fixed assets $275.20 $277.00 $289.40 Common stock $230.00 $230.00 $230.00 Retained earnings $423.37 $367.23 $307.00 Other assets $88.80 $81.70 $81.80 Total owners' equity $653.37 $597.23 $537.00 TOTAL LIABILITIES AND OWNERS' TOTAL ASSETS $693.07 $688.40 $731.50 EQUITY $693.07 $688.40 $731.50
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