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 | $ | 960,000 | $ | 1,260,000 |
Marketable securities | 0 | 300,000 | ||
Accounts receivable, net | 2,700,000 | 1,800,000 | ||
Inventory | 3,900,000 | 2,400,000 | ||
Prepaid expenses | 240,000 | 180,000 | ||
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Total current assets | 7,800,000 | 5,940,000 | ||
Plant and equipment, net | 9,300,000 | 8,940,000 | ||
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Total assets | $ | 17,100,000 | $ | 14,880,000 |
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Liabilities and Stockholders' Equity | ||||
Liabilities: | ||||
Current liabilities | $ | 3,900,000 | $ | 2,760,000 |
Note payable, 10% | 3,600,000 | 3,000,000 | ||
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Total liabilities | 7,500,000 | 5,760,000 | ||
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Stockholders' equity: | ||||
Common stock, $78 par value | 7,800,000 | 7,800,000 | ||
Retained earnings | 1,800,000 | 1,320,000 | ||
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Total stockholders' equity | 9,600,000 | 9,120,000 | ||
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Total liabilities and stockholders' equity | $ | 17,100,000 | $ | 14,880,000 |
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Lydex Company Comparative Income Statement and Reconciliation | ||||
This Year | Last Year | |||
Sales (all on account) | $ | 15,750,000 | $ | 12,480,000 |
Cost of goods sold | 12,600,000 | 9,900,000 | ||
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Gross margin | 3,150,000 | 2,580,000 | ||
Selling and administrative expenses | 1,590,000 | 1,560,000 | ||
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Net operating income | 1,560,000 | 1,020,000 | ||
Interest expense | 360,000 | 300,000 | ||
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Net income before taxes | 1,200,000 | 720,000 | ||
Income taxes (30%) | 360,000 | 216,000 | ||
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Net income | 840,000 | 504,000 | ||
Common dividends | 360,000 | 252,000 | ||
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Net income retained | 480,000 | 252,000 | ||
Beginning retained earnings | 1,320,000 | 1,068,000 | ||
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Ending retained earnings | $ | 1,800,000 | $ | 1,320,000 |
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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: |
Current ratio | 2.3 | |||||||||||||||||
Acid-test ratio | 1.2 | |||||||||||||||||
Average collection period | 30 | days | ||||||||||||||||
Average sale period | 60 | days | ||||||||||||||||
Return on assets | 9.5 | % | ||||||||||||||||
Debt-to-equity ratio | 0.65 | |||||||||||||||||
Times interest earned ratio | 5.7 | |||||||||||||||||
Price-earnings ratio | 10 |
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