Q4. Case Study Assessing Martin Manufacturing's Current Financial Position:

Terri Spiro, an experienced budget analyst at Martin Manufacturing Company, has been charged with assessing the firm's financial performance during 2003 and its financial position at year-end 2003. To complete this assignment, she gathered the firm's 2003 financial statements, which follow. In addition, Terri obtained the firm's ratio values for 2001 and 2002, along with the 2003 industry average ratios (also applicable to 2001 and 2002). These are presented in the table on page 94.

Martin Manufacturing Company Income Statement for the Year Ended December 31, 2003 Sales revenue $5,075,000 Less: Cost of goods sold 3,704,000 Gross profits $1,371,000 Less: Operating expenses Selling expense $650,000 General and administrative expenses 416,000 Depreciation expense 152,000 Total operating expense 1,218,000 Operating profits $ 153,000 Less: Interest expense 93,000 Net profits before taxes $ 60,000 Less: Taxes (rate = 40%) 24,000 Net profits after taxes $ 36,000 Less: Preferred stock dividends 3,000 Earnings available for common stockholders $ 33,000 Earnings per share (EPS) $0.33Martin Manufacturing Company Balance Sheets December 31 Assets 2003 2002 Current assets Cash $ 25,000 $ 24,100 Accounts receivable 805,556 763,900 Inventories 700,625 763,445 Total current assets $1,531,181 $1,551,445 Gross fixed assets (at cost) $2,093,819 $1,691,707 Less: Accumulated depreciation 500,000 348,000 Net fixed assets $1,593,819 $1,343,707 Total assets $3,125,000 $2,895,152 Liabilities and Stockholders' Equity Current liabilities Accounts payable $ 230,000 $ 400,500 Notes payable 311,000 370,000 Accruals 75,000 100,902 Total current liabilities $ 616,000 $ 871,402 Long-term debt $1,165,250 $ 700,000 Total liabilities $1,781,250 $1,571,402 Stockholders' equity Preferred stock (2,500 shares, $1.20 dividend) $ 50,000 $ 50,000 Common stock (100,000 shares at $4 par)" 400,000 400,000 Paid-in capital in excess of par value 593,750 593,750 Retained earnings 300,000 280,000 Total stockholders' equity $1,343,750 $1,323,750 Total liabilities and stockholders' equity $3,125,000 $2,895,152 "The firm's 100,000 outstanding shares of common stock closed 2003 at a price of $11.38 per share.Martin Manufacturing Company Historical ratios Actual Actual Actual Industry average Ratio 2001 2002 2003 2003 Current ratio 1.7 1.8 1.5 Quick ratio 1.0 0.9 1.2 Inventory turnover (times) 5.2 5.0 10.2 Average collection period 50 days 55 days 46 days Total asset turnover (times) 1.5 1.5 2.0 Debt ratio 45.8% 54.3% 24.5% Times interest earned ratio 2.2 1.9 2.5 Gross profit margin 27.5% 28.0% 26.0% Net profit margin 1.1% 1.0% 1.2% Return on total assets (ROA) 1.7% 1.5% 2.4% Return on common equity (ROE) 3.1% 3.3% 3.2% Price/earnings (P/E) ratio 33.5 38.7 43.4 Market/book (M/B) ratio 1.0 1.1 1.2