706Chapter 15 Required: 1. You decide first to assess the companys performance in terms of debt management and profit-ability. Compute the following for both this year and last year: 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 $12,960,000.) e. The return on equity. (Stockholders equity at the beginning of last year totaled $9,048,000. There has been no change in common stock over the last two years.) f. Is the companys financial leverage positive or negative? Explain. 2. You decide next to assess the companys stock market performance. Assume that Lydexs stock price at the end of this year is $72 per share and that at the end of last year it was $40.For both this year and last year, compute: a. The earnings per share. b. The dividend yield ratio. c. The dividend payout ratio. d. The price-earnings ratio. How do investors regard Lydex Company as compared to other companies in the industry? Explain. e. The book value per share of common stock. Does the difference between market value per share and book value per share suggest that the stock at its current price is a bargain? Explain. 3. You decide, finally, to assess the companys liquidity and asset management. For both this year and last year, compute: 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 $1,560,000.) e. The average sale period. (The inventory at the beginning of last year totaled $1,920,000.) f. The operating cycle. g. The total asset turnover. (The total assets at the beginning of last year totaled $14,500,000.) 4. Prepare a brief memo that summarizes how Lydex is performing relative to its competitors. PROBLEM 1516 Common-Size Financial Statements [LO151] Refer to the financial statement data for Lydex Company given in Problem 1515. Required: For both this year and last year: 1. Present the balance sheet in common-size format. 2. Present the income statement in common-size format down through net income. 3. Comment on the results of your analysis. PROBLEM 1517 Interpretation of Financial Ratios [LO152, LO153, LO155, LO156] Pecunious Products, Inc.s financial results for the past three years are summarized below: Year 3 Year 2 Year 1 Sales trend . . . . . . . . . . . . . . . . . . . 128.0 115.0 100.0 Current ratio . . . . . . . . . . . . . . . . . . 2.5 2.3 2.2 Acid-test ratio . . . . . . . . . . . . . . . . . 0.8 0.9 1.1 Accounts receivable turnover . . . . . . 9.4 10.6 12.5 Inventory turnover . . . . . . . . . . . . . . 6.5 7.2 8.0 Dividend yield . . . . . . . . . . . . . . . . . 7.1% 6.5% 5.8% Dividend payout ratio . . . . . . . . . . . . 40% 50% 60% Return on total assets . . . . . . . . . . . 12.5% 11.0% 9.5% Return on equity . . . . . . . . . . . . . . . 14.0% 10.0% 7.8% Dividends paid per share * . . . . . . . . $1.50 $1.50 $1.50 *There have been no changes in common stock outstanding over the three-year period. Your boss has asked you to review these results and then answer the following questions: a. Is it becoming easier for the company to pay its bills as they come due? b. Are customers paying their accounts at least as fast now as they were in Year 1? c. Is the total of the accounts receivable increasing, decreasing, or remaining constant? d. Is the level of inventory increasing, decreasing, or remaining constant? gar2563X_ch15_675-712.indd 70610/15/13 8:07 PMFinal PDF to printer PROBLEM 1518 Common-Size Statements and Financial Ratios for a Loan Application [LO151, LO152, LO153, LO154] Paul Sabin organized Sabin Electronics 10 years ago to produce and sell several electronic devices on which he had secured patents. Although the company has been fairly profitable, it is now expe-riencing a severe cash shortage. For this reason, it is requesting a $500,000 long-term loan from Gulfport State Bank, $100,000 of which will be used to bolster the Cash account and $400,000 of which will be used to modernize equipment. The companys financial statements for the two most recent years follow: Sabin Electronics Comparative Balance Sheet This Year Last Year Assets Current assets: Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 70,000 $ 150,000 Marketable securities . . . . . . . . . . . . . . . . 0 18,000 Accounts receivable, net . . . . . . . . . . . . . 480,000 300,000 Inventory . . . . . . . . . . . . . . . . . . . . . . . . . 950,000 600,000 Prepaid expenses . . . . . . . . . . . . . . . . . . . 20,000 22,000 Total current assets . . . . . . . . . . . . . . . . . . . 1,520,000 1,090,000 Plant and equipment, net . . . . . . . . . . . . . . . 1,480,000 1,370,000 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . $3,000,000 $2,460,000 Liabilities and Stockholders Equity Liabilities: Current liabilities . . . . . . . . . . . . . . . . . . . . $ 800,000 $ 430,000 Bonds payable, 12% . . . . . . . . . . . . . . . . 600,000 600,000 Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . 1,400,000 1,030,000 Stockholders equity: Common stock, $15 par . . . . . . . . . . . . . 750,000 750,000 Retained earnings . . . . . . . . . . . . . . . . . . 850,000 680,000 Total stockholders equity . . . . . . . . . . . . . . 1,600,000 1,430,000 Total liabilities and equity . . . . . . . . . . . . . . $3,000,000 $2,460,000 Sabin Electronics Comparative Income Statement and Reconciliation This Year Last Year Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,000,000 $4,350,000 Cost of goods sold . . . . . . . . . . . . . . . . . . . 3,875,000 3,450,000 Gross margin . . . . . . . . . . . . . . . . . . . . . . . . 1,125,000 900,000 Selling and administrative expenses . . . . . . 653,000 548,000 Net operating income . . . . . . . . . . . . . . . . . 472,000 352,000 Interest expense . . . . . . . . . . . . . . . . . . . . . 72,000 72,000 Net income before taxes . . . . . . . . . . . . . . . 400,000 280,000 Income taxes (30%) . . . . . . . . . . . . . . . . . . 120,000 84,000 Net income . . . . . . . . . . . . . . . . . . . . . . . . . 280,000 196,000 Common dividends . . . . . . . . . . . . . . . . . . . 110,000 95,000 Net income retained . . . . . . . . . . . . . . . . . . 170,000 101,000 Beginning retained earnings . . . . . . . . . . . . 680,000 579,000 Ending retained earnings . . . . . . . . . . . . . . . $ 850,000 $ 680,000 708Chapter 15 During the past year, the company introduced several new product lines and raised the selling prices on a number of old product lines in order to improve its profit margin. The company also hired a new sales manager, who has expanded sales into several new territories. Sales terms are 2/10, n/30. All sales are on account. Required: 1. To assist in approaching the bank about the loan, Paul has asked you to compute the following ratios for both this year and last year: a. The amount of 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 $250,000.) e. The average sale period. (The inventory at the beginning of last year totaled $500,000.) f. The operating cycle. g. The total asset turnover. (The total assets at the beginning of last year were $2,420,000.) h. The debt-to-equity ratio. i. The times interest earned ratio. j. The equity multiplier. (The total stockholders equity at the beginning of last year totaled $1,420,000.) 2. For both this year and last year: a. Present the balance sheet in common-size format. b. Present the income statement in common-size format down through net income. 3. Paul Sabin has also gathered the following financial data and ratios that are typical of compa-nies in the electronics industry: Current ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5 Acid-test ratio . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3 Average collection period . . . . . . . . . . . . . . . . . . 18 days Average sale period . . . . . . . . . . . . . . . . . . . . . . 60 days Debt-to-equity ratio . . . . . . . . . . . . . . . . . . . . . . 0.90 Times interest earned ratio . . . . . . . . . . . . . . . . 6.0 Comment on the results of your analysis in (1) and (2) above and compare Sabin Electronics performance to the benchmarks from the electronics industry. Do you think that the company is likely to get its loan application approved?