Finansal Yönetim Finance (Eyüp Bastı) Problems - Chapter 3 Chapter 3 Financial Analysis 6. Why is trend analysis helpful in analyzing ratios? (L04) 7. Inflation can have significant effects on income statements and balance sheets, and therefore on the calculation of ratios. Discuss tbe possible impact of inflation on the following ratios, and explain the direction of the impact based on your assumptions. (LOS) a. Return on investment b. Inventory turnover c. Fixed asset turnover d. Debt-to-assets ratio 8. What effect will disinflation following a highly inflationary period have on the reported income of the firm? (LOS) 9. Why might disinflation prove to be favorable to financial assets? (LOS) 10. Comparisons of income can be very difficult for two companies even though they sell the same products in equal volume. Why? (L02) 1. Barnes Appliances has sales of $10,000,000, net income of $450,000, total assets of $4,000,000, and stockholders' equity of $2,000,000. a. What is the profit margin? b. What is the return on assets? c. What is the return on equity? d. The debt-to-assets ratio is currently 50 percent. If it were 60 percent, what would the return on equity be? To answer this question, use formula 3b in the text. 2. The Gilliam Corp. has the following balance sheet and income statement. Com­ pute the profitability, asset utilization, liquidity, and debt utilization ratios. Assets Current assets: Cash ... GILLIAM CORPORATION Balance Sheet December 31 , 200x Marketable securities Accounts receivable (net) Inventory ... ,. , .,. , ., , \,.,., .. . , Total current assets. , . , . , . , , . . . ' Investments ............. . Net plant and equipment, Total assets . $ 70,000 40,000 J 250,000 200,000 $ 560,000 100,000 440,000 $1,100,000 continued Practice Problems and Solutions 73 Profitability ratios (L02) All 13 ratios (L02) 74 Part 2 Financial Analysis and Planning Liabilities and Stockholders' Equity Current liabilities: Accounts payable .... .......... . . . . . Notes payable .......... _ . .. . ... . •. . ... . Accrued taxes ................. . • • . ... .. Total currentliabilities .. .. .. .. .. . . • •.. .. Long-term liabilities: Bonds payable ....... . , . , .......... , . . , Totalliabililies ........ . Stockholders' equity Preferred stock, $100 par value . . .. ... . Common stock, $5 par value .......•• ..... Capital paid in excess of par . ........ . •. . . . Retained earnings. . . . . ...... .. . . ••.. . Total stockholders' equity . . ........ . Total liabilities and stockholders' equity .. . GILLIAM CORPORATION Income Statement 130,000 120,000 30,000 $ 280,000 200,000 $ 480,000 150,000 50,000 200,000 220,000 620,000 $1,100,000 For the Year Ending December 31, 200X Sales (on credit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,400,000 Less: Cost of goods sold . ............ . ... . 1,600,000 Gross profit . . . ..... .. ..... . . . 800,000 Less: Selling and administrative expenses ....... . 560,000' Operating profit (EBIT) ...... . 240,000 Less: Interest expense ........ •.. .....•••. ... 30,000 Earnings before taxes (EST) ............. . ..... . 210,000 Less: Taxes ....... . ..... . ...• ......... . •.. . 75,000 Earnings after taxes (EAT) .................•.... $ 135,000 ' Includes $40,000 in lease payments. Solutions I. a. Profit margin b. Return on assets c. Return on equity d. Return on equity 2. Profitability ratios I. Profit margin = Net income Sales Net income Total assets $450,000 $10,000,000 $450,000 = $4,000,000 4.5% = 11.25% Net income $450,000 = 22.5% $2,000,000 = Stockholders' equity Return on assets (investment) - -- - --'---- -'- = 11.25% (I - .6) (I - Debt/Assets) 11.25% = 28.13% .4 Net income Sales $135,000 2,400,000 5.63% Chapter 3 Financial Analysis Net income $135 000 2. Return on assets = ' = 12.27% Total assets 1,100,000 Net income $135,000 Stockholders' equity 620,000 = 21.77% 3. Return on equity = Asset utilization ratios 4. Receivables turnover Sales (credits) = $2,400,000 = 9.6x Accounts receivable A II · . d Accounts receivable 5. verage co ectlon penD = ------- - 250,000 $250,000 Avg. daily credit sales 6,667 Sales $2,400,000 _ 12x 6. Inventory turnover = ----'--- - Inventory 200,000 Sales 7. Fixed asset turnover = =--==­ Fixed assets Sales 8. Total asset turnover = =--==­ Total assets Liquidity ratios Current assets 9. Current ratio = Current liabilities = $2,400,000 = 5.45x 440,000 = $2,400,000 = 2.18x 1 ,100,000 560,000 = 2x 280,000 = 37.5 days 10. Quick ratio = Current assets - Inventory $560,000 - 200,000 Current liabilities 280,000 360,000 = 1.29x 280,000 Debt utilization ratios Total debt = $480,000 _ 43.64"'0 I I. Debt to total assets = =----.,.