Question

In: Accounting

You have just been hired as a financial analyst for Lydex Company, a manufacturer of safety...

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 $ 870,000 $ 1,110,000
Marketable securities 0 300,000
Accounts receivable, net 2,340,000 1,440,000
Inventory 3,510,000 2,100,000
Prepaid expenses 240,000 180,000
Total current assets 6,960,000 5,130,000
Plant and equipment, net 9,340,000 8,960,000
Total assets $ 16,300,000 $ 14,090,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities $ 3,920,000 $ 2,800,000
Note payable, 10% 3,600,000 3,000,000
Total liabilities 7,520,000 5,800,000
Stockholders' equity:
Common stock, $70 par value 7,000,000 7,000,000
Retained earnings 1,780,000 1,290,000
Total stockholders' equity 8,780,000 8,290,000
Total liabilities and stockholders' equity $ 16,300,000 $ 14,090,000
Lydex Company
Comparative Income Statement and Reconciliation
This Year Last Year
Sales (all on account) $ 15,770,000 $ 12,680,000
Cost of goods sold 12,616,000 9,510,000
Gross margin 3,154,000 3,170,000
Selling and administrative expenses 1,594,000 1,568,000
Net operating income 1,560,000 1,602,000
Interest expense 360,000 300,000
Net income before taxes 1,200,000 1,302,000
Income taxes (30%) 360,000 390,600
Net income 840,000 911,400
Common dividends 350,000 455,700
Net income retained 490,000 455,700
Beginning retained earnings 1,290,000 834,300
Ending retained earnings $ 1,780,000 $ 1,290,000

To begin your assignment you gather the following financial data and ratios that are typical of companies in Lydex Company’s industry:

Current ratio 2.3
Acid-test ratio 1.0
Average collection period 30 days
Average sale period 60 days
Return on assets 8.3 %
Debt-to-equity ratio 0.7
Times interest earned ratio 5.9
Price-earnings ratio 10

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 $76 per share and that at the end of last year it was $44. For both this year and last year, compute: (Round your "Percentage" answers to 1 decimal place and other intermediate and final answers to 2 decimal places.)

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.

Solutions

Expert Solution

No of common shares= 7,000,000 / $70 = 100000 shares

a) Earning per share = Net Income / No. of common shares outstanding
This year = 840000 / 100000 = 8.4 per share
Last year = 911400 / 100000 = 9.11 per share

b). Dividend yeild ratio = Annual dividend per share / Price per share
This Year = 3.5 / 76 = 4.61%
Last Year = 4.55 / 44 = 10.34%
Annual dividend per share = Annual dividend / No. of shares
This Year = 350000 / 100000 = 3.5 per share
Last Year = 455700 / 100000 = 4.557 per share

c). Dividend payout ratio = Dividend for the period / Net Income available to common shareholders
This year = 350000 / 840000 = 0.4166 or 41.67%
Last Year = 455700 / 911400 = 0.5 or 50%

d). Price earnig ratio = Market value per share / EPS
This year = 76 / 8.4 = 9
Last year = 44 / 9.11 = 4.83

e). Book Value per share = Total shareholder's equity / Total outstanding shares
This year = 8780000 / 100000 = 87.8
Last Year = 8290000 / 100000 = 82.9


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