Debt analysis Springfield Banks is evaluating Creek Enterprises, which has requested a $4,000,000 loan, to assess the firm's financial leverage and financial .. risk. On the basis of the debt ratios for Creek, along with the industry averages (see top of page 103) and Creek's recent financial statements (following), evaluate and recomend appropriate action on the loan request. Creek Enterprises Income Statement for the Year Ended December 31, 2012 Sales veue $30,000,000 Less: Cost of goods sold 21.000.000 Gross profits $9.000.000 Less: Operating expenses Selling expense 5.3,000,000 General and administrative expenses 1,800,000 Lease expense 200,000 Depreciation expense 1,000,000 Total operating expense $. 6.000.000 Operating polits $ 3,000,000 Les locerest expense 1.000.000 Net profits before taxes $ 2,000,000 Less: Taxes (rate -40%) 800.000 Net profits after taxes $ 1,200,000 Less: Preferred stock dividende 100.000 Earnings available for common stockholders $1.100.000 1 Debt analysis Springfield Banks is evaluating Creek Enterprises, which has requested a $4,000,000 loan, to assess the firm's financial leverage and financial risk. On the basis of the debt ratios for Creek, along with the industry averages (see top of page 103) and Creek's recent financial statements (following), evaluate and recomend appropriate action on the loan request. Creek Enterprises Income Statement for the Year Ended December 31, 2012 Sales caveau $30,000,000 Less: Cost of goods sold 21.000.000 Gross profits $9.000.000 Less: Operating expenses Selling expense 5.3,000,000 General and administrative expenses 1,800,000 Lease expense 200,000 Depreciation expense 1,000,000 Total operating expense $. 6.000.000 Operating profits $ 3,000,000 Les locerest expense 1.000.000 Net profits before taxes $ 2,000,000 Less: Taxes (rate -40%) 800.000 Net profits after taxes $ 1,200,000 Less: Preferred stock divideoda 100.000 Earnings available for common stockholders $1.100.000 1 Industry averages Debt ratio 0.51 Times interest earned ratio 7.30 Fissed-payment coverage ratio 1.85 Creek Enterprises Balance Sheet. December 31, 2012 Assets Liabilities and Stockholders' Equity Cash $ 1,000,000 Accounts payable $ 8,000,000 Marketable securities 3,000,000 Notes payable 8,000,000 Accounts receivable 12,000,000 Accruals 500,000 Inventories 7.500.000 Total current liabilities $16.500.000 Total current assets $23.500,000 Long-term debt (includes Land and buildings $11,000,000 financial leases) $20.000.000 Machinery and equipment 20,500,000 Preferred stock (25,000 Furniture and fixtures 8,000,000 shares, 54 dividend) $ 2,500,000 Gross fixed assets (at cost" $39,500,000 Common stock (1 million Less: Accumulated depreciation 13.000.000 shares at $5 pas) 5,000,000 Net fixed assets $26.500.000 Paid-in capital in excess of Total assets $50.000.000 par value 4,000,000 Retained earnings 2.000.000 Total stockholders' equity $13.500.000 Total liabilities and stuckholders' cquity $50.000.000 The firm has a t-year financial lease requiring annual beginning of-year payment of S200,000. Three years of the lease have yet to can. "Required annual principal payments are $800,000 Liquidity management Bauman Company's total current assets, total current liabil- ities, and inventory for each of the past 4 years follow: Trem Total current assets Total current liabilities Inventory 2009 2010 2011 2012 $16,950 $21,900 $22,500 $27,000 9,000 12,600 12,600 17,400 6,000 6,900 6,900 7,200 2. Calculate the firm's current and quick ratios for each year Compare the resulting time series for these measures of liquidity. b. Comment on the firm's liquidity over the 2009-2010 period. c. If you were told that Bauman Company's inventory turnover for each year in the 2009-2012 period and the industry averages were as follows, would this infor- mation support or conflict with your evaluation in part b? Why? Inventory turnover 2009 2010 2011 2012 Bauman Company 6.8 2.0 Industry average 11.2 10.8 11.0 10.6 Ratio comparisons Robert Acias recently inherited a stock portfolio from his uncle. Wishing to learn more about the companies in which he is now invested, Rubert per- forms a ratio analysis on each one and decides to compare them to each other. Some of his ratios are listed below. Ratio Current ratio Quick ratio Debt patio Net profit margin Island Burger Electric Utility Heaven 1.10 1.3 0.90 0.82 0.68 0.46 6.2% 14.3% Fink Software 6.8 5.2 0.0 28.5% Roland Motors 4.5 3.7. 