- - - --" Total assets I, 100,000 T ·· d _In::.c:.:o::.m::.e:.b::.e:.:~.:.ore:.:...:i:::nt::e::.:re::s::..t =an::.:d:.t=ax:::e::::s 12. unes !Dterest earne = - Interest Note: Income before interest and taxes equals operating profit, $240,000. Times interest earned = 240,000 = 8x 30,000 F · d hIn _=-c:..:o :.::: m::.e:...b ::. e::.~.:. ore:.:....:fi::.x=e..::d....:c .:: h.:: ar",g", es=--=an:::d:..tax=.:.:.es 13. lXe c arge coverage = - Fixed charges Income before fixed charges and taxes = Operating profit plus Lease payments' $240,000 + $40,000 = $280,000 Fixed charges = Lease payments + Interest $40,000 + $30,000 = $70,000 F · d h $280,000 4 Ixe c arge coverage = = x 70,000 *Lease payments are in a footnote on the income statement. 76 Problems Profitability ratios (L02) Profitability ratios (L02) Profitability ratios (L02) Profitability ratios (L02) Profitability ratios (L02) Profitability ratios (L02) Profitability ratios (L02) Profitability ratios (L02) Part 2 Financial Analysis and Planning All Problems are available in Homewortc: Manager. Please see the preface for more Infonnatlon. I. Dental Delights has two divisions. Division A has a profit of $200,000 on sales of $4,000,000. Division B is only able to make $30,000 on sales of $480,000. Based on the profit margins (returns on sales), which division is superior? 2. Griffey Junior Wear, Inc., has $800,000 in assets and $200,000 of debt. It net income of $100,000. a. What is the return on assets? b. What is the return on stockholders' equity? 3. Bass Chemical, Inc., is considering expanding into a new product line. Assets to support this expansion will cost $1,200,000. Bass estimates that it can gener­ ate $2 million in annual sales, with a 5 percent profit margin. What would net income and return on assets (investment) be for the year? 4. Franklin Mint and Candy Shop can open a new store that will do an annual sales volume of $750,000. It will tum over its assets 2.5 times per year. The profit margin on sales will be 6 percent. What would net income and return on assets (investment) be for the year? 5. Hugh Snore Bedding, Inc., has assets of $400,000 and turns over its assets 1.5 times per year. Return on assets is 12 percent. What is its profit margin (return on sales)? 6. One-Size-Fits-All Casket Co.'s income statement for 2008 is as follows: Sales .. . .. ........ .. . .. . $3,000,000 Cost of goods sold ........ . 2,100,000 Gross profit ....... . 900,000 Se ll ing and administrative expense . . .... . . 450,000 Operating profit . 450,000 Interest expense ........ • . '0' , ' • • • • • ••• • • 75,000 Income before taxes. 375,000 Taxes (30%) ..... . .. . .. . .. . . .. . . . .. . 112,500 Income after taxes . .. . .. . .. . .. . . .... . $ 262,500 a. Compute the profit margin for 2008. b. Assume that in 2009 sales increase by 10 percent and cost of goods sold increases by 25 percent. Tbe firm is able to keep all otber expenses tbe same, Once again, assume a tax rate of 30 percent on income before taxes. What are income after taxes and the profit margin for 2009? 7. Easter Egg and Poultry Company has $2,000,000 in assets and $1 ,400,000 of debt. It reports net income of $200,000. a. What is the firm 's return on assets? b. What is its return on stockholders' eq uity? c, If the firm has an asset turnover ratio of 2.5 times, what is the profit margin (return on sales)? 8. Sharpe Razor Company has total assets of $2,500,000 and current assets of $1,000,000, It turns over its fixed assets 5 times a year and has $700,000 Chapter 3 Financial Analysis of debt. Its return on sales is 3 percent What is Sharpe's return on stockholders' equity? 9. Baker Oats had an asset turnover of 1.6 times per year. a. If the return on total assets (investment) was 11.2 percent, what was Baker's profit margin? b. The following year, on the same level of assets, Baker's assets turnover declined to 1.4 times and its profit margin was 8 percent. How did the return on total assets change from that of the previous year? 10. Global Healthcare Products has the following ratios compared to its industry for 2008. Return on sales . . ...••......... •. .. Return on assets . . .. .. .... . . . . • • • . . Global Healthcare 2% 18% Industry 10% -....: 12% Explain why the return-on-assets ratio is so much more favorable than the return-on-sales ratio compared to the industry. No numbers are necessary; a one-sentence answer is all that is required. II. Acme Transportation Company has the following ratios compared to its indus­ try for 2009. Return on assets . . . Return on equity . .. . Acme Transportation 9% 12% Industry 6% 24% Explain why the return-on-equity ratio is so much less favorable than the return-on-assets ratio compared to the industry. No numbers are necessary; a one-sentence answer is all that is required. 