need help with Business Finance discussion

GRADED DISCUSSION 1 Hudson Valley Realty Hudson Valley Realty owns a number of commercial properties in suburban towns north and east of New York City. One of them used to be rented to an upscale department store that was best known for jewelry and fine china but 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 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 Valley's rental manager, wants to take a close look at the potential tenant's 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. Vermont Heritage: Income Statement ($ in millions) Sales 2011 $949.00 2010 $955.10 Cost of goods sold $466.60 $472.80 Gross profit $482.40 $482.30 Selling and $332.30 administrative expenses $320.80 Depreciation $21.30 $21.30 Other income $1.40 (expenses) EBIT $130.20 Interest expense (net of $0.80 interest income) ($9.20) $131.00 $0.60 Taxable income $129.40 $130.40 Taxes Net income Dividends $49.20 $80.20 $24.06 $50.10 $80.30 $20.08 Vermont Heritage: Balance Sheets ($ in millions) ASSETS 2011 2010 2009 LIABILITIES Current assets Current liabilitie Cash and cash items $57.40 $61.60 $81.90 Accounts payabl Accounts receivable $28.02 $27.00 $26.40 Short-term notes Inventory $187.13 $186.90 $198.20 Other current lia Other current assets $56.52 $54.20 $53.80 Total current assets $329.07 $329.70 $360.30 Total current liab Net fixed assets $275.20 $277.00 $289.40 Long-term debt Other assets $88.80 $81.70 $81.80 Other long-term liabilities Total liabilities OWNERS' EQU Common stock Retained earning Total owners' eq TOTAL ASSETS $693.07 $688.40 $731.50 TOTAL LIABIL AND OWNERS EQUITY In your initial response to the topic you have to answer 2 or 3 of the first set of questions as well as the last question. You are expected to make your own contribution in a main topic as well as respond with value added comments to at least two of your classmates as well as to your instructor. 1. Look at Vermont Heritage's sales revenue, EBIT, and net income over the three-year period. Would you classify it as a growing, diminishing, or stable company? Please explain your answer. 2. Look at Vermont Heritage's 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? Please explain your answer. 3. Depreciation expense is the same for all three years. What does that tell you about Vermont Heritage's growth? Please explain your answer. 4. Look at Vermont Heritage's EBIT, interest expense, and debt accounts (current liabilities, long-term debt,and other liabilities) 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? Please explain your answer. 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? Please explain your answer. 6. Compare current assets with current liabilities. Would you expect Vermont Heritage to have any problems meeting its short-term obligations? Please explain your answer. Overall, do you think Vermont Heritage will be a relatively safe tenant for Hudson Valley's building? Please explain your answer. 2. Comparison of Expenses, Cost of goods sold and Administrative expenses 2011 Cost of goods sold Selling and Administrative expenses As a % of sales 2010 49.17% $466.60 $472.80 35.02% As a % of sales 49.5 % 2009 $436.60 33.59% 48.07% 34.79% $332.30 $320.80 $315.60 $949.00 Sales As a % of sales $955.10 $907.30 Looking at the above calculation we can conclude that the proportion of expenses to Sales are roughly being maintained over the last three years. They are not growing out of control. 3. Depreciation being the same in all the three years indicates a Straight line method of depreciation being followed. It also indicates that Vermont Heritage has not purchased any fixed assets in the last three years. Hence we can conclude that the growth has been stagnant. 6. 2011 Current assets Current Liabilities Current Ratio 2010 2009 $329.07 $329.70 $360.30 $31.00 10.62 $34.27 9.62 $135.10 2.67 From the above calculation, we can conclude the following: - The Current assets have reduced over the years but not drastically. - The Current liabilities have been curbed drastically. - The Current Ratio shows a healthy trend and indicates that Vermont Heritage has more than enough assets to cover its Current liabilities. Hence, it will have no problems meeting it's short term obligations