Question

Data for Barry Computer Co. and its industry averages follow. The firm's debt is priced at par, so the market value of its debt equals its book value. Since dollars are in thousands, number of shares are shown in thousands too.

Barry Computer Company:
Balance Sheet as of December 31, 2019 (In Thousands)
Cash	$	140,070		Accounts payable	$	140,070
Receivables		250,125		Other current liabilities		130,065
Inventories		230,115		Notes payable to bank		60,030
Total current assets	$	620,310		Total current liabilities	$	330,165
				Long-term debt		200,100
Net fixed assets		380,190		Common equity (47,023.5 shares)		470,235
Total assets	$	1,000,500		Total liabilities and equity	$	1,000,500

Barry Computer Company: Income Statement for Year Ended December 31, 2019 (In Thousands)
Sales			$	1,450,000
Cost of goods sold
Materials	$594,500
Labor	420,500
Heat, light, and power	87,000
Indirect labor	116,000
Depreciation	58,000			1,276,000

Gross profit		$	174,000
Selling expenses			72,500
General and administrative expenses			29,000
Earnings before interest and taxes (EBIT)		$	72,500
Interest expense			22,011
Earnings before taxes (EBT)		$	50,489
Federal and state income taxes (25%)			12,622
Net income		$	37,867
Earnings per share		$	0.8053
Price per share on December 31, 2019		$	13.00

1. Calculate the indicated ratios for Barry. Do not round intermediate calculations. Round your answers to two decimal places.

   Ratio	Barry	Industry Average
   Current	×	1.89	×
   Quick	×	1.13	×
   Days sales outstandinga	days	29	days
   Inventory turnover	×	6.88	×
   Total assets turnover	×	1.72	×
   Profit margin	%	2.44	%
   ROA	%	4.21	%
   ROE	%	8.95	%
   ROIC	%	8.00	%
   TIE	×	3.26	×
   Debt/Total capital	%	34.32	%
   M/B		5.30
   P/E		19.01
   EV/EBITDA		8.60

   
   aCalculation is based on a 365-day year.
   

2. Construct the DuPont equation for both Barry and the industry. Do not round intermediate calculations. Round your answers to two decimal places.

   	FIRM	INDUSTRY
   Profit margin	%	2.44%
   Total assets turnover	×	1.72×
   Equity multiplier	×	×

3. Select the correct option based on Barry's strengths and weaknesses as revealed by your analysis.-Select-IIIIIIIVVItem 19

1. The firm's days sales outstanding ratio is less than the industry average, indicating that the firm should tighten credit or enforce a more stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets decreased, or both. While the company's profit margin is lower than the industry average, its other profitability ratios are high compared to the industry - net income should be higher given the amount of equity, assets, and invested capital. However, the company seems to be in an average liquidity position and financial leverage is similar to others in the industry.

2. The firm's days sales outstanding ratio is more than the industry average, indicating that the firm should tighten credit or enforce a more stringent collection policy. The total assets turnover ratio is well above the industry average so sales should be increased, assets increased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity, assets, and invested capital. However, the company seems to be in an above average liquidity position and financial leverage is similar to others in the industry.

3. The firm's days sales outstanding ratio is comparable to the industry average, indicating that the firm should neither tighten credit nor enforce a more stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets increased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity, assets, and invested capital. However, the company seems to be in a below average liquidity position and financial leverage is similar to others in the industry.

4. The firm's days sales outstanding ratio is more than twice as long as the industry average, indicating that the firm should tighten credit or enforce a more stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets decreased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity, assets, and invested capital. Finally, it's market value ratios are also below industry averages. However, the company seems to be in an average liquidity position and financial leverage is similar to others in the industry.

5. The firm's days sales outstanding ratio is more than twice as long as the industry average, indicating that the firm should loosen credit or apply a less stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets increased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity, assets, and invested capital. However, the company seems to be in an average liquidity position and financial leverage is similar to others in the industry.

4. Suppose Barry had doubled its sales as well as its inventories, accounts receivable, and common equity during 2019. How would that information affect the validity of your ratio analysis? (Hint: Think about averages and the effects of rapid growth on ratios if averages are not used. No calculations are needed.)

1. If 2019 represents a period of normal growth for the firm, ratios based on this year will be accurate and a comparison between them and industry averages will have substantial meaning. Potential investors who look only at 2019 ratios will be misled, and a return to supernormal conditions in 2020 could hurt the firm's stock price.

2. If 2019 represents a period of supernormal growth for the firm, ratios based on this year will be distorted and a comparison between them and industry averages will have substantial meaning. Potential investors who look only at 2019 ratios will be well informed, and a return to normal conditions in 2020 could hurt the firm's stock price.

3. If 2019 represents a period of supernormal growth for the firm, ratios based on this year will be distorted and a comparison between them and industry averages will have little meaning. Potential investors who look only at 2019 ratios will be misled, and a return to normal conditions in 2020 could hurt the firm's stock price.

4. If 2019 represents a period of supernormal growth for the firm, ratios based on this year will be accurate and a comparison between them and industry averages will have substantial meaning. Potential investors need only look at 2019 ratios to be well informed, and a return to normal conditions in 2020 could help the firm's stock price.

5. If 2019 represents a period of normal growth for the firm, ratios based on this year will be distorted and a comparison between them and industry averages will have little meaning. Potential investors who look only at 2019 ratios will be misled, and a continuation of normal conditions in 2020 could hurt the firm's stock price.

Answer 1

Barry's financial ratios are as follows:-

Current Ratio=

Quick Ratio =

Days' sales outstanding(DSO) =

Inventory turnover =

Total assets turnover =

Profit Margin =

ROA =

ROE =

ROIC =  

where Invested Capital = Other current Liabilities + Notes payable + Long term debt + Common equity - Cash

TIE =

Debt/Total Capital =

M/B =

P-E ratio = Market Price/EPS = 13/0.8053 = 16.143

EV-EBITDA =

Du-Pont equation for the Barry and industry =

Du-Pont (Barry) = '

Du-Pont(industry) =

2.44% * 1.72 * Equity multiplier

c) The correct answer is option (IV) as the days sales outstanding indeed is more than twice of the industry average and hence, the company Barry should tighten its credit policy, so that it can recover the payment dues earlier. The other options are factually incorrect in the comparison of the DSOs. Option (V) is wrong as it asks to loosen the credit policies whereas it should be strengthened.

d)

The correct answer is (III). It is important ti understand that a normal growth year would make the ratios accurate and the supernormal growth would make the ratios distorted. If the ratios are distorted, then the comparison with the industry wll have little meaning, If the comparisons have little meaning, then relative valuation is difficult and innacurate. Return back to normal growth would make comparison again feasible but it would mark down the value of the company from a supernormal growth assumed valuation. Only (III) adheres to the explanation. Option (I) is correct except there's no reason for investors to be apprehensive of 2020 stock prices and market prices to correct.