You are an investor who is considering adding Chem-Med to your portfolio. As such, you are...

  

 

  

Transcribed Image Text:

You are an investor who is considering adding Chem-Med to your portfolio. As such, you are interested in the company's record of profitability, prospects for the future, degree of risk, and how it compares with others in the industry. From that point of view, answer the following questions: 1. What was Chem-Med's rate of sales growth in 2015? What is it forecasted to be in 2016, 2017, and 2018? 2. What was Chem-Med's net income growth in 2015? What is it forecasted to be in 2016, 2017, and 2018? Is projected net income growing faster or slower than projected sales? After computing these values, take a hard look at the 2016 income statement data to see if you want to make any adjustments. 3. How does Chem-Med's current ratio for 2015 compare to Pharmacia's? How does it compare to the industry average? Compute Chem-Med's current ratio for 2018. Is there any problem with it? 4. What is Chem-Med's total debt-to-assets ratio for 2015, 2016, 2017, 2018? Is any trend evident in the four-year period? Does Chem-Med in 2015 have more or less debt than the average company in the industry? 5. What is Chem-Med's average accounts receivable collection period for 2015, 2016, 2017, 2018? Is the period getting longer or shorter? What are the consequences? 6. How does Chem-Med's return-on-equity ratio (ROE) compare to Pharmacia's and the industry for 2015? Using the Du Pont method, compare the positions of Chem-Med and Pharmacia. Compute ROE for each company using the following formula: ROE Profit margin Asset turnover/(1-Debt to assets) Compare the results to determine the sources of ROE for each company. = Figure 1 CHEM-MED COMPANY Income Statements 2013-2015 (in 000s) Pro Forma Income Statements. 2013 2014 2015 2016 2017 2018 $5,340 $ 777 $3,051 $3,814 $7,475 Net sales (all credit) $10,466 257 995 1,040 1,716 2,154 Cost of goods sold 3,054 520 2,056 2,774 3,624 5,321 7,412 Gross profit 610 705 Selling, etc., expenses 964 1,520 2,120 2,645 0 Other inc (exps)* 0 0 500 0 0 1,351 1,810 2,604 3,201 4,767 Operating profit (90) 11 (101) 1,276 1,716 75 94 202 302 434 Interest expense 2,402 2,899 4,333 Income before tax Income taxes (40% in 1986; 33% thereafter) 510 566 793 957 1,430 0 ($ 101) $ 766 $1,150 Net income $1,609 $1,943 $ 2.903 0 0 0 0 0 0 Dividends paid Increase in retained earnings ($ 101) $ 766 $1,150 2,326 2,326 2,347 $1,609 2,347 S 0.83 $1,943 2,347 $ 2,903 2,347 Average number of shares** $ 0.69 ($ 0.04) $ 0.33 $ 0.49 Earnings per share $ 1.24 * Other Inc (Exps) refers to extraordinary gains and losses. In 2016, $500,000 is expected from Pharmacia, Inc., in settlement of their suit. **Shares are not publicly traded. Figure 2 Assets: Cash and equivalents Accounts receivable Inventories Other current Total current assets Property, plant, and equipment Less: accumulated depreciation Property, plant, and equipment, Liabilities: net Other fixed assets Total assets Accounts payable Short-term debt Total current liabilities Long-term debt Total liabilities Equity: Common stock Retained earnings Total equity Total liabilities and equity CHEM-MED COMPANY Balance Sheets Pro Forma Balance Sheets As of Dec. 31, years ended: 2014 2015 2016 2017 2018 $ 103 $167 $ 205 S422 S 101 409 564 907 1,495 2,351 302 960 1,102 1,443 798 28 59 29 41 57 11 873 1,720 2,255 3,417 3,261 403 1,901 81 4,301 5,531 8,923 2,298 2,917 82 346 2,216 2,571 413 522 588 1,820 3,888 5,009 8,335 0 200 215 399 200 101 $3,190 $4,491 $2,223 $6,343 $8,641 $11,995 210 $ 405 $ 551 S 771 $1,080 $ 1,512 35 39 42 59 82 135 245 444 593 830 1,162 1,647 17 19 21 27 50 17 262 463 614 857 1,212 1,664 2,062 2,062 2,062 2,062 2,062 2,062 665 1.815 3.424 5,366 8,269 (101) 1,961 2,727 3,877 5,486 7,428 10,331 $2,223 $3,190 $4,491 $6,343 $8,641 $11.995 As of Dec. 31, years ended: 2013 S 124 100 151 Figure 3 Biotechnology Industry Statistics Median Company in SIC 2831 Biological Products* 2013 2014 2015 2.5 2.3 2.4 Current ratio Quick ratio 1.2 1.1 1.3 Inventory turnover 5.5 5.6 5.7 Total asset turnover 1.16 1.18 Return on sales 4.00% 5.00% Return on assets 4.64$ 5.90% Return on equity 8.44% 12.29% Total debt to assets 0.45 0.52 Selected Statistics Pharmacia Company 2013 2014 2015 Current ratio 2.8 2.7 2.8 Quick ratio 1.5 1.3 1.6 Inventory turnover 5.6 5.7 5.8 Total asset turnover 1.9 2 1.9 Return on sales 6.00% 6.50% 7.00% Return on assets 11.40% 13.00% 13.30% Return on equity 19.04% 27.66% 29.56% Total debt to assets 0.40 0.53 0.55 Price-earnings ratio 13.7 14 15 Average stock price $21.78 $24.92 $31.50 * Source: Dun's Industry Ratios. The data have been adjusted for this case. 1.15 4.00% 4.60% 7.64% 0.40 You are an investor who is considering adding Chem-Med to your portfolio. As such, you are interested in the company's record of profitability, prospects for the future, degree of risk, and how it compares with others in the industry. From that point of view, answer the following questions: 1. What was Chem-Med's rate of sales growth in 2015? What is it forecasted to be in 2016, 2017, and 2018? 