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	$	58,650		Accounts payable	$	164,220
Receivables		398,820		Other current liabilities		117,300
Inventories		281,520		Notes payable to bank		140,760
Total current assets	$	738,990		Total current liabilities	$	422,280
				Long-term debt		293,250
Net fixed assets		434,010		Common equity (45,747 shares)		457,470
Total assets	$	1,173,000		Total liabilities and equity	$	1,173,000

Barry Computer Company: Income Statement for Year Ended December 31, 2019 (In Thousands)
Sales			$	1,700,000
Cost of goods sold
Materials	$816,000
Labor	408,000
Heat, light, and power	68,000
Indirect labor	119,000
Depreciation	68,000			1,479,000

Gross profit		$	221,000
Selling expenses			102,000
General and administrative expenses			51,000
Earnings before interest and taxes (EBIT)		$	68,000
Interest expense			23,460
Earnings before taxes (EBT)		$	44,540
Federal and state income taxes (25%)			11,135
Net income		$	33,405
Earnings per share		$	0.7302
Price per share on December 31, 2019		$	10.00

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

   Ratio	Barry	Industry Average
   Current	×	1.70	×
   Quick	×	1.11	×
   Days sales outstandinga	days	40	days
   Inventory turnover	×	6.33	×
   Total assets turnover	×	1.72	×
   Profit margin	%	1.84	%
   ROA	%	3.16	%
   ROE	%	7.77	%
   ROIC	%	7.00	%
   TIE	×	2.93	×
   Debt/Total capital	%	50.18	%
   M/B		5.00
   P/E		15.96
   EV/EBITDA		8.75

   
   ^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	%	1.84%
   Total assets turnover	×	1.72×
   Equity multiplier	×	×

3. Select the correct option based on Barry's strengths and weaknesses as revealed by your analysis.
   1. 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.
   2. 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.
   3. 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.
   4. 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.
   5. 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.
   -Select-IIIIIIIVVItem 19
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 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.
   2. 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.
   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 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.
   4. 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.
   5. 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.

Answer 1

Current ratio = current assets/ current liabilities = $738,990/$422,280= 1.75 (this ratio is a number)

quick ratio = current assets - inventories / current liabilities = $738,990 - 281,520/$422,280 = 1.0833

Days of sales outstanding = (Avg receivables / Credit sales) *365 = 398,820*365/1,700,000 = 85.629 days

Inventory turnover ration = COGS/Avg inventory = 1,479,000/ 281,520 = 5.2536

Total assets turnover = Net sales/ average total assets = 1,700,000 /1,173,000 = 1.4492

gross Profit margin = (Sales - COGS) *100/Sales = (1,700,000-1,479,000)*100/1,700,000 = 13%

Net profit margin = Net profit *100/ Sales = 33,405*100/1,700,000 = 1.965%

ROA = operating income or net income / total assets = 33,405 *100 /1,173,000 = 2.8478%

ROE = net income / Shareholders equity = 33405*100/457,470 = 7.3021%

ROIC = NOPAT/ invested capital = EBIT(1-tax rate)/ Total debt+ equity = (44,540*(1-0.25))*100/(1,173,000) = 2.8478

TIE = EBIT/Int expenses = 44,540/23,460 = 1.8985

Debt/Total capital = Total debts/ shareholders equity = (293,250 + 422,280)*100/1700000 = 42.09%

M/B = Market value/ book value = 10/10 = 1 (Book value = $457470/ 45747 shares = $10)

P/E = price per share/ EPS = 10/ 0.7302 = 13.6948

EV/EBITDA = (Market cap + Debt - Cash)/ (EBIT + Dep) = (457470+293,250 + 422,280- 58,650)/ (68,000+68000) = 8.1937

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For company:

Equity multiple = 1173000/ 457,470 = 2.5641

Use the given values to construct the DuPont Model.

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Option III is correct.

To arrive at the conclusion, compare the ratios of the company with the industry average.

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Option IV is correct.

If 2019 represents a period of supernormal growth for the firm (as the firm was able to double its sales), ratios based on this year will be distorted (because of the inflated items) and a comparison between them and industry averages will have little meaning (because the growththat the firm enjoyed could be specific to the company alone Since the reason for growth is not given, it can not be safely assumed to pertain to the entire industry). 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.