Hudson Valley Realty owns a number of commercial properties in suburban towns north and east of New York City. The firm previously rented one of them to an upscale department store renowned for jewelry and fine china, but that also sold everything from chandeliers to bed linens to lawn furniture. The building became vacant two years ago when the tenant broke a ten-year lease after only three years of occupancy and unexpectedly filed for bankruptcy. Hudson Valley considered any effort to recover early termination penalties a waste of time and money.

Interest expense, high real estate taxes, insurance, and security costs make it extremely expensive to hold vacant property in this area. Although Hudson Valley is obviously eager to find a new tenant, it does not want another unexpected vacancy to have a serious negative effect on its investment returns. Hudson Valley wants to be sure that the new tenant will be financially stable and will likely stay for at least the full term of the lease.

Vermont Heritage, a well-known furniture chain that targets affluent customers with traditional tastes, has expressed interest in the location. Peter Cortland, Hudson Valleys rental manager, wants to take a close look at the potential tenants financial statements before entering into more serious negotiations. Vermont Heritage has submitted the following audited income statements and balance sheets for the last three years.

Income Statement ($ in millions)

Account	20x3	20x2	20x1
Sales	949.0	955.1	907.3
Cost of Goods Sold	466.6	472.8	436.6
Gross Profit	482.4	482.3	470.7
Selling & Administrative	332.3	320.8	315.6
Depreciation	21.3	21.3	21.3
Other income (expenses)	1.4	-9.2	-11.9
Earnings Before Interest and Taxes	130.2	131.0	121.9
Interest Expense	0.8	0.6	0.6
Taxable Income	129.4	130.4	121.3
Taxes	49.2	50.1	45.9
Net Income	80.2	80.3	75.4
Dividends	24.1	20.1	18.9

Vermont Heritage

Balance Sheet ($ in millions)

Account	20x3	20x2	20x1
Current Assets
Cash	57.4	61.6	81.9
Accounts Receivable	28.0	27.0	26.4
Inventory	187.1	186.9	198.2
Other Current Assets	56.5	54.2	53.8
Total Current Assets	329.0	329.7	360.3
Net Fixed Assets	275.2	277.0	289.4
Other Assets	88.8	81.7	81.8
Total Assets	693.0	688.4	731.5
Current Liabilities
Accounts Payable	20.4	22.2	26.1
Short-term Notes	4.2	4.7	101.1
Other Current Liabilities	6.4	7.4	8.0
Total Current Liabilities	31.0	34.3	135.1
Long-term Debt	3.2	4.5	9.2
Other Long-term Liabilities	5.5	52.4	50.2
Total Liabilities	39.7	91.2	194.5
Owners Equity
Common Stock	230.0	230.0	230.0
Retained Earnings	423.3	367.2	307.0
Total Owners Equity	653.3	597.2	537.0
Total Liabilities & Equity	693.0	688.4	731.5

Required:

1. Look at Vermont Heritages sales revenue, earnings before interest and taxes, and net income over the three-year period. Would you classify it as a growing diminishing, or stable company?

2. Look at Vermont Heritages expense accounts, cost of goods sold, and selling and administrative expenses. Do they seem to be roughly proportional to sales? Do any of these categories seem to be growing out of control?

3. Depreciation expense is the same for all three years. What does that tell you about Vermont Heritages growth?

4. Look at Vermont Heritages earnings before interest and taxes, interest expense, and debt accounts over the three-year period. Comparing debt to equity, do you think the company seems to have excessive debt? Would you expect the company to have any problems meeting its interest payments?

5. Dividends have increased as a percentage of net income. Why do you think the company decided to pay out more of its earnings to shareholders?

6. Compare current assets with current liabilities. Would you expect Vermont Heritage to have any problems meeting its short-term obligations?

7. Overall, do you think Vermont Heritage will be a relatively safe tenant for Hudson Valleys building?