12. Gates Appliances has a return-on-assets (investment) ratio of 8 percent. a. If the debt-to-total-assets ratio is 40 percent, what is the return on equity? b. If the firm had no debt, what would the return-on-equity ratio be? 13. Using the Du Pont method, evaluate the effects of the following relationships for the Butters Corporation. a. Butters Corporation has a profit margin of 7 percent and its return on assets (investtnent) is 25.2 percent. What is its assets turnover? b. If the Butters Corporation has a debt-to-total-assets ratio of 50 percent, what would the firm's return on equity be? c. What would happen to return on equity if the debt-to-total-assets ratio decreased to 35 percent? 14. Jerry Rice and Grain Stores _has $4,000,000 in yearly sales. The firm earns 3.5 percent on each dollar of sales and turns over its assets 2.5 times per year. It has $100,000 in current liabilities and $300,000 in long-term liabilities. 77 Profitability ratios (L02) Du Pont system of analysis (L03) Du Pont system of analysis (L03) Du Pont system of analysis (L03) Du Pont system of analysis (L03) Du Pont system of analysis (L03) 78 Interpreting results fro m the Du Pont system of analys is (L03) Average collection peri od (L02) Average daily rates (L02) Inventory turnover (L02) Part 2 Financial Analysis and Planning a. What is its return on stockholders' equity? b. If the asset base remains the same as computed in part a, but total asset trunover goes up to 3, what will be the new return on stockholders' equity? Assume that the profit margin stays the same as do current and long-term liabilities. 15. Assume the following data for Interactive Technology and Silicon Software: Interactive Silicon Technology (IT) Software (SS) Net income . .......... . $ 15,000 $ 50,000 Sales. . .... . . . . . 150,000 1,000,000 Total assets. 160,000 400,000 Tolal debt. 60,000 240,000 Stockholders' equity 100,000 160,000 a. Compute return on stockholders' equity for both firms using ratio 3a in the text on page 59. Which firm has the higher return? b. Compute the following additional ratios for both firms . Net income/Sales Net incomelTotal assets SaieslTotal assets DebtITotal assets c. Discuss the factors from part b that added or detracted from one firm hav­ ing a higher return on stockholders' equity than the other firm as computed in part a. 16. A firm bas sales of $3 million, and 10 percent of the sales are for cash. The year-end accounts receivable balance is $285,000. What is the average collec­ tion period? (Use a 360-day year.) 17. Martin Electronics has an accounts receivable turnover equal to 15 times. If accounts receivable are equal to $80,000, what is the value for average daily credit sales? 18. Perez Corporation has the following financial data for the years 2007 and 2008: 2007 2008 Sales. $8,000,000 $10,000,000 Cost of goods sold 6,000,000 9,000,000 Inventory ......... 800,000 1,000,000 a. Compute inventory turnover based on ratio number 6, SaleslInventory, for each year. b. Compute inventory turnover based on an alternative calculation that is used by many financial analysts, Cost of goods soldlInventory, for each year. c. What conclusions can you draw from part a and part b? Chapter 3 Financial Analysis 19. The Speed-O Company makes scooters for kids. Sales in 2008 were $8,000,000. Assets were as fo llows : Cash .. . Accounts rece ivable ......... . Inventory . ................. . Net plant and equipment. Total assets a. Compute the following: Accounts receivable turnover Inventory turnover Fixed asset turnover Total asset turnover $ 200,000 1,600,000 600,000 1,000,000 $3,600,000 b. In 2009, sales increased to $\0,000,000 and the assets for that year were as follows: Cash .......... . . .. ..••. . . . Accounts receivable .. ....... . Inventory .......... . Net plant and equipment . ..... . Total assets ....... .. ... . Once again, compute the four ratios. $ 200,000 1,600,000 2,200,000 1,050,000 $5,250,000 C. Indicate if there is an improvement or decline in total asset turnover, and based on the other ratios, indicate why this development has taken place. ~ 20. The balance sheet for Stud Clothiers is shown below. Sales for the year were $2,400,000, with 90 percent of sales sold on credit. Assets Cash . ....... .......... . Accounts receivable ... Inventory ..... . Plant and equipment . .. Total