23. Problem 4.23 (Ratio Analysis) eBook Data for Barry Computer Co. and its industry averages follow. The firm's debt is priced at par, so the market value of its debt equals its book value. Since dollars are in thousands, number of shares are shown in thousands too. Barry Computer Company: Balance Sheet as of December 31, 2018 (In Thousands) Cash Accounts payable $170,100 385,560 249,480 $181,440 158,760 Receivables Other current liabilities Inventories Notes payable to bank 56,700 Total current assets $805,140 Total current liabilities $396,900 $260,820 476,280 Net fixed assets Long-term debt Common equity (47,628 shares) 328,860 Total assets $1,134,000 Total liabilities and equity $1,134,000 Barry Computer Company: Income Statement for Year Ended December 31, 2018 (In Thousands) Sales $1,800,000 Cost of goods sold Materials Labor Heat, light, and power $846,000 432,000 72,000 72,000 72,000 Indirect labor Depreciation 1,494,000 Gross profit Selling expenses 306,000 198,000 36,000 72,000 General and administrative expenses $ $ Earnings before interest and taxes (EBIT) Interest expense 28,690 Earnings before taxes (EBT) $ 43,310 Federal and state income taxes (40%) 17,324 Net income $ 25,986 Earnings per share Price per share on December 31, 2018 $ $ 0.54560 14.00 a. Calculate the indicated ratios for Barry. Round your answers to two decimal places. Ratio Barry Industry Average Current 1.99x 1.37x Quick Days sales outstanding 36.53 days Inventory turnover 7.57x Total assets turnover 1.89x Profit margin 1.35% ROA 2.55% ROE 6.06% ROIC 7.40% TIE 2.42x Debt/Total capital 41.10% M/B 5.40% P/E 28.04% EV/EBITDA 7.73% Calculation is based on a 365-day year. b. Construct the DuPont equation for both Barry and the industry. Round your answers to two decimal places. FIRM INDUSTRY Profit margin 1.35% Total assets turnover 1.89x Equity multiplier c. Select the correct option based on Barry's strengths and weaknesses as revealed by your analysis. -Select- I. The firm's days sales outstanding ratio 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. II. 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. Finally, it's market value ratios are also below Industry averages. However, the company seems to be in an average liquidity position and financial leverage is similar to others in the industry. III. The firm's days sales outstanding ratio 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. IV. The firm's days sales outstanding ratio 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. V. The firm's days sales outstanding ratio 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. d. Suppose Barry had doubled its sales as well as its inventories, accounts receivable, and common equity during 2018. 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- I. If 2018 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 2018 ratios will be misled, and a return to supernormal conditions in 2019 could hurt the firm's stock price. II. If 2018 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 2018 ratios will be well informed, and a return to normal conditions in 2019 could hurt the firm's stock price. III. If 2018 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 2018 ratios will be misled, and a return to normal conditions in 2019 could hurt the firm's stock price. IV. If 2018 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 2018 ratios to be well informed, and a return to normal conditions in 2019 could help the firm's stock price. V. If 2018 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 2018 ratios will be misled, and a continuation of normal conditions in 2019 could hurt the firm's stock price. 23. Problem 4.23 (Ratio Analysis) eBook Data for Barry Computer Co. and its industry averages follow. The firm's debt is priced at par, so the market value of its debt equals its book value. Since dollars are in thousands, number of shares are shown in thousands too. Barry Computer Company: Balance Sheet as of December 31, 2018 (In Thousands) Cash Accounts payable $170,100 385,560 249,480 $181,440 158,760 Receivables Other current liabilities Inventories Notes payable to bank 56,700 Total current assets $805,140 Total current liabilities $396,900 $260,820 476,280 Net fixed assets Long-term debt Common equity (47,628 shares) 328,860 Total assets $1,134,000 Total liabilities and equity $1,134,000 Barry Computer Company: Income Statement for Year Ended December 31, 2018 (In Thousands) Sales $1,800,000 Cost of goods sold Materials Labor Heat, light, and power $846,000 432,000 72,000 72,000 72,000 Indirect labor Depreciation 1,494,000 Gross profit Selling expenses 306,000 198,000 36,000 72,000 General and administrative expenses $ $ Earnings before interest and taxes (EBIT) Interest expense 28,690 Earnings before taxes (EBT) $ 43,310 Federal and state income taxes (40%) 17,324 Net income $ 25,986 Earnings per share Price per share on December 31, 2018 $ $ 0.54560 14.00 a. Calculate the indicated ratios for Barry. Round your answers to two decimal places. Ratio Barry Industry Average Current 1.99x 1.37x Quick Days sales outstanding 36.53 days Inventory turnover 7.57x Total assets turnover 1.89x Profit margin 1.35% ROA 2.55% ROE 6.06% ROIC 7.40% TIE 2.42x Debt/Total capital 41.10% M/B 5.40% P/E 28.04% EV/EBITDA 7.73% Calculation is based on a 365-day year. b. Construct the DuPont equation for both Barry and the industry. Round your answers to two decimal places. FIRM INDUSTRY Profit margin 1.35% Total assets turnover 1.89x Equity multiplier c. Select the correct option based on Barry's strengths and weaknesses as revealed by your analysis. -Select- I. The firm's days sales outstanding ratio 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. II. 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. Finally, it's market value ratios are also below Industry averages. However, the company seems to be in an average liquidity position and financial leverage is similar to others in the industry. III. The firm's days sales outstanding ratio 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. IV. The firm's days sales outstanding ratio 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. V. The firm's days sales outstanding ratio 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. d. Suppose Barry had doubled its sales as well as its inventories, accounts receivable, and common equity during 2018. 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- I. If 2018 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 2018 ratios will be misled, and a return to supernormal conditions in 2019 could hurt the firm's stock price. II. If 2018 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 2018 ratios will be well informed, and a return to normal conditions in 2019 could hurt the firm's stock price. III. If 2018 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 2018 ratios will be misled, and a return to normal conditions in 2019 could hurt the firm's stock price. IV. If 2018 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 2018 ratios to be well informed, and a return to normal conditions in 2019 could help the firm's stock price. V. If 2018 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 2018 ratios will be misled, and a continuation of normal conditions in 2019 could hurt the firm's stock price