Jim Harrod knew that service, above all, was important to his customers. Jim and Becky Harrod had opened their first store in Omaha, Nebraska in 1997, Harrod's carried a full line of sporting goods including everything from baseball bats and uniforms to fishing gear and hunting equipment. By the year 2015, there were twelve Harrod stores producing $5 million in total sales and generating a profit of over $200,000 per series cach year in June and this generates a lot of interest in baseball (and softball as well). Jim, who had been a walk-on third string offensive tackle at the University of Nebraska (the Cornhuskers in Lincoln, Nebraska), took great pride in his stores as well as his prior university affiliation. He and Becky (also a University of Nebraska graduate in the early 1990s) contributed S2,000 annually to the University of Nebraska athletic program. The growth in the stores was the good news for Jim and Becky. The less than good news was the intense competition that they faced. Not only were they forced to compete with nationally established sporting good stores such as Oshman's and the year. On the positive side, there was an increasing demand for sporting goods as leisure time activities continued to grow. Also, the state of Nebraska, where all twelve located, experiencing moderate growth. Finally, there had been a sharp upturn in the last decade for women's sporting goods equipment. This was particularly true of softball uniforms for high school, college, and city league women's teams. Jim's wife Becky was one of the top softball players in the city of Omaha, and her extensive contacts throughout the state help to bring in new business. While Nebraska is primarily known as a football state, Omaha actually hosts the college baseball world stores were was Academy, but represented intense competition for the sporting goods dollar. The national stores were extremely competitive in terms of pricing However, Jim, Becky and their employees offered great personal service, and they hoped this would allow them to continue with their specialty niche. Walmart also In January of 2016, Becky, who served as the company's chief financial officer, walked into Jim's office and said, "I've had it with the First National Bank of Omaha. charge us 2% percentage points over prime. The prime rate is the rate at which banks make loans to their most creditworthy customers. It was 4.75 percent at the time Becky had visited the bank, so that the total rate on the loan would be 7.25 percent. It was not so much the total rate that Becky objected to, as the fact that Harrod's was being asked to pay 2% percent over prime. She felt that Harrod's was a strong enough company that one percent over prime should be all that the bank required. Her banker told her he would review the firm's financial statements with her next week and reconsider the premium Harrod's was being asked to pay over prime. While Becky knew the bank "crunched all the numbers," she decided to do some additional financial analysis on her own. She had a bachelor's degree in finance with a 3.3 GPA. She began by examining Figures 1, 2, and 3. is willing to renew our loan and line of credit, but the bank wants to 1. Compute the profitability ratios, including the a and b components (DuPont Methods) of ratios 2 and 3 as shown in the textbook. The profitability ratios should be shown for all three years. 2. Write a brief one-paragraph description of any trends that appear to have taken place over the three-year time period. 3. In examining the income statement in Figure 1, note that there was an extraordinary loss of S170,000 in 2015. This might have represented uninsured losses from a fire, a lawsuit settlement, etc. It probably does not represent a recurring event or affect the earnings capability of the fim. For that reason, the astute financial analyst might add back in the extraordinary loss to gauge the true operating carnings of the firm. Since it was a tax-deductible item, we must first multiply by (1-tax rate) before adding it back in. The tax rate was 35 percent for the year." Required S170,000 .65 S110,500 Extraordinary loss (1-tax rate) Aftertax addition to profits from eliminating the extraordinary loss from net income The more representative net income number for 2015 would now be: Initially reported (Figure 1) Adjustment for extraordinary loss being eliminated Adjusted net income $200,318 +110,500 S310,818 This adjustment was made because the $170.000 deduction saved 35 percent of this amount in taxes If we eliminate the S170,000, the tax benefit would also be climinated. Thus, the firm would only benefit by 65 percent of SI70,000, based on a 35 percent tax rate. The aflertax benefit of the tax adjustment for the extraoridinary loss is S110.500. Harrnd's Sporting Goods Based on the adjusted net income figure of $310,818, recompute the profitability ratios for 2015 (include parts a and b for ratios 2 and 3). 