NOVA PRODUCTS

INCOME STATEMENT $($$ millions$)$

$201920202021$

Sales $5,957\mathrm{.}86,228\mathrm{.}36,876\mathrm{.}0$

Cost of Goods Sold $2,156\mathrm{.}92,217\mathrm{.}62,481\mathrm{.}8$

Gross Profit $3,800\mathrm{.}94,010\mathrm{.}74,394\mathrm{.}2$

Selling, General, & Administrative Expense $2,889\mathrm{.}52,979\mathrm{.}63,213\mathrm{.}6$

Operating Income Before Depreciation $911\mathrm{.}41,031\mathrm{.}11,180\mathrm{.}6$

Depreciation, Depletion, & Amortization $109\mathrm{.}0124\mathrm{.}8123\mathrm{.}5$

Operating Profit $802\mathrm{.}4906\mathrm{.}31,057\mathrm{.}1$

Interest Expense $71\mathrm{.}159\mathrm{.}749\mathrm{.}0$

Non$-$Operating Income$/$Expense $36\mathrm{.}325\mathrm{.}3(0\mathrm{.}3)$

Special Items $(77\mathrm{.}9)(36\mathrm{.}3)(14\mathrm{.}3)$

Pretax Income $689\mathrm{.}7835\mathrm{.}6993\mathrm{.}5$

Total Income Taxes $240\mathrm{.}3292\mathrm{.}3318\mathrm{.}9$

Minority Interest $4\mathrm{.}58\mathrm{.}79\mathrm{.}8$

Income Before Extraordinary Items & Discontinued Operations $444\mathrm{.}9534\mathrm{.}6664\mathrm{.}8$

Extraordinary Items $(0\mathrm{.}3)0\mathrm{.}00\mathrm{.}0$

Discontinued Operations $0\mathrm{.}00\mathrm{.}00\mathrm{.}0$

Adjusted Net Income $444\mathrm{.}6534\mathrm{.}6664\mathrm{.}8$

BALANCE SHEET $($$ millions$)$

$201920202021$

ASSETS

Cash & Short$-$Term Investments $508\mathrm{.}5606\mathrm{.}8694\mathrm{.}0$

Net Receivables $519\mathrm{.}5555\mathrm{.}4599\mathrm{.}8$

Inventories $612\mathrm{.}5614\mathrm{.}7653\mathrm{.}4$

Other Current Assets $248\mathrm{.}6271\mathrm{.}3278\mathrm{.}9$

Total Current Assets $1,889\mathrm{.}12,048\mathrm{.}22,226\mathrm{.}1$

Gross Plant, Property & Equipment $1,552\mathrm{.}41,548\mathrm{.}41,728\mathrm{.}9$

Accumulated Depreciation $779\mathrm{.}7779\mathrm{.}3873\mathrm{.}3$

Net Plant, Property & Equipment $772\mathrm{.}7769\mathrm{.}1855\mathrm{.}6$

Intangibles $0\mathrm{.}020\mathrm{.}646\mathrm{.}2$

Deferred Charges $0\mathrm{.}00\mathrm{.}00\mathrm{.}0$

Other Assets $530\mathrm{.}8489\mathrm{.}6434\mathrm{.}4$

TOTAL ASSETS $3,192\mathrm{.}63,327\mathrm{.}53,562\mathrm{.}3$

LIABILITIES

Long Term Debt Due In One Year $1\mathrm{.}23\mathrm{.}14\mathrm{.}4$

Notes Payable $87\mathrm{.}6602\mathrm{.}1239\mathrm{.}7$

Accounts Payable $404\mathrm{.}1379\mathrm{.}9400\mathrm{.}1$

Taxes Payable $375\mathrm{.}9353\mathrm{.}0321\mathrm{.}9$

Other Current Liabilities $592\mathrm{.}2637\mathrm{.}4621\mathrm{.}6$

Total Current Liabilities $1,461\mathrm{.}01,975\mathrm{.}51,587\mathrm{.}7$

Long Term Debt $1,236\mathrm{.}3767\mathrm{.}0877\mathrm{.}7$

Deferred Taxes $30\mathrm{.}635\mathrm{.}450\mathrm{.}6$

Investment Tax Credit $0\mathrm{.}00\mathrm{.}00\mathrm{.}0$

Minority Interest $29\mathrm{.}037\mathrm{.}046\mathrm{.}0$

Other Liabilities $510\mathrm{.}8640\mathrm{.}3629\mathrm{.}0$

TOTAL LIABILITIES $3,267\mathrm{.}73,455\mathrm{.}23,191\mathrm{.}0$

EQUITY

Common Stock $89\mathrm{.}189\mathrm{.}690\mathrm{.}3$

Capital Surplus $938\mathrm{.}01,019\mathrm{.}51,188\mathrm{.}4$

Retained Earnings $899\mathrm{.}9943\mathrm{.}91,473\mathrm{.}0$

Less: Treasury Stock $2,002\mathrm{.}12,180\mathrm{.}72,380\mathrm{.}4$

TOTAL EQUITY $(75\mathrm{.}1)(127\mathrm{.}7)371\mathrm{.}3$

TOTAL LIABILITIES & EQUITY $3,192\mathrm{.}63,327\mathrm{.}53,562\mathrm{.}3$

$201920202021$

Book Value of Shareholders' Equity $(75\mathrm{.}1)(127\mathrm{.}7)371\mathrm{.}3$

Debt$-$to Assets$-$Ratio $102\mathrm{.}3523147103\mathrm{.}83771689\mathrm{.}57695871$

Times$-$Interest$-$Earned $10\mathrm{.}715\mathrm{.}021\mathrm{.}3$

The debt$-$to$-$asset ratio in $2019$ and $2020$ means that the company was highly leveraged and relied more on debt than equity.

Looking at the times$-$interest$-$earned in the year $2020,$ which is $15,$ would be between an A and an AA based on the chart in the textbook.

$201920202021$

EBIT $760\mathrm{.}8895\mathrm{.}31,042\mathrm{.}5$

Percentage of decline $90\mathrm{.}793\mathrm{.}395\mathrm{.}3$

The percentages for $2019$ to $2020$ means they are very likely to be able to cover its interest in all three years.

The $$60$ million interst expense reduced its taxes by $$21$ million in $2020.$ See formula in cell to the right. $21.$ Based on this information. Can you answer these questions? Answer question $($a$)$ and $($b$)$ again for $2020$ assuming the company had borrowed an additional $$3$ billion in debt at $8$ percent interest at the start of the year and distributed the proceeds to shareholders as a special dividend. You may ignore the effect of added interest expense on Nova$$s balance sheet. Might shareholders benefit from such an increase in financial leverage? Explain.

Based on your analysis, is Nova heavily or modestly indebted? Should the company acquire more debt, or shed existing debt? Why?