You have just been hired as a financial analyst for Lydex Company, a manufacturer of safety helmets.
Question:
You have just been hired as a financial analyst for Lydex Company, a manufacturer of safety helmets. Your boss has asked you to perform a comprehensive analysis of the company’s financial statements, including comparing Lydex’s performance to its major competitors. The company’s financial statements for the last two years are as follows: |
Lydex Company Comparative Balance Sheet | ||||
This Year | Last Year | |||
Assets | ||||
Current assets: | ||||
Cash | $ | 860,000 | $ | 1,100,000 |
Marketable securities | 0 | 300,000 | ||
Accounts receivable, net | 2,300,000 | 1,400,000 | ||
Inventory | 3,500,000 | 2,000,000 | ||
Prepaid expenses | 240,000 | 180,000 | ||
Total current assets | 69,00,000 | 49,80,000 | ||
Plant and equipment, net | 9,320,000 | 8,950,000 | ||
Total assets | $ | 16,220,000 | $ | 13,900,000 |
Liabilities and Stockholders' Equity | ||||
Liabilities: | ||||
Current liabilities | $ | 3,910,000 | $ | 2,780,000 |
Note payable, 10% | 3,600,000 | 3,000,000 | ||
Total liabilities | 7,510,000 | 5,780,000 | ||
Stockholders' equity: | ||||
Common stock, $75 par value | 7,500,000 | 7,500,000 | ||
Retained earnings | 1,210,000 | 6,500,000 | ||
Total stockholders' equity | 87,100,000 | 81,500,000 | ||
Total liabilities and stockholders' equity | $ | 16,220,000 | $ | 13,930,000 |
Lydex Company Comparative Income Statement and Reconciliation | ||||
This Year | Last Year | |||
Sales (all on account) | $ | 15,860,000 | $ | 13,580,000 |
Cost of goods sold | 12,688,000 | 10,185,000 | ||
Gross margin | 3,172,000 | 3,395,000 | ||
Selling and administrative expenses | 1,006,000 | 1,604,000 | ||
Net operating income | 2,166,000 | 1,791,000 | ||
Interest expense | 366,000 | 306,000 | ||
Net income before taxes | 1,800,000 | 1,485,000 | ||
Income taxes (30%) | 540,000 | 445,500 | ||
Net income | 1,260,000 | 1,039,500 | ||
Common dividends | 400,000 | 519,750 | ||
Net income retained | 860,000 | 519,750 | ||
Beginning retained earnings | 1,010,000 | 490,250 | ||
Ending retained earnings | $ | 1,870,000 | $ | 1,010,000 |
To begin your assigment you gather the following financial data and ratios that are typical of companies in Lydex Company’s industry: |
Current ratio | 2.4 | |
Acid-test ratio | 1.1 | |
Average collection period | 40 | days |
Average sale period | 60 | days |
Return on assets | 9.3 | % |
Debt-to-equity ratio | .66 | |
Times interest earned ratio | 5.9 | |
Price-earnings ratio | 10 | |
Part 1
Required: |
1. | You decide first to assess the company’s performance in terms of debt management and profitability. Compute the following for both this year and last year: (Round your intermediate calculations and final percentage answers to 1 decimal place. i.e., 0.123 should be considered as 12.3%. Round the rest of the intermediate calculations and final answers to 2 decimal places.) |
a. | The times interest earned ratio. |
b. | The debt-to-equity ratio. |
c. | The gross margin percentage. |
d. | The return on total assets. (Total assets at the beginning of last year were $13,070,000.) |
e. | The return on equity. (Stockholders’ equity at the beginning of last year totaled $7,990,250. There has been no change in common stock over the last two years.) |
f. | Is the company’s financial leverage positive or negative? |
Part 2
2. | You decide next to assess the company’s stock market performance. Assume that Lydex’s stock price at the end of this year is $94 per share and that at the end of last year it was $62. For both this year and last year, compute: (Round your intermediate calculations and final answers to 2 decimal places. For percentages 0.1234 should be considered as 12.34%.) |
a. | The earnings per share. |
b. | The dividend yield ratio. |
c. | The dividend payout ratio. |
d. | The price-earnings ratio. |
e. | The book value per share of common stock. |
Part 3
3. | You decide, finally, to assess the company’s liquidity and asset management. For both this year and last year, compute: (Use 365 days in a year. Round your intermediate calculations and final answer to 2 decimal places.) |
a. | Working capital. |
b. | The current ratio. |
c. | The acid-test ratio. |
d. | The average collection period. (The accounts receivable at the beginning of last year totaled $1,670,000.) |
e. | The average sale period. (The inventory at the beginning of last year totaled $2,030,000.) |
f. | The operating cycle. |
g. | The total asset turnover. (The total assets at the beginning of last year totaled $13,070,000.) |
Managerial Accounting
ISBN: 978-0077522940
15th edition
Authors: Ray Garrison, Eric Noreen, Peter Brewer