Question

In: Accounting

[The following information applies to the questions displayed below.] You have just been hired as a...

[The following information applies to the questions displayed below.]

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 $ 1,000,000     $ 1,240,000    
     Marketable securities 0     300,000    
     Accounts receivable, net 2,860,000     1,960,000    
     Inventory 3,640,000 2,400,000    
     Prepaid expenses 270,000     210,000    
  Total current assets 7,770,000     6,110,000    
  Plant and equipment, net 9,600,000     9,090,000    
  Total assets $ 17,370,000     $ 15,200,000    
Liabilities and Stockholders' Equity
  Liabilities:
     Current liabilities $ 4,050,000     $ 3,060,000    
     Note payable, 10% 3,700,000     3,100,000    
  Total liabilities 7,750,000     6,160,000    
  Stockholders' equity:
      Common stock, $75 par value 7,500,000     7,500,000    
      Retained earnings 2,120,000     1,540,000    
  Total stockholders' equity 9,620,000     9,040,000    
  Total liabilities and stockholders' equity $ 17,370,000     $ 15,200,000    
Lydex Company
Comparative Income Statement and Reconciliation
This Year Last Year
  Sales (all on account) $ 15,900,000    $ 13,980,000   
  Cost of goods sold 12,720,000    10,485,000   
  Gross margin 3,180,000    3,495,000   
  Selling and administrative expenses 1,410,000    1,620,000   
  Net operating income 1,770,000    1,875,000   
  Interest expense 370,000    310,000   
  Net income before taxes 1,400,000    1,565,000   
  Income taxes (30%) 420,000    469,500   
  Net income 980,000    1,095,500   
  Common dividends 400,000    547,750   
  Net income retained 580,000    547,750  
  Beginning retained earnings 1,540,000    992,250   
  Ending retained earnings $ 2,120,000    $ 1,540,000   

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

  Current ratio 2.3   
  Acid-test ratio 1.1   
  Average collection period 32 days     
  Average sale period 60 days     
  Return on assets 9.7 %          
  Debt-to-equity ratio .65
  Times interest earned ratio 5.7
  Price-earnings ratio 10

rev: 09_22_2016_QC_CS-61528, 08_02_2017_QC_CS-78100

References

Section BreakProblem 13-15A Comprehensive Ratio Analysis [LO13-2, LO13-3, LO13-4, LO13-5, LO13-6]

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 $13,110,000.)
e. The return on equity. (Stockholders’ equity at the beginning of last year totaled $8,492,250. There has been no change in common stock over the last two years.)
f. Is the company’s financial leverage positive or negative?


          

References

eBook & Resources

WorksheetLearning Objective: 13-02 Compute and interpret financial ratios that managers use to assess liquidity.Learning Objective: 13-05 Compute and interpret financial ratios that managers use to assess profitability.

Part 1Learning Objective: 13-03 Compute and interpret financial ratios that managers use for asset management purposes.Learning Objective: 13-06 Compute and interpret financial ratios that managers use to assess market performance.

Difficulty: 1 EasyLearning Objective: 13-04 Compute and interpret financial ratios that managers use for debt management purposes.

Check my work

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 $102 per share and that at the end of last year it was $70. 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.


          

References

eBook & Resources

WorksheetLearning Objective: 13-02 Compute and interpret financial ratios that managers use to assess liquidity.Learning Objective: 13-05 Compute and interpret financial ratios that managers use to assess profitability.

Part 2Learning Objective: 13-03 Compute and interpret financial ratios that managers use for asset management purposes.Learning Objective: 13-06 Compute and interpret financial ratios that managers use to assess market performance.

Difficulty: 1 EasyLearning Objective: 13-04 Compute and interpret financial ratios that managers use for debt management purposes.

Check my work

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 $1,710,000.)
e. The average sale period. (The inventory at the beginning of last year totaled $2,070,000.)
f. The operating cycle.
g. The total asset turnover. (The total assets at the beginning of last year totaled $13,110,000.)


          

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