2. What was Chem-Med's net income growth in 2015? What is it forecasted to be in 2016, 2017, and 2018? Is projected net income growing faster or slower than projected sales? After computing these values, take a hard look at the 2016 income statement data to see if you want to make any adjustments. 3. How does Chem-Med's current ratio for 2015 compare to Pharmacia's? How does it compare to the industry average? Compute Chem-Med's current ratio for 2018. Is there any problem with it? 4. What is Chem-Med's total debt-to-assets ratio for 2015, 2016, 2017, 2018? Is any trend evident in the four-year period? Does Chem-Med in 2015 have more or less debt than the average company in the industry? 5. What is Chem-Med's average accounts receivable collection period for 2015, 2016, 2017, 2018? Is the period getting longer or shorter? What are the consequences? 6. How does Chem-Med's return-on-equity ratio (ROE) compare to Pharmacia's and the industry for 2015? Using the Du Pont method, compare the positions of Chem-Med and Pharmacia. Compute ROE for each company using the following formula: ROE Profit margin Asset turnover/(1-Debt to assets) Compare the results to determine the sources of ROE for each company. = Figure 1 CHEM-MED COMPANY Income Statements 2013-2015 (in 000s) Pro Forma Income Statements. 2013 2014 2015 2016 2017 2018 $5,340 $ 777 $3,051 $3,814 $7,475 Net sales (all credit) $10,466 257 995 1,040 1,716 2,154 Cost of goods sold 3,054 520 2,056 2,774 3,624 5,321 7,412 Gross profit 610 705 Selling, etc., expenses 964 1,520 2,120 2,645 0 Other inc (exps)* 0 0 500 0 0 1,351 1,810 2,604 3,201 4,767 Operating profit (90) 11 (101) 1,276 1,716 75 94 202 302 434 Interest expense 2,402 2,899 4,333 Income before tax Income taxes (40% in 1986; 33% thereafter) 510 566 793 957 1,430 0 ($ 101) $ 766 $1,150 Net income $1,609 $1,943 $ 2.903 0 0 0 0 0 0 Dividends paid Increase in retained earnings ($ 101) $ 766 $1,150 2,326 2,326 2,347 $1,609 2,347 S 0.83 $1,943 2,347 $ 2,903 2,347 Average number of shares** $ 0.69 ($ 0.04) $ 0.33 $ 0.49 Earnings per share $ 1.24 * Other Inc (Exps) refers to extraordinary gains and losses. In 2016, $500,000 is expected from Pharmacia, Inc., in settlement of their suit. **Shares are not publicly traded. Figure 2 Assets: Cash and equivalents Accounts receivable Inventories Other current Total current assets Property, plant, and equipment Less: accumulated depreciation Property, plant, and equipment, Liabilities: net Other fixed assets Total assets Accounts payable Short-term debt Total current liabilities Long-term debt Total liabilities Equity: Common stock Retained earnings Total equity Total liabilities and equity CHEM-MED COMPANY Balance Sheets Pro Forma Balance Sheets As of Dec. 31, years ended: 2014 2015 2016 2017 2018 $ 103 $167 $ 205 S422 S 101 409 564 907 1,495 2,351 302 960 1,102 1,443 798 28 59 29 41 57 11 873 1,720 2,255 3,417 3,261 403 1,901 81 4,301 5,531 8,923 2,298 2,917 82 346 2,216 2,571 413 522 588 1,820 3,888 5,009 8,335 0 200 215 399 200 101 $3,190 $4,491 $2,223 $6,343 $8,641 $11,995 210 $ 405 $ 551 S 771 $1,080 $ 1,512 35 39 42 59 82 135 245 444 593 830 1,162 1,647 17 19 21 27 50 17 262 463 614 857 1,212 1,664 2,062 2,062 2,062 2,062 2,062 2,062 665 1.815 3.424 5,366 8,269 (101) 1,961 2,727 3,877 5,486 7,428 10,331 $2,223 $3,190 $4,491 $6,343 $8,641 $11.995 As of Dec. 31, years ended: 2013 S 124 100 151 Figure 3 Biotechnology Industry Statistics Median Company in SIC 2831 Biological Products* 2013 2014 2015 2.5 2.3 2.4 Current ratio Quick ratio 1.2 1.1 1.3 Inventory turnover 5.5 5.6 5.7 Total asset turnover 1.16 1.18 Return on sales 4.00% 5.00% Return on assets 4.64$ 5.90% Return on equity 8.44% 12.29% Total debt to assets 0.45 0.52 Selected Statistics Pharmacia Company 2013 2014 2015 Current ratio 2.8 2.7 2.8 Quick ratio 1.5 1.3 1.6 Inventory turnover 5.6 5.7 5.8 Total asset turnover 1.9 2 1.9 Return on sales 6.00% 6.50% 7.00% Return on assets 11.40% 13.00% 13.30% Return on equity 19.04% 27.66% 29.56% Total debt to assets 0.40 0.53 0.55 Price-earnings ratio 13.7 14 15 Average stock price $21.78 $24.92 $31.50 * Source: Dun's Industry Ratios. The data have been adjusted for this case. 1.15 4.00% 4.60% 7.64% 0.40

Answer rating: 100% (QA)

Part A Chem Meds Sales Growth Increase in Sales for the year 2015 3814 3051 763 Growth in 2015 763 3051 X 100 25 Expected Increase in Sales of 2016 5340 3814 1526 Expected Growth in 2016 1526 3814 X 1... View the full answer