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 | ||||
Current assets: | ||||
Cash | $ | 880,000 | $ | 1,120,000 |
Marketable securities | 0 | 300,000 | ||
Accounts receivable, net | 2,380,000 | 1,480,000 | ||
Inventory | 3,520,000 | 2,200,000 | ||
Prepaid expenses | 240,000 | 180,000 | ||
Total current assets | 7,020,000 | 5,280,000 | ||
Plant and equipment, net | 9,360,000 | 8,970,000 | ||
Total assets | $ | 16,380,000 | $ | 14,250,000 |
Liabilities and Stockholders' Equity | ||||
Liabilities: | ||||
Current liabilities | $ | 3,930,000 | $ | 2,820,000 |
Note payable, 10% | 3,620,000 | 3,020,000 | ||
Total liabilities | 7,550,000 | 5,840,000 | ||
Stockholders' equity: | ||||
Common stock, $75 par value | 7,500,000 | 7,500,000 | ||
Retained earnings | 1,330,000 | 910,000 | ||
Total stockholders' equity | 8,830,000 | 8,410,000 | ||
Total liabilities and stockholders' equity | $ | 16,380,000 | $ | 14,250,000 |
Lydex Company Comparative Income Statement and Reconciliation | ||||
This Year | Last Year | |||
Sales (all on account) | $ | 15,780,000 | $ | 12,780,000 |
Cost of goods sold | 12,624,000 | 9,585,000 | ||
Gross margin | 3,156,000 | 3,195,000 | ||
Selling and administrative expenses | 1,794,000 | 1,572,000 | ||
Net operating income | 1,362,000 | 1,623,000 | ||
Interest expense | 362,000 | 302,000 | ||
Net income before taxes | 1,000,000 | 1,321,000 | ||
Income taxes (30%) | 300,000 | 396,300 | ||
Net income | 700,000 | 924,700 | ||
Common dividends | 280,000 | 462,350 | ||
Net income retained | 420,000 | 462,350 | ||
Beginning retained earnings | 910,000 | 447,650 | ||
Ending retained earnings | $ | 1,330,000 | $ | 910,000 |
To begin your assignment you gather the following financial data and ratios that are typical of companies in Lydex Companys industry:
Current ratio | 2.3 | |
Acid-test ratio | 1.0 | |
Average collection period | 30 | days |
Average sale period | 60 | days |
Return on assets | 8.4 | % |
Debt-to-equity ratio | 0.7 | |
Times interest earned ratio | 5.7 | |
Price-earnings ratio | 10 | |
Part 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 "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 $12,990,000.)
e. The return on equity. (Stockholders equity at the beginning of last year totaled $7,947,650. There has been no change in common stock over the last two years.)
f. Is the companys financial leverage positive or negative?
Part 2-
You decide next to assess the companys stock market performance. Assume that Lydexs stock price at the end of this year is $78 per share and that at the end of last year it was $46. For both this year and last year, compute: (Round your "Percentage" answers to 1 decimal place and other intermediate 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.
Part 3-
You decide, finally, to assess the companys liquidity and asset management. For both this year and last year, compute:
a. Working capital.
b. The current ratio. (Round your final answers to 2 decimal places.)
c. The acid-test ratio. (Round your final answers to 2 decimal places.)
d. The average collection period. (The accounts receivable at the beginning of last year totaled $1,590,000.) (Use 365 days in a year. Round your intermediate calculations and final answers to 2 decimal place.)
e. The average sale period. (The inventory at the beginning of last year totaled $1,950,000.) (Use 365 days in a year. Round your intermediate calculations and final answers to 2 decimal place.)
f. The operating cycle. (Round your intermediate calculations and final answers to 2 decimal place.)
g. The total asset turnover. (The total assets at the beginning of last year totaled $12,990,000.) (Round your final answers to 2 decimal places.)
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