Question
You have just been hired as a financial analyst for Lydex Company, a manufacturer of safety helmets. Your boss has asked you to perform a
You have just been hired as a financial analyst for Lydex Company, a manufacturer of safety helmets. Your boss has asked you to perform a comprehensive analysis of the companys financial statements, including comparing Lydexs performance to its major competitors. The companys financial statements for the last two years are as follows: |
Lydex Company Comparative Balance Sheet | ||||
| This Year | Last Year | ||
Assets |
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Current assets: |
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Cash | $ | 1,010,000 | $ | 1,250,000 |
Marketable securities |
| 0 |
| 300,000 |
Accounts receivable, net |
| 2,900,000 |
| 2,000,000 |
Inventory |
| 3,650,000 |
| 2,000,000 |
Prepaid expenses |
| 270,000 |
| 210,000 |
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Total current assets |
| 7,830,000 |
| 5,760,000 |
Plant and equipment, net |
| 9,620,000 |
| 9,100,000 |
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Total assets | $ | 17,450,000 | $ | 14,860,000 |
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Liabilities and Stockholders' Equity |
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Liabilities: |
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Current liabilities | $ | 4,060,000 | $ | 3,080,000 |
Note payable, 10% |
| 3,700,000 |
| 3,100,000 |
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Total liabilities |
| 7,760,000 |
| 6,180,000 |
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Stockholders' equity: |
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Common stock, $70 par value |
| 7,000,000 |
| 7,000,000 |
Retained earnings |
| 2,690,000 |
| 1,680,000 |
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Total stockholders' equity |
| 9,690,000 |
| 8,680,000 |
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Total liabilities and stockholders' equity | $ | 17,450,000 | $ | 14,860,000 |
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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 |
| 12,728,000 |
| 10,560,000 |
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Gross margin |
| 3,182,000 |
| 3,520,000 |
Selling and administrative expenses |
| 912,000 |
| 1,624,000 |
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Net operating income |
| 2,270,000 |
| 1,896,000 |
Interest expense |
| 370,000 |
| 310,000 |
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Net income before taxes |
| 1,900,000 |
| 1,586,000 |
Income taxes (30%) |
| 570,000 |
| 475,800 |
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Net income |
| 1,330,000 |
| 1,110,200 |
Common dividends |
| 320,000 |
| 555,100 |
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Net income retained |
| 1,010,000 |
| 555,100 |
Beginning retained earnings |
| 1,680,000 |
| 1,124,900 |
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Ending retained earnings | $ | 2,690,000 | $ | 1,680,000 |
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To begin your assigment you gather the following financial data and ratios that are typical of companies in Lydex Companys industry: |
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Current ratio | 2.3 |
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Acid-test ratio | 1.1 |
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Average collection period | 32 | days |
Average sale period | 60 | days |
Return on assets | 9.8 | % |
Debt-to-equity ratio | .66 |
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Times interest earned ratio | 5.8 |
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Price-earnings ratio | 10 |
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Required: |
1. | You decide first to assess the companys performance in terms of debt management and profitability. Compute the following for both this year and last year: (Round your intermediate calculations and final percentage answers to 1 decimal place. i.e., 0.123 should be considered as 12.3%. Round the rest of the intermediate calculations and final 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 companys financial leverage positive or negative? |
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2. | You decide next to assess the companys stock market performance. Assume that Lydexs stock price at the end of this year is $104 per share and that at the end of last year it was $72. For both this year and last year, compute: (Round your intermediate calculations and final percentage answers to 1 decimal place. i.e., 0.123 should be considered as 12.3%. Round the rest of the intermediate calculations and final answers to 2 decimal places.) |
a. | The earnings per share. |
b. | The dividend yield ratio. |
c. | The dividend payout ratio. |
d. | The price-earnings ratio. |
e. | The book value per share of common stock |
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3. | You decide, finally, to assess the companys liquidity and asset management. For both this year and last year, compute: (Use 365 days in a year. Round "days" intermediate calculations and final answers to 1 decimal place. Round all other intermediate calculations and final answers to 2 decimal places.) |
a. | Working capital. |
b. | The current ratio. |
c. | The acid-test ratio. |
d. | The average collection period. (The accounts receivable at the beginning of last year totaled $1,720,000.) |
e. | The average sale period. (The inventory at the beginning of last year totaled $2,080,000.) |
f. | The operating cycle. |
g. | The total asset turnover. (The total assets at the beginning of last year totaled $14,660,000.) |
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