Question

Data for Barry Computer Co. and its industry averages follow.

Barry Computer Company:
Balance Sheet as of December 31, 2016 (In Thousands)
Cash	$112,560		Accounts payable	$103,180
Receivables	356,440		Other current liabilities	103,180
Inventories	196,980		Notes payable to bank	75,040
Total current assets	$665,980		Total current liabilities	$281,400
			Long-term debt	$253,260
Net fixed assets	272,020		Common equity	403,340
Total assets	$938,000		Total liabilities and equity	$938,000

Barry Computer Company: Income Statement for Year Ended December 31, 2016 (In Thousands)
Sales			$1,400,000
Cost of goods sold
Materials	$658,000
Labor	322,000
Heat, light, and power	56,000
Indirect labor	98,000
Depreciation	70,000		1,204,000

Gross profit		$   196,000
Selling expenses		126,000
General and administrative expenses		14,000
Earnings before interest and taxes (EBIT)		$     56,000
Interest expense		30,391
Earnings before taxes (EBT)		$     25,609
Federal and state income taxes (40%)		10,244
Net income		$     15,365

1. Calculate the indicated ratios for Barry. Round your answers to two decimal places.

   Ratio	Barry	Industry Average
   Current	x	2.32x
   Quick	x	1.64x
   Days sales outstandinga	days	44.25 days
   Inventory turnover	x	7.32x
   Total assets turnover	x	1.74x
   Profit margin	%	1.05%
   ROA	%	1.82%
   ROE	%	4.23%
   ROIC	%	7.10%
   TIE	x	1.94x
   Debt/Total capital	%	43.57%

   
   ^aCalculation is based on a 365-day year.
   
2. Construct the DuPont equation for both Barry and the industry. Round your answers to two decimal places.

   	FIRM	INDUSTRY
   Profit margin	%	1.05%
   Total assets turnover	x	1.74x
   Equity multiplier	x	x

3. Select the correct option based on Barry's strengths and weaknesses as revealed by your analysis.
   -Select-IIIIIIIVVItem 16
   1. The firm's days sales outstanding 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.
   2. 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. However, the company seems to be in an average liquidity position and financial leverage is similar to others in the industry.
   3. The firm's days sales outstanding 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. The firm's days sales outstanding 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.
   5. The firm's days sales outstanding 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.
4. Suppose Barry had doubled its sales as well as its inventories, accounts receivable, and common equity during 2016. 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.)
   -Select-IIIIIIIVVItem 17
   1. If 2016 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 2016 ratios to be well informed, and a return to normal conditions in 2017 could help the firm's stock price.
   2. If 2016 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 2016 ratios will be misled, and a continuation of normal conditions in 2017 could hurt the firm's stock price.
   3. If 2016 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 2016 ratios will be misled, and a return to supernormal conditions in 2017 could hurt the firm's stock price.
   4. If 2016 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 2016 ratios will be well informed, and a return to normal conditions in 2017 could hurt the firm's stock price.
   5. If 2016 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 2016 ratios will be misled, and a return to normal conditions in 2017 could hurt the firm's stock price.

Answer 1

						Barry		Industry
Current Ratio	=	Current Assets	=	858000	=	1.73		1.69
		Current Liabilites		495000
Current Assets	=	Cash	+	Receivable	+	Inventories
	=	82500	+	412500	+	3,63,000.00
	=	8,58,000.00
Current Liabilities	=	Accounts Payable	+	Other Current Liabilities	+	Notes payable to bank
	=	2,31,000.00	+	181500	+	82500
	=	4,95,000.00
Quick Ratio	=	Quick Assets	=	495000	=	1		0.94
		Current Liabilities		495000
Quick Assets	=	Cash	+	Receivable
		82500	+	412500
	=	495000
Current Liabilities	=	Accounts Payable	+	Other Current Liabilities	+	Notes payable to bank
	=	0.00	+	0	+	2460000
	=	24,60,000.00
Days Sales Outstanding	=	Receivable	=	412500	X 365=	50.19		23.45
		Sales		3000000
Inventory Turnover	=	Turnover	=	3000000	=	8.26		9.02
		Inventory		363000
Total Asset Turnover	=	Turnover	=	3000000	=	1.82		2.05
		Asset		1650000
Profit Margin	=	Profit	=	48834	X 100 =	1.6278		1.52%
		Sales		3000000
Return on Assets	=	Profit	=	48834	X 100 =	2.96		3.12%
		Assets		1650000
Return on Equity	=	Profit	=	48834	X 100 =	6.73		7.47%
		Common Equity		726000
Return on Invested Capital	=	Net operating profit after tax	=	72000	X 100 =	6.23		7.10%
		Invested Capital		1155000
Net operating profit after tax		= EBIT X(1-Tax rate)
Invested capital	=	Long Term Debt	+	Common Equity
Times interest earned	=	Earning Before interest and taxes	=	120000		3.11		3.14
		Interest expenses		38610
Debt To Total Capital		Debt	=	429000	X 100 =	59%		42.23%
		Capital		726000
Dupont Analysis						Barry		Industry
Profit Margin						1.63%		1,52%
Total Asset Turnover						1.82		2.05
Equity Multiplier		Total Asset	=	1650000		2.27
		Total equity		726000
	Or	Return on Equity		6.73		2.27	7.47%	2.39
		Return on Assets		2.96			3.12%
Answer C	Option II
Answer D	Option III