Lydex Company

Comparative Balance Sheet

This Year

Last Year

Assets

Current Assets:

Cash

$960,000

$1,260,000

Marketable securities

0

300,000

Accounts Receivable, net

2,700,000

1,800,000

Inventory

3,900,000

2,400,000

Prepaid expenses

240,000

180,000

Total current assets

7,800,000

5,940,000

Plant and equipment, net

9,300,000

8,940,000

Total assets

$17,100,000

$14,880,000

Liabilities and Stockholders Equity

Liabilities:

Current liabilities

$3,900,000

$2,760,000

Note payable, 10%

3,600,000

3,000,000

Total liabilities

7,500,000

5,760,000

Stockholders equity:

Common stock, $78 par value

7,800,000

7,800,000

Retained earnings

1,800,000

1,320,000

Total stockholders equity

9,600,000

9,120,000

Total liabilities and stockholders equity

$17,100,000

$14,880,000

Lydex Company

Comparative Income Statement and Reconciliation

This year

Last year

Sales (all on account)

$15,750,000

$12,480,000

Cost of goods sold

12,600,000

9,900,000

Gross margin

3,150,000

2,580,000

Selling and administrative expenses

1,590,000

1,560,000

Net operating income

1,560,000

1,020,000

Interest expense

360,000

300,000

Net income before taxes

1,200,000

720,000

Income taxes (30%)

360,000

216,000

Net Income

840,000

504,000

Common dividends

360,000

252,000

Net income retained

480,000

252,000

Beginning retained earnings

1,320,000

1,068,000

Ending retained earnings

$1,800,000

$1,320,000

To begin your assignment you gather the following financial data and ratios that are typical of companies in Lydex Companys industry:

Current ratio

2.3

Acid-text ratio

1.2

Average collection period

30 days

Average sale period

60 days

Return on assets

9.5%

Debt-to-equity ratio

0.65

Times interest earned ratio

5.7

Price-earning ratio

10

REQUIRED:

1)You decide first to assess the companys performance in terms of debt management and profitability. 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.

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.