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 $ 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    




  Total current assets 7,390,000     5,690,000    
  Plant and equipment, net 9,480,000     9,030,000    




  Total assets $ 16,870,000     $ 14,720,000    








Liabilities and Stockholders' Equity
  Liabilities:
     Current liabilities $ 3,990,000     $ 2,940,000    
     Note payable, 10% 3,660,000     3,060,000    




  Total liabilities 7,650,000     6,000,000    




  Stockholders' equity:
      Common stock, $75 par value 7,500,000     7,500,000    
      Retained earnings 1,720,000     1,220,000    




  Total stockholders' equity 9,220,000     8,720,000    




  Total liabilities and stockholders' equity $ 16,870,000     $ 14,720,000    









Lydex Company
Comparative Income Statement and Reconciliation
This Year Last Year
  Sales (all on account) $ 15,840,000    $ 13,380,000   
  Cost of goods sold 12,672,000    10,035,000   




  Gross margin 3,168,000    3,345,000   
  Selling and administrative expenses 1,602,000    1,596,000   




  Net operating income 1,566,000    1,749,000   
  Interest expense 366,000    306,000   




  Net income before taxes 1,200,000    1,443,000   
  Income taxes (30%) 360,000    432,900   




  Net income 840,000    1,010,100   
  Common dividends 340,000    505,050   




  Net income retained 500,000    505,050  
  Beginning retained earnings 1,220,000    714,950   




  Ending retained earnings $ 1,720,000    $ 1,220,000   









       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

rev: 09_22_2016_QC_CS-61528, 08_02_2017_QC_CS-78100

1.
value:
5.00 points
Required information

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?


           


2.
value:
5.00 points
Required information

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.


           


3.
value:
5.00 points
Required information

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.)


           

Solutions

Expert Solution

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)


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