Questions 1-6. Thank you!

Figure 1 Pro Forma Income Statements 2016 2017 2018 $5,340 1,716 3,624 CHEM-MED COMPANY Income Statements 20132015 (in 000) 2013 2014 2015 Net sales (all credit) $ 777 $3,051 $3,814 Cost of goods sold 257 995 1,040 Gross profit 520 2,056 2,7741 Selling, etc., expenses 610 705 964 Other inc (exps)* 0 Operating profit (90) 1,351 1,810 Interest expense 75 94 Income before tax (101) 1,276 1,716 Income taxes (40% in 1986; 33% thereafter) 510 566 Net income ($ 101) S 766 S1.150 S7,475 2.154 5,321 2.120 $10,466 3,054 7,412 2,645 1.520 0 0 500 0 0 3.201 4,767 2,604 202 302 434 2,402 2.899 0 793 $1,609 957 $1.943 4,333 1.430 $ 2.903 0 0 0 0 $1,943 Dividends paid Increase in retained earnings Average number of shares Earnings per share 0 0 ($ 101) $ 766 $1.150 2,326 2,326 2,3471 ($ 0.04) $ 0.33 $ 0:49 $1,609 2,347 2,347 $ 2,903 2,347 $ 1.24 $ 0.69 S 0.83 *Other Inc (Exps) refers to extraordinary gains and losses. In 2016, $500,000 is expected from Pharmacia, Inc., in settlement of their suit. ** Shares are not publicly traded. Figure 2 CHEM-MED COMPANY Balance Sheets Pro Forma Balance Sheets As of Dec. 31, years ended: |As of Dec. 31, years ended: 2013 2014 2015 2016 2017 2018 S 124 $ 103 S 167 S205 S422 S 101 100 409 564 907 1,495 2,351 151 302 960 1,102 1,443 798 Assets: Cash and equivalents Accounts receivable Inventories Other current Total current assets Property, plant, and equipment Less: accumulated depreciation Property, plant, and equipment, 28 59 29 41 57 11 403 873 1,720 2,255 3,417 1,901 2,298 2,917 4,301 5,531 3,261 8,923 588 81 82 346 413 522 1,820 2,216 2,571 3,888 5,009 8,335 net 0 101 200 200 215 399 $2.223 $3,190 $4,491 $6,343 $8,641 S11,995 210 $ 405 $ 551 $ 771 $1,080 S 1,512 135 35 39 42 59 82 245 444 593 830 1,162 1,647 Other fixed assets Total assets Liabilities: Accounts payable Short-term debt Total current liabilities Long-term debt Total liabilities Equity: Common stock Retained earnings Total equity Total liabilities and equity 17 19 21 27 50 17 262 463 614 857 1.212 1,664 2,062 2,062 2,062 _(101) 665 1.815 1,961 2.727 3,877 $2.223 $3.190 $4,491 2,062 2,062 3.424 5,366 5,486 7,428 2.062 8.269 10,331 $11.995 $ 6,343 $8.641 Figure 3 Biotechnology Industry Statistics Median Company in SIC 2831 Biological Products* 2013 2014 2015 2.5 2.3 2.4 1.1 1.3 5.5 5.6 5.7 1.15 1.16 1.18 4.00% 4.00% 5.00% 4.60% 4.64$ 5.90% 7.64% 8.44% 12.29% 0.40 0.45 0.52 Current ratio Quick ratio Inventory turnover Total asset turnover Return on sales Return on assets Return on equity Total debt to assets 1.2 5.6 Current ratio Quick ratio Inventory turnover Total asset turnover Return on sales Return on assets Return on equity Total debt to assets Price-earnings ratio Average stock price Selected Statistics Pharmacia Company 2013 2014 2015 2.8 2.7 2.8 1.5 1.3 1.6 5.7 5.8 1.9 2 1.9 6.00% 6.50% 7.00% 11.40% 13.00% 13.30% 19.04% 27.66% 29.56% 0.40 0.53 0.55 13.7 14 $21.78 $24.92 $31.50 15 * Source: Dun's Industry Ratios. The data have been adjusted for this case. Required You are an investor who is considering adding Chem-Med to your portfolio. As such, you are interested in the company's record of profitability, prospects for the future, degree of risk, and how it compares with others in the industry. From that point of view, answer the following questions: 1. What was Chem-Med's rate of sales growth in 2015? What is it forecasted to be in 2016, 2017, and 2018? 2. What was Chem-Med's net income growth in 2015? What is it forecasted to be in 2016, 2017, and 2018? Is projected net income growing faster or slower than projected sales? After computing these values, take a hard look at the 2016 income statement data to see if you want to make any adjustments. 3. How does Chem-Med's current ratio for 2015 compare to Pharmacia's? How does it compare to the industry average? Compute Chem-Med's current ratio for 2018. Is there any problem with it? 4. What is Chem-Med's total debt-to-assets ratio for 2015, 2016, 2017, 2018? Is any trend evident in the four-year period? Does Chem-Med in 2015 have more or less debt than the average company in the industry? 5. What is Chem-Med's average accounts receivable collection period for 2015, 2016, 2017, 2018? Is the period getting longer or shorter? What are the consequences? 6. How does Chem-Med's return-on-equity ratio (ROE) compare to Pharmacia's and the industry for 2015? Using the Du Pont method, compare the positions of Chem-Med and Pharmacia. Compute ROE for each company using the following formula: ROE = Profit margin * Asset turnover/(1-Debt to assets) Compare the results to determine the sources of ROE for each company