0.35 8.4% Assuning that his uncle was a wise investor who assembled the portfolio with care, Robert finds the wide differences in these ratios confusing. Help him out. . . What problems might Robert encounter in comparing these companies to une another on the basis of their ratios? b. Why might the current and quick ratios for the electric utility and the fast-food stock be so much lower than the same ratios for the other companies? c. Why might it be all right for the electric utility to carry a large amount of debt, but not the software company? d. Why wouldn't investors invest all of their money in software companies instead of in less profitable companies? (Focus on risk and return) Cross-sectional ratio analysis Use the financial statements below and on page 106 for Fox Manufacturing Company for the year ended December 31, 2012, along with the industry average ratios below, to a. Prepare and interpret a complete ratic analysis of the firm's 2012 operations. b. Summarize your findings and make recommendations. Fox Manufacturing Company Income Statement for the Year Ended December 31, 2012 Sales revenue $600,000 Less: Cost of goods sold 460.000 Gross profits. $140,000 Less: Operating expenses General and administrative expenses $30,000 Depreciation expease 30.000 Total operating expense 60.000 Operating profics $ 30,000 Less: Interest expense 10.000 Net profits before taxes $ 70,000 Less: Taxes 27.100 Net profits after taxes (earnings available for common stockholders) $ 42.900 Earnings per share (EPS) $2.15 Ratio Industry average, 2012 Current ratio 2.35 Quick ratio 0.87 Inventory turnover" 4.55 Average collection period 35.8 days Tutal asset turnuver 1.09 Debt catio 0.300 Times interese earned ratio 12.3 Gross profit margin 0.202 Operating profit margin 0.135 Net profit margin 0.091 Return on total assets (ROA) 0.099 Return on common equity (ROE) 0.167 Earnings per share (EPS) $3.10 "Based on a 365-day year and on end-of-year fiyat Fox Manufacturing Company Balance Sheet December 31, 2012 Assets Cash $ 15,000 Marketable securities 7,200 Accounts receivable 34,100 Inventories 82.000 Total current assets $138,300 Net fixed assets 270.000 Total assets $408,300 Liabilities and Stocicholders' Equity Accounts payable 57.000 Notts payable 13,000 Accruals 5.000 Total carrear liabilities $ 75.000 Long-term debe si 50.000 Common stock equity (20,000 shares outstanding) $110,200 Regained earnings 2.73.100 Total stockholders' equity $183.100 Total liabilities and stockholders' equity 5408,300 Financial statement analysis The financial statements of Zach Industries for the year ended December 31, 2012, follow. 16,000 Zach Industries Income Statement for the Year Ended December 31, 2012 Salos cercaue $160,000 Les Cost of goods sold -106,000 Geosi profits $ 54.000 Lans: Operating expenses Selling expense Gestcal and administrative expenst 10,000 1.000 Depreciation expense 10.000 Toral operating expense $ 32.000 Operating prufits $ 17,000 Leasi Interest expense 6.100 Net profits before taxes $ 10,900 Less: Taxes 4,360 Net profits after taxes 6-540 Lexic expense Zach ladusties Balance Sheet December 31, 2012 Assets $ 1,000 Cash 500 Marketable securities Accounts receivable 25,000 Inventories 45.500 Tocal current assets $ 72.000 Land- $ 28,000 Buildings and equipment 90,000 Less: Accumulated depreciation 38.000 Net 6xed assets $ 78,000 Total assets $150.000 Liabilities and Stockholders' Equity Accounts payable $ 27,000 Notts payable 47.000 Total current liabilities $ 69,000 Long-term debt 22,950 Common stock 31,500 Retained eainings 26.550 Total liabilities and stockholdets" equity $150.000 "The firm's 3,000 cascanding shares of common stock closed 2012 at a price of 525 pershare. 2. Use the preceding financial statements to complete the following table. Assume the industry averages given in the table are applicable for both 2011 and 2012. Todssy average Retual.2011 Actual 2012 Current catio 1.80 -1.84 Quick.ratio 0.20 0.78 Laventory turnover 2.50 2.59 Average collection period 37 days 36.3 days Debt ratio 67% Times'interest acted ratio 3.8 Gross profit margiai 40% Net probit bargia 3.6% Return on total assets 4,0% 4.0% Return on common equity 9.8% Markedbook cario 1:1 1.2 Based on a 365 day year and on end-ofyear figures. 