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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

Current assets:

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

Total current assets

7,830,000

5,760,000

Plant and equipment, net

9,620,000

9,100,000

Total assets

$

17,450,000

$

14,860,000

Liabilities and Stockholders' Equity

Liabilities:

Current liabilities

$

4,060,000

$

3,080,000

Note payable, 10%

3,700,000

3,100,000

Total liabilities

7,760,000

6,180,000

Stockholders' equity:

Common stock, $70 par value

7,000,000

7,000,000

Retained earnings

2,690,000

1,680,000

Total stockholders' equity

9,690,000

8,680,000

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

12,728,000

10,560,000

Gross margin

3,182,000

3,520,000

Selling and administrative expenses

912,000

1,624,000

Net operating income

2,270,000

1,896,000

Interest expense

370,000

310,000

Net income before taxes

1,900,000

1,586,000

Income taxes (30%)

570,000

475,800

Net income

1,330,000

1,110,200

Common dividends

320,000

555,100

Net income retained

1,010,000

555,100

Beginning retained earnings

1,680,000

1,124,900

Ending retained earnings

$

2,690,000

$

1,680,000

To begin your assigment you gather the following financial data and ratios that are typical of companies in Lydex Companys industry:

Current ratio

2.3

Acid-test ratio

1.1

Average collection period

32

days

Average sale period

60

days

Return on assets

9.8

%

Debt-to-equity ratio

.66

Times interest earned ratio

5.8

Price-earnings ratio

10

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?

This Year

Last Year

a.

b.

c.

%

%

d.

%

%

e.

%

%

f.

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

This Year

Last Year

a.

b.

%

%

c.

%

%

d.

e.

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.)

This Year

Last Year

a.

b.

c.

d.

days

days

e.

days

days

f.

days

days

g.

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