In: Accounting
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 |
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This Year | Last Year | |||
Assets | ||||
Current assets: | ||||
Cash | $ | 940,000 | $ | 1,180,000 |
Marketable securities | 0 | 300,000 | ||
Accounts receivable, net | 2,620,000 | 1,720,000 | ||
Inventory | 3,580,000 | 2,300,000 | ||
Prepaid expenses | 250,000 | 190,000 | ||
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Total current assets | 7,390,000 | 5,690,000 | ||
Plant and equipment, net | 9,480,000 | 9,030,000 | ||
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Total assets | $ | 16,870,000 | $ | 14,720,000 |
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Liabilities and Stockholders' Equity | ||||
Liabilities: | ||||
Current liabilities | $ | 3,990,000 | $ | 2,940,000 |
Note payable, 10% | 3,660,000 | 3,060,000 | ||
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Total liabilities | 7,650,000 | 6,000,000 | ||
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Stockholders' equity: | ||||
Common stock, $75 par value | 7,500,000 | 7,500,000 | ||
Retained earnings | 1,720,000 | 1,220,000 | ||
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Total stockholders' equity | 9,220,000 | 8,720,000 | ||
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Total liabilities and stockholders' equity | $ | 16,870,000 | $ | 14,720,000 |
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Lydex Company Comparative Income Statement and Reconciliation |
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This Year | Last Year | |||
Sales (all on account) | $ | 15,840,000 | $ | 13,380,000 |
Cost of goods sold | 12,672,000 | 10,035,000 | ||
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Gross margin | 3,168,000 | 3,345,000 | ||
Selling and administrative expenses | 1,602,000 | 1,596,000 | ||
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Net operating income | 1,566,000 | 1,749,000 | ||
Interest expense | 366,000 | 306,000 | ||
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Net income before taxes | 1,200,000 | 1,443,000 | ||
Income taxes (30%) | 360,000 | 432,900 | ||
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Net income | 840,000 | 1,010,100 | ||
Common dividends | 340,000 | 505,050 | ||
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Net income retained | 500,000 | 505,050 | ||
Beginning retained earnings | 1,220,000 | 714,950 | ||
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Ending retained earnings | $ | 1,720,000 | $ | 1,220,000 |
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To begin your assigment you gather the following financial data and ratios that are typical of companies in Lydex Company’s industry: |
Current ratio | 2.4 | |
Acid-test ratio | 1.1 | |
Average collection period | 40 | days |
Average sale period | 60 | days |
Return on assets | 9.1 | % |
Debt-to-equity ratio | .69 | |
Times interest earned ratio | 5.7 | |
Price-earnings ratio | 10 | |
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rev: 09_22_2016_QC_CS-61528, 08_02_2017_QC_CS-78100
Part 1
Required: |
1. |
You decide first to assess the company’s performance in terms of debt management and profitability. Compute the following for both this year and last year: (Round your intermediate calculations and final percentage answers to 1 decimal place. i.e., 0.123 should be considered as 12.3%. Round the rest of the intermediate calculations and final answers to 2 decimal places.) |
a. | The times interest earned ratio. |
b. | The debt-to-equity ratio. |
c. | The gross margin percentage. |
d. | The return on total assets. (Total assets at the beginning of last year were $13,050,000.) |
e. | The return on equity. (Stockholders’ equity at the beginning of last year totaled $8,214,950. There has been no change in common stock over the last two years.) |
f. | Is the company’s financial leverage positive or negative? |
Part 2
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 $90 per share and that at the end of last year it was $58. For both this year and last year, compute: (Round your intermediate calculations and final answers to 2 decimal places. For percentages 0.1234 should be considered as 12.34%.) |
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. |
Part 3
3. |
You decide, finally, to assess the company’s liquidity and asset management. For both this year and last year, compute: (Use 365 days in a year. Round "days" intermediate calculations and final answers to 1 decimal place. Round all other intermediate calculations and final answers to 2 decimal places.) |
a. | Working capital. |
b. | The current ratio. |
c. | The acid-test ratio. |
d. | The average collection period. (The accounts receivable at the beginning of last year totaled $1,650,000.) |
e. | The average sale period. (The inventory at the beginning of last year totaled $2,010,000.) |
f. | The operating cycle. |
g. | The total asset turnover. (The total assets at the beginning of last year totaled $13,050,000.) |
1).Part 1
a). Times interest earned ratio = Earning before Interest and Tax
(EBIT)/ Interest Expense
This Year = 1566000/366000 = 4.278
Last Year = 1749000/306000 = 5.715
b). Debt to Equity Ratio= Debt / Equity
This Year = 3660000/9220000 = 0.396
Last Year = 3060000/8720000 = 0.351
c).Gross Margin Percentage : Gross profit /Turnover
This Year = 3168000/15840000 = 0.2 or 20%
Last Year = 3345000 / 13380000 = 0.25 or 25%
d). Return on Total Assets = EBIT /Average Total Assets
This Year = 1566000 / ((16870000+14720000)/2) = 1566000/15795000 =
0.099 or 9.91%
Last Year = 1749000 / ((14720000+13050000)/2)= 1749000/13885000 =
0.1259 or 12.59%
e).Return on equity = Net Income / Average Shareholder's
Equity
This Year = 840000/((9220000+8720000)/2) =840000/8970000= 0.0936 or
9.36%
Last Year = 1010100/((8720000+8214950)/2) =1010100/8467475 = 0.119
or 11.93%
f) Financial Leverage = EBIT / EBT
This Year = 1566000/1200000 = 1.305
Last Year = 1749000/1443000 = 1.212
2). Part 2 :
a). Earning per share = Net Income / No. of shares
outstanding
This Year = 840000/(7500000/75) = 840000/100000 = 8.4
Last Year = 1010100/(7500000/75) = 1010100/100000 = 10.101
b).Dividend yeild ratio = Dividend per share/ Price per
share
This year = (340000/100000)/90 = 0.0.37 or 3.77%
Last Year = (505050/100000)/58 = 0.087 or 8.70%
c).Dividend payout ratio = Dividend paid / Net income available
to common stakeholder's
This Year = 340000/840000 = 0.404 or 40.47%
Last Year = 505050/1010100 = 0.5 or 50%
d). Price Earning ratio = Market Value per share/EPS
This year = 90/8.4 = 10.71
Last Year = 58/10.10 = 5.74
e). Book value per share of common stock = Stockholder's equity/
No. of shares
This year = 7500000/100000 = 75
Last Year = 7500000/100000 = 75
3). Part 3
a) Working capital = Current Assets - Current Liabilities
This Year = 7390000 - 3990000 = 3400000
Last Year = 5690000 - 2940000 = 2750000
b).Current RAtio = CA/CL
This Year = 7390000/3990000= 1.852
Last Year = 5690000/2940000 = 1.935
c). Quick Ratio = Quick assets / CL
This Year = (940000+2620000)/3990000 = 0.892
Last Year =(1180000+300000+1720000)/2940000 = 1.088
d). Average Collection period = 365/Account receivable turnover
ratio
Account receivable turnover ratio = (Sales on account/ Average
account receivable)