8 yze Zach Industries' financial condition as it is related to (1) liquidity, stivity. (3) debt, (4) profitability, and (5) market. Summarize the company's u financial condition Ratio 4.0 8.0% Debt analysis Springfield Banks is evaluating Creek Enterprises, which has requested a $4,000,000 loan, to assess the firm's financial leverage and financial .. risk. On the basis of the debt ratios for Creek, along with the industry averages (see top of page 103) and Creek's recent financial statements (following), evaluate and recomend appropriate action on the loan request. Creek Enterprises Income Statement for the Year Ended December 31, 2012 Sales veue $30,000,000 Less: Cost of goods sold 21.000.000 Gross profits $9.000.000 Less: Operating expenses Selling expense 5.3,000,000 General and administrative expenses 1,800,000 Lease expense 200,000 Depreciation expense 1,000,000 Total operating expense $. 6.000.000 Operating polits $ 3,000,000 Les locerest expense 1.000.000 Net profits before taxes $ 2,000,000 Less: Taxes (rate -40%) 800.000 Net profits after taxes $ 1,200,000 Less: Preferred stock dividende 100.000 Earnings available for common stockholders $1.100.000 1 Debt analysis Springfield Banks is evaluating Creek Enterprises, which has requested a $4,000,000 loan, to assess the firm's financial leverage and financial risk. On the basis of the debt ratios for Creek, along with the industry averages (see top of page 103) and Creek's recent financial statements (following), evaluate and recomend appropriate action on the loan request. Creek Enterprises Income Statement for the Year Ended December 31, 2012 Sales caveau $30,000,000 Less: Cost of goods sold 21.000.000 Gross profits $9.000.000 Less: Operating expenses Selling expense 5.3,000,000 General and administrative expenses 1,800,000 Lease expense 200,000 Depreciation expense 1,000,000 Total operating expense $. 6.000.000 Operating profits $ 3,000,000 Les locerest expense 1.000.000 Net profits before taxes $ 2,000,000 Less: Taxes (rate -40%) 800.000 Net profits after taxes $ 1,200,000 Less: Preferred stock divideoda 100.000 Earnings available for common stockholders $1.100.000 1 Industry averages Debt ratio 0.51 Times interest earned ratio 7.30 Fissed-payment coverage ratio 1.85 Creek Enterprises Balance Sheet. December 31, 2012 Assets Liabilities and Stockholders' Equity Cash $ 1,000,000 Accounts payable $ 8,000,000 Marketable securities 3,000,000 Notes payable 8,000,000 Accounts receivable 12,000,000 Accruals 500,000 Inventories 7.500.000 Total current liabilities $16.500.000 Total current assets $23.500,000 Long-term debt (includes Land and buildings $11,000,000 financial leases) $20.000.000 Machinery and equipment 20,500,000 Preferred stock (25,000 Furniture and fixtures 8,000,000 shares, 54 dividend) $ 2,500,000 Gross fixed assets (at cost" $39,500,000 Common stock (1 million Less: Accumulated depreciation 13.000.000 shares at $5 pas) 5,000,000 Net fixed assets $26.500.000 Paid-in capital in excess of Total assets $50.000.000 par value 4,000,000 Retained earnings 2.000.000 Total stockholders' equity $13.500.000 Total liabilities and stuckholders' cquity $50.000.000 The firm has a t-year financial lease requiring annual beginning of-year payment of S200,000. Three years of the lease have yet to can. "Required annual principal payments are $800,000 Liquidity management Bauman Company's total current assets, total current liabil- ities, and inventory for each of the past 4 years follow: Trem Total current assets Total current liabilities Inventory 2009 2010 2011 2012 $16,950 $21,900 $22,500 $27,000 9,000 12,600 12,600 17,400 6,000 6,900 6,900 7,200 2. Calculate the firm's current and quick ratios for each year Compare the resulting time series for these measures of liquidity. b. Comment on the firm's liquidity over the 2009-2010 period. c. If you were told that Bauman Company's inventory turnover for each year in the 2009-2012 period and the industry averages were as follows, would this infor- mation support or conflict with your evaluation in part b? Why? Inventory turnover 2009 2010 2011 2012 Bauman Company 6.8 2.0 Industry average 11.2 10.8 11.0 10.6 Ratio comparisons Robert Acias recently inherited a stock portfolio from his uncle. Wishing to learn more about the companies in which he is now invested, Rubert per- forms a ratio analysis on each one and decides to compare them to each other. Some of his ratios are listed below. Ratio Current ratio Quick ratio Debt patio Net profit margin Island Burger Electric Utility Heaven 1.10 1.3 0.90 0.82 0.68 0.46 6.2% 14.3% Fink Software 6.8 5.2 0.0 28.5% Roland Motors 4.5 3.7. 0.35 8.4% Assuning that his uncle was a wise investor who assembled the portfolio with care, Robert finds the wide differences in these ratios confusing. Help him out. . . What problems might Robert encounter in comparing these companies to une another on the basis of their ratios? b. Why might the current and quick ratios for the electric utility and the fast-food stock be so much lower than the same ratios for the other companies? c. Why might it be all right for the electric utility to carry a large amount of debt, but not the software company? d. Why wouldn't investors invest all of their money in software companies instead of in less profitable companies? (Focus on risk and return) Cross-sectional ratio analysis Use the financial statements below and on page 106 for Fox Manufacturing Company for the year ended December 31, 2012, along with the industry average ratios below, to a. Prepare and interpret a complete ratic analysis of the firm's 2012 operations. b. Summarize your findings and make recommendations. Fox Manufacturing Company Income Statement for the Year Ended December 31, 2012 Sales revenue $600,000 Less: Cost of goods sold 460.000 Gross profits. $140,000 Less: Operating expenses General and administrative expenses $30,000 Depreciation expease 30.000 Total operating expense 60.000 Operating profics $ 30,000 Less: Interest expense 10.000 Net profits before taxes $ 70,000 Less: Taxes 27.100 Net profits after taxes (earnings available for common stockholders) $ 42.900 Earnings per share (EPS) $2.15 Ratio Industry average, 2012 Current ratio 2.35 Quick ratio 0.87 Inventory turnover" 4.55 Average collection period 35.8 days Tutal asset turnuver 1.09 Debt catio 0.300 Times interese earned ratio 12.3 Gross profit margin 0.202 Operating profit margin 0.135 Net profit margin 0.091 Return on total assets (ROA) 0.099 Return on common equity (ROE) 0.167 Earnings per share (EPS) $3.10 "Based on a 365-day year and on end-of-year fiyat Fox Manufacturing Company Balance Sheet December 31, 2012 Assets Cash $ 15,000 Marketable securities 7,200 Accounts receivable 34,100 Inventories 82.000 Total current assets $138,300 Net fixed assets 270.000 Total assets $408,300 Liabilities and Stocicholders' Equity Accounts payable 57.000 Notts payable 13,000 Accruals 5.000 Total carrear liabilities $ 75.000 Long-term debe si 50.000 Common stock equity (20,000 shares outstanding) $110,200 Regained earnings 2.73.100 Total stockholders' equity $183.100 Total liabilities and stockholders' equity 5408,300 Financial statement analysis The financial statements of Zach Industries for the year ended December 31, 2012, follow. 16,000 Zach Industries Income Statement for the Year Ended December 31, 2012 Salos cercaue $160,000 Les Cost of goods sold -106,000 Geosi profits $ 54.000 Lans: Operating expenses Selling expense Gestcal and administrative expenst 10,000 1.000 Depreciation expense 10.000 Toral operating expense $ 32.000 Operating prufits $ 17,000 Leasi Interest expense 6.100 Net profits before taxes $ 10,900 Less: Taxes 4,360 Net profits after taxes 6-540 Lexic expense Zach ladusties Balance Sheet December 31, 2012 Assets $ 1,000 Cash 500 Marketable securities Accounts receivable 25,000 Inventories 45.500 Tocal current assets $ 72.000 Land- $ 28,000 Buildings and equipment 90,000 Less: Accumulated depreciation 38.000 Net 6xed assets $ 78,000 Total assets $150.000 Liabilities and Stockholders' Equity Accounts payable $ 27,000 Notts payable 47.000 Total current liabilities $ 69,000 Long-term debt 22,950 Common stock 31,500 Retained eainings 26.550 Total liabilities and stockholdets" equity $150.000 "The firm's 3,000 cascanding shares of common stock closed 2012 at a price of 525 pershare. 2. Use the preceding financial statements to complete the following table. Assume the industry averages given in the table are applicable for both 2011 and 2012. Todssy average Retual.2011 Actual 2012 Current catio 1.80 -1.84 Quick.ratio 0.20 0.78 Laventory turnover 2.50 2.59 Average collection period 37 days 36.3 days Debt ratio 67% Times'interest acted ratio 3.8 Gross profit margiai 40% Net probit bargia 3.6% Return on total assets 4,0% 4.0% Return on common equity 9.8% Markedbook cario 1:1 1.2 Based on a 365 day year and on end-ofyear figures. 8 yze Zach Industries' financial condition as it is related to (1) liquidity, stivity. (3) debt, (4) profitability, and (5) market. Summarize the company's u financial condition Ratio 4.0 8.0%
