Terri Spiro, an experienced budget analyst at Martin Manufacturing Company, has been charged with assessing the firms financial performance during 2006 and its financial position at year-end 2006. To complete this assignment, she gathered the firms 2006 financial statements (below and on the facing page). In addition, Terri obtained the firms ratio values for 2004 and 2005, along with the 2006 industry average ratios (also applicable to 2004 and 2005).

Q2. Analyze the firms current financial position from both a cross-sectional and a time-series viewpoint. Break your analysis into evaluations of the firms liquidity, activity, debt, profitability, and market.

Q3. Summarize the firms overall financial position on the basis of your findings in part b

Q4. What ethical issues could confront a financial manger?

Martin Manufacturing Company Income Statement for the Year Ended December 31, 2006 $5,075,000 3,704,000 $1,371,000 $650,000 416,000 152,000 Sales revenue Less: Cost of goods sold Gross profits Less: Operating expenses Selling expense General and administrative expenses Depreciation expense Total operating expense Operating profits Less: Interest expense Net profits before taxes Less: Taxes (rate = 40%) Net profits after taxes Less: Preferred stock dividends Earnings available for common stockholders 1,218,000 $ 153,000 93,000 $ 60,000 24,000 $ 36,000 3,000 $ 33,000 Earnings per share (EPS) $0.33 Martin Manufacturing Company Balance Sheets December 31 2006 2005 Assets Current assets Cash Accounts receivable Inventories Total current assets Gross fixed assets (at cost) Less: Accumulated depreciation Net fixed assets Total assets $ 25,000 805,556 700,625 $1,531,181 $2,093,819 500,000 $1,593,819 $3,125,000 $ 24,100 763,900 763,445 $1,551,445 $1,691,707 348,000 $1,343,707 $2,895,152 Liabilities and Stockholders' Equity $ 230,000 311,000 75,000 $ 616,000 $1,165,250 $1,781,250 $ 400,500 370,000 100,902 $ 871,402 $ 700,000 $1,571,402 Current liabilities Accounts payable Notes payable Accruals Total current liabilities Long-term debt Total liabilities Stockholders' equity Preferred stock (2,500 shares, $1.20 dividend) Common stock (100,000 shares at $4 par) Paid-in capital in excess of par value Retained earnings Total stockholders' equity Total liabilities and stockholders' equity $ 50,000 400,000 593,750 300,000 $1,343,750 $3,125,000 $ 50,000 400,000 593,750 280,000 $1,323,750 $2,895,152 "The firm's 100,000 outstanding shares of common stock closed 2006 at a price of $11.38 per share. Martin Manufacturing Company Historical and Industry Average Ratios Actual Actual Actual 2004 2005 2006 Industry average 2006 Ratio 1.7 1.8 1.5 1.0 0.9 5.0 50.7 days 1.5 45.8% 55.8 days 1.5 54.3% Current ratio Quick ratio Inventory turnover (times) Average collection period Total assct turnover (times) Debt ratio Times interest earned ratio Gross profit margin Net profit margin Return on total assets (ROA) Return on common cquity (ROE) Price/carnings (P/E) ratio Market/book (M/B) ratio 2.2 1.9 1.2 10.2 46 days 2.0 24.5% 2.5 26.0% 1.2% 2.4% 3.2% 43.4 27.5% 1.1% 1.7% 3.1% 33.5 1.0 28.0% 1.0% 1.5% 3.3% 38.7 1.1 1.2 Martin Manufacturing Company Income Statement for the Year Ended December 31, 2006 $5,075,000 3,704,000 $1,371,000 $650,000 416,000 152,000 Sales revenue Less: Cost of goods sold Gross profits Less: Operating expenses Selling expense General and administrative expenses Depreciation expense Total operating expense Operating profits Less: Interest expense Net profits before taxes Less: Taxes (rate = 40%) Net profits after taxes Less: Preferred stock dividends Earnings available for common stockholders 1,218,000 $ 153,000 93,000 $ 60,000 24,000 $ 36,000 3,000 $ 33,000 Earnings per share (EPS) $0.33 Martin Manufacturing Company Balance Sheets December 31 2006 2005 Assets Current assets Cash Accounts receivable Inventories Total current assets Gross fixed assets (at cost) Less: Accumulated depreciation Net fixed assets Total assets $ 25,000 805,556 700,625 $1,531,181 $2,093,819 500,000 $1,593,819 $3,125,000 $ 24,100 763,900 763,445 $1,551,445 $1,691,707 348,000 $1,343,707 $2,895,152 Liabilities and Stockholders' Equity $ 230,000 311,000 75,000 $ 616,000 $1,165,250 $1,781,250 $ 400,500 370,000 100,902 $ 871,402 $ 700,000 $1,571,402 Current liabilities Accounts payable Notes payable Accruals Total current liabilities Long-term debt Total liabilities Stockholders' equity Preferred stock (2,500 shares, $1.20 dividend) Common stock (100,000 shares at $4 par) Paid-in capital in excess of par value Retained earnings Total stockholders' equity Total liabilities and stockholders' equity $ 50,000 400,000 593,750 300,000 $1,343,750 $3,125,000 $ 50,000 400,000 593,750 280,000 $1,323,750 $2,895,152 "The firm's 100,000 outstanding shares of common stock closed 2006 at a price of $11.38 per share. Martin Manufacturing Company Historical and Industry Average Ratios Actual Actual Actual 2004 2005 2006 Industry average 2006 Ratio 1.7 1.8 1.5 1.0 0.9 5.0 50.7 days 1.5 45.8% 55.8 days 1.5 54.3% Current ratio Quick ratio Inventory turnover (times) Average collection period Total assct turnover (times) Debt ratio Times interest earned ratio Gross profit margin Net profit margin Return on total assets (ROA) Return on common cquity (ROE) Price/carnings (P/E) ratio Market/book (M/B) ratio 2.2 1.9 1.2 10.2 46 days 2.0 24.5% 2.5 26.0% 1.2% 2.4% 3.2% 43.4 27.5% 1.1% 1.7% 3.1% 33.5 1.0 28.0% 1.0% 1.5% 3.3% 38.7 1.1 1.2