Question:
You have just been hired as a stock analyst for a large stock brokerage company. Your first assignment is to analyze the performance of Gidley Electronics. The companys
balance sheet for 2014 and 2015 is presented below and on the next page.
The companys income statement and reconciliation of retained earnings for the years ended December 31, 2014 and 2015 are presented below.
The market prices of the companys stock as of January 1, 2014, December 31, 2014, and December 31, 2015, were $65, $69, and $54 per share, respectively. The January 1, 2014, balance in shareholders equity was $450,000 there were no changes in the number of common shares outstanding or in accounts receivable during 2014, and the income tax rate was 40 percent for 2014 and 2015. Total assets as of January 1, 2014, were $1,450,000.
REQUIRED:
Answer the following questions (including any relevant ratios in your answers) for both 2014 and 2015.
Unless the December 31, 2013, balance is provided, assume that the December 31, 2014, balance reflects the average balance during 2014.
1. How effective is the company at managing investments made by the equity owners?
2. Is the company using debt in the best interests of the equity owners?
3. Can the company meet its current obligations using current assets? Using cash-like assets?
4. How sensitive are stock prices to changes in earnings?
5. How many days is the average account receivable outstanding? Are the days outstanding increasing ordecreasing?
Balance Sheet
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial...
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2015 2014 Assets Current assets Cash Short-term marketable securities Accounts receivable Inventory Prepaid expenses S 110,000 175,000 350,000 290,000 55,000 S 980,000 650,000 (165,000) $1,465,000 $ 115,000 220,000 400,000 240,000 35,000 $1,010,000 590,000 (130,000) $1,470,000 Total curent assets Property, plant, and equipment Less: Accumulated depreciation Total assets Liabilities and Shareholders' Equity Current liabilities $ 60,000 15,000 50,000 55,000 110,000 $ 290,000 380,000 220,000 145,000 430,000 $1,465,000 $ 50,000 20,000 35,000 35,000 135,000 $275,000 440,000 170,000 115,000 470,000 $1,470,000 Accounts payable Wages payable Unearned revenue Income taxes payable Current portion of long-term debt Total current liabilities Bonds payable Common stock ($10 par value) Additional paid-in capital Retained earnings Total liabilities and shareholders' equity 2015 2014 Income Statement Revenue $1,405,000 $1,255,000 3,010,000 $3,855,000 $4,265,000 Net cash sales Net credit sales 2,450,000 Total revenue Cost of goods sold Beginning inventory Net purchases Cost of goods available for sale Less: Ending inventory $240,000 300,000 2,005,000 $1,995,000 $2,305,000 240,000 $1,705,000 $2,065,000 $2,150,000 $2,200,000 1,755,000 290,000 Cost of goods sold Gross profit Selling and administrative expenses 100,000 (450,000 (620,000 $1,005,000 $1,030,000 165,000 Depreciation expense (95,000) (470,000) (580,000) General selling expenses General administrative expenses Net operating income Interest expense Net income from continuing 150,000 $855,000 345,000 $510,000 $865,000 350,000 $515,000 operations before taxes ncome taxes Net income Reconciliation of Retained Earnings Beginning retained earnings balance Plus: Net income Less: Dividends Ending retained earnings balance $470,000 510,000 (550,000) $430,000 $165,000 515,000 (210,000 $470,000