4. Now with the adjusted net income numbers as part of the ratios for 2015, write a brief one-paragraph description of trends that appear to have taken place over the three-year time period (refer back to the data in Question 1 for 2013 and 2014). 5. Once again, using the revised profitability ratios for 2015 that you developed in Question 3, write a complete one paragraph analysis of the company's profitability ratios compared to the industry ratios (figure 3). Make sure to include asset turnover and debt to total assets as supplemental material in your analysis. 6. Harrod's has a superior sales to total assets ratio compared to the industry. For 2015, compute ratios 4, 6 and 7 as described in the text and compare them to industry data to see why this is so. Write a brief one-paragraph description of the results. Note: for ratio 4, only half the sales are on credit terms. 7. Conclusion: Based on your analysis in answering Questions 4 and 5, do you think that Becky Harrod has a legitimate complaint about being charged 2% percent over prime instead of one percent over prime? There is no absolute right answer to this question, but use your best judgment. Required Figure 1 Harrod's Sporting Goods Income Statement (2013-2015) 2013 2014 2015 Sales $4,269,871 $4,483,360 $5,021,643 2,991,821 2,981,434 3,242,120 Cost of goods sold Gross $1,278,050 $1,501,926 $1,779,523 Profit Selling and administrative expense 865,450 1,004,846 1,175,100 S412,600 $497,080 $604,423 Operating profit Interest 115,300 122,680 126,241 expense Extraordinary 170,000 loss Net income before 297,300 374,400 308,182 taxes Taxes 104,100 31,300 107,864 Net $ 193,200 $ 243,100 $ 200,318 income Figure 2 Harrod's Sporting Goods Balance Sheet (2013-2015) 2013 2014 2015 Cash S 121,328 S 125,789 99,670 Marketable 56,142 66,231 144,090 securities wwww. Accounts 341,525 216,240 398,200 reeivable Inventory 972,456 1,250,110 1,057,008 Total current $1,491,451 S1,658,370 S1,698,968 assets 1.678,749 702.280 1,811,142 Net plant and equipment Total $3,170,200 $3,360,650 S3,510.110 assets enoon Xunuodeenm Liabilities and Stockholders' Equity $ 539,788 $ 576,910 S 601,000 Accounts payable Notes 160,540 180,090 203,070 payable Total current S700,328 $757,000 S804,070 liabilities Long-term liabilities 1,292,995 1,372,240 1,265,272 Total S1,965,600 $2,049,995 $2,176,310 liabilities Common 367,400 368,000 368,000 stock Retained 837,200 942,665 965,800 earnings Total Stockholders" 1,204,600 1,310,655 1,333,800 equity Total liabilities and stockholders" $3,170,200 $3,360,650 S3,510,110 equity Figure 3 Harrod's Sporting Goods Selected Industry Ratios for 2015 1. Net income/Sales Net income/Total Assets Sales Total Assets Net income/Stockholder's Equity Debt/Total Assets Sales/Receivables 4.51% 5.10% 1.33 x 9.80% 2a. 2b. 3a. 3b. 0.48 5.75 x 4. Withdrawal of funds in the form of dividends or gther means makes the incrcase in retained carnings less than net income. Cupyreht Case 1 S. Sales/Inventory 6. 3.01 x Sales/Fixed Assets 3.20 x Home Insert Page Layout Formulas Data Review View X Cut Calibri (Body) A. Av Wrap Text Percentage 11 Copy A Merge & Center % > Con Form Paste Format B11 : x v fx A B 2 Mini-case #1- Chapter 3 3 Spring 2018 51. Profitabillty Ratios: 2013 2014 2015 Industry 7 la. Profit marginnet income/sales 4.50% 5.40% 4.00% 916. Retun on investment (assets)net income / total assets 6.10N 7.40% 5.80% 10 11 E DuPont = (net income / sales) x sales / total assets) 12 13 ld. Return on equity net income/ stockholders equity 14 15 le. Return on equity = retum on investment / (1- debt / assets) 16 17 3 Profitability Ratios: (2015 recalculated) 2013 2014 2015 18 19 la. Profit margin net income / sales 0.00% 20 21 ib Returm on investment (assets)net income/total assets 0.00% 23 1e. DuPont (net incame /sales x (sales / total ussets) 0.cON 24 25 1d. Return on equity net incone / tockholden equity 26 27 1e. Return on equityreturn on investment/(1 dett /assets) 0.00N 0.00% 29 6.Selected Asset Utilisation Ration 2015 Industry 31 Ga Recevables turnoereredt valen/average receivales 31 33 mentory turnover sales/avere investory 34 35 . Fed usset urnoversales/averge fieed aets