Lydex Company

Comparative Balance Sheet

 This Year Last Year

Assets

Current assets:

Cash $ $1,010,000$ $ $1,250,000$

Marketable securities $0300,000$

Accounts receivable, net $2,900,0002,000,000$

Inventory $3,650,0002,000,000$

Prepaid expenses $270,000210,000$

Total current assets $7,830,0005,760,000$

Plant and equipment, net $9,620,0009,100,000$

Total assets $ $17,450,000$ $ $14,860,000$

Liabilities and Stockholders' Equity

Liabilities:

Current liabilities $ $4,060,000$ $ $3,080,000$

Note payable, $10\%3,700,0003,100,000$

Total liabilities $7,760,0006,180,000$

Stockholders' equity:

Common stock, $$70$ par value $7,000,0007,000,000$

Retained earnings $2,690,0001,680,000$

Total stockholders' equity $9,690,0008,680,000$

Total liabilities and stockholders' equity $ $17,450,000$ $ $14,860,000$



Lydex Company

Comparative Income Statement and Reconciliation

 This Year Last Year

Sales $($all on account$)$ $ $15,910,000$ $ $14,080,000$

Cost of goods sold $12,728,00010,560,000$

Gross margin $3,182,0003,520,000$

Selling and administrative expenses $912,0001,624,000$

Net operating income $2,270,0001,896,000$

Interest expense $370,000310,000$

Net income before taxes $1,900,0001,586,000$

Income taxes $(30\%)570,000475,800$

Net income $1,330,0001,110,200$

Common dividends $320,000555,100$

Net income retained $1,010,000555,100$

Beginning retained earnings $1,680,0001,124,900$

Ending retained earnings $ $2,690,000$ $ $1,680,000$



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



Current ratio $2\mathrm{.}3$ 

Acid$-$test ratio $1\mathrm{.}1$ 

Average collection period $32$ days

Average sale period $60$ days

Return on assets $9\mathrm{.}8\%$ 

Debt$-$to$-$equity ratio $0\mathrm{.}7$ 

Times interest earned ratio $5\mathrm{.}8$ 

Price$-$earnings ratio $10$ 

Required:

$1.$ You decide first to assess the company$’$s performance in terms of debt management and profitability. Compute the following for both this year and last year: $($Round your "Percentage" answers to $1$ decimal place and other answers to $2$ decimal places.$)$



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 $$13,120,000.)$

e$.$ The return on equity. $($Stockholders$’$ equity at the beginning of last year totaled $$8,124,900.$ There has been no change in common stock over the last two years.$)$

f$.$ Is the company$’$s financial leverage positive or negative?