OMEWORK PROBLEM

Financial Statements for Sundown Ski Wear, Inc. for 2019 were as follows:

Sundown Ski Wear

Balance Sheet as of December 31, 2019 (Millions)

Cash	$ 20		Accounts Payable	80
Accounts Receivable	50		Accrued Liabilities	30
Inventory	160		Notes Payable	90
Total Current Assets	$230		Total Current Liabilities	$200
Gross Fixed Assets	400		Long-term Debt	150
less Accum. Depreciation	140		Common Stock	80
Net Fixed Assets	$260		Retained Earnings	60
			Total Stockholders Equity	140
Total Assets	$490		Total Liabilities and Equity	$490

Sundown Ski Wear

Income Statement for the year Ended December 31, 2019 (Millions)

Net Sales	$1,500
Cost of Goods Sold	1,230
Gross Profit	270
Selling and Administrative Expenses	150
Depreciation Expense	30
Operating Earnings (EBIT)	90
Interest Expense	30
Earnings Before Taxes (EBT)	60
Taxes (25%)	15
Net Income	$ 45

Industry Average Ratios

Current Ratio	2.0 X		Gross Profit Margin	18.0%
Quick Ratio	0.8 X		Operating (EBIT) Margin	5.8%
Times Interest Earned	7.0 X		Net Profit Margin	3.7%
Cash Coverage	9.0 X		Return on Assets (ROA)	10.1%
COGS / Inventory	8.2 X		Return on Equity (ROE)	15.9%
Average Collection Period	24 days		Total Debt / Total Assets	30.0%
Sales / Fixed Assets	6.0 X
Sales / Total Assets	3.0 X

1. Due to unanticipated factors, e.g. the Covid pandemic and the ensuing downturn in vacation travel, Sundowns sales declined 30 percent in 2020. Furthermore, pricing pressures in the industry resulted in Sundowns gross profit margin declining to 15 percent in 2020. However, on a positive note, the firm was able to cut selling and administrative expenses in 2020 to $130 Million (from $150 Million in 2019). Other expenses (depreciation, interest) remained unchanged from 2019. Construct a hypothetical income statement for Sundown for 2020 based on these outcomes [Note: if the firm has negative earnings before tax, it cannot receive a tax refund because under the 2017 Tax Cuts and Jobs Act, losses can only be carried forward against future earnings]. Is the firm likely to survive such a dismal year? How? What if these conditions persist for a long period of time (e.g. 3+ years) beyond 2020; is the firm likely to survive then? What factors impact Sundowns long-term survival under these adverse circumstances? [5 Points]