Decision Makers$$ Perspective $9/18/24$

Judgment Case $145$ Analyzing financial statements; financial leverage; interest coverage

AGF Foods Company is a large, primarily domestic, consumer foods company involved in the

manufacture, distribution, and sale of a variety of food products. Industry averages are derived

from Troy$$s The Almanac of Business and Industrial Financial Ratios. Following are the $2024$ and $2023$ comparative income statements and balance sheets for AGF. $($The financial data we use

are from actual financial statements of a well$-$known corporation, but the company name is

fictitious, and the numbers and dates have been modified slightly to disguise the company$$s

identity.$)$

Table Summary: The table shows years ended December $31,2024,$ and $2023$ for A G F Foods

Company in millions of dollars. The table contains $2$ sections with $3$ columns each. The heading

of the first section is entered in row $1$ of column $1.$ The column headings in row $1$ is as follows:

comparative income statements; $2024$; $2023.$ Net sales is entered in row $2$ of column $1$ under

which is a single row with an entry. Gross profit is entered in row $4$ of column $1$ under which is a

single row with an entry. Operating income is entered in row $6$ of column $1$ under which is a

single row with an entry. Income from operations before tax is entered in row $8$ of column $1$

under which is a single row with an entry. Row $10$ of column $1$ contains an entry. Dollar values

are entered in columns $2$ and $3.$ The heading of the second section in row $11$ of column $1$ is as

follows: comparative balance sheets. Assets is entered in row $12$ of column $1$ under which are $5$

rows with entries. Liabilities and shareholders$$ equity is entered in row $18$ of column $1$ under

which are $4$ rows with entries. Shareholders$$ equity is entered in row

$...$lar values.

AGF FOODS COMPANY

Years Ended December $31,2024$ and $2023$

$($$ in millions$)$

Comparative Income Statements $20242025$

Net sales $$6,440$ $$5,800$

Cost of goods sold $(3,667)(3,389)$

Gross profit $2,7732,411$

Operating expenses $(1,916)(1,629)$

Operating income $857782$

Interest expense $(54)(53)$

Income from operations before tax $803729$

Income taxes $(316)(287)$

Net income $ $487$ $ $442$

Comparative Balance Sheets

Assets

Total current assets $$1,879$ $$1,490$

Property, plant, and equipment $($net$)$ $$2,592$ $$2,291$

Intangibles $($net$)800843$

Other assets $7460$

Total assets $$5,345$ $$4,684$

Liabilities and Shareholders$$ Equity

Total current liabilities $$1,473$ $ $941$

Long$-$term debt $534728$

Deferred income taxes $407344$

Total liabilities $2,4142,013$

Shareholders$$ equity:

Common stock $180180$

Additional paid$-$in capital $2163$

Retained earnings $2,7302,428$

Total shareholders$$ equity $2,9312,671$

Total liabilities and shareholders$$ equity $$5,345$ $$4,684$

Long$-$term solvency refers to a company$$s ability to pay its long$-$term obligations. Financing

ratios provide investors and creditors with an indication of this element of risk.

Required:

$1.$ Calculate the debt to equity ratio for AGF for $2024.$

$2.$ The average ratio for the stocks listed on the New York Stock Exchange in a comparable time period was $1\mathrm{.}0.$ Other things being equal, does AGF appear to have higher or lower default risk than others in its industry?

$3.$ Is AGF experiencing favorable or unfavorable financial leverage?

$4.$ Calculate AGF$$s times interest earned ratio for $2024.$

$5.$ The coverage for the stocks listed on the New York Stock Exchange in a comparable time period was $5\mathrm{.}1.$ Other things being equal, does AGF appear to have higher or lower interest coverage than others in its industry?

Answer

$1.).$ Debt Equity Ratio$=$ Total debt$/$ Total Equity

Total Debt $=$Total outside Liabilities $2414$

Total Equity $=$ Total shareholders Equity $2931$

Debt Equity Ratio $(2414/2931)0\mathrm{.}82$

$2$ As debt Equity ratio is lower than Industry i$.$e

$1$ company's Default risk is favorable

$3$ Computation of Financial leverage

$($a$)$ Total income before tax $803$

Tax on income $316$

Tax rate $(316/803)39\mathrm{.}35\%$

Earnings before interest & tax $857$

Tax @$39\mathrm{.}35\%337$

Earning available on equity $520$

rate of earning for on equity $(520/2931)17\mathrm{.}74\%$

Debt interest $\%(54/534)10\mathrm{.}11\%$

As earning on equity is more than debt financing Hence Financial leverage is Favorable

$4$ Time interest earn Ratio $=$ Earnings before interest and tax$/$ Interest payable $(857/54)=15\mathrm{.}87$

$5$ Interest coverage ratio $=$ Time interest earn Ratio $=15\mathrm{.}87$ is Higher than industry ratio.

Please give me an full explanation of the answer.