Casey Fashions, Inc., sells clothing throughout North America. The company's compensation committee, made up of five members from the board of directors, is meeting to discuss the CEO's contract, which expires next month. The committee is currently reviewing financial information for the three most recent fiscal years: year 3 (most recent), year 2, and year 1 (shown as follows). The income statement indicates sales increased 30 percent from year 1 to year 2 and 35 percentfrom year 2 to year 3. Net income increased 14 percent from year 1 to year 2, and 18 percent from year 2 to year 3. One member on the committee, Chris Carson, would like to offer the CEO a multivear extension with a significant bump in salary and thousands of shares of stock options. When questioned why, Chris pointed to the positive results reflected on the income statement Another committee member, Mary Nichols, agrees with Chris that income statement trends look great, but she would like to review other measures of performance as well. Required - being neat an organized: 1. Calculate ROI for each of the three years. (Note: Land held for sale is an account we haven't used in this class. Review the ROI section to know how this affects your work.) (state the equation, present the data, solve the equation) 2. Calculate Rl for each of the 3 years assuming the company's cost of capital rate is 12 percent. (state the equation, present the data, solve the equation). 3. Calculate Gross Margin Ratio and Operating Profit Ratio for each year to support or reject Chris's claims about, "positive results reflected on the income statement" are true. (state each equation, present the data, solve each equation) 4. Based on the results, summarize and explain your findings and your final opinion on Chris's assertion that the CEO did an outstanding job and deserves all that is being offered. Casey Fashions, Inc. Income Statement (dollar amounts are in the thousands) Average Balances Year 3 Year 2 Year 1 Sales $96,525 $71,500 $55,000 Cost of goods slod 28,958 21,450 16,500 Gross margin 67,567 50,050 38,500 Selling and administrative expenses 60,200 43,800 33,000 Operating income 7,367 6,250 5,500 Income tax expense (30%) 2,210 1,875 1,650 Net income $5,157 $4,375 $3,850 Casey Fashions, Inc. Balance Sheet Average Balances (dollar amounts are in the thousands) Average Balances Year 3 Year 2 Year 1 Assets Cash $10,752 $6,720 $4,200 Accounts receivable 11,776 7,360 4,600 Inventory 13,312 8,320 5,200 Total current assets 35,840 22,400 14,000 Property plant and equipment (net) 38,400 24,000 15,000 Land (held for sale) 3,500 3,500 3,500 Total assets $77,740 $49,900 $32,500 Liabilities and owners' equity Accounts payable $9,216 $5,760 $3,600 Other current liabilities 5,632 3,520 2,200 Total current liabilities 14,848 9,280 5,800 Long-term liabilities 0 0 0 Total liabilities 14,848 9,280 5,800 Total owners' equity 62,892 40,620 26,700 Total liabilities and owners' equity $77,740 $49,900 $32,500 Note: The Balances presented are already Averaged, so this calculated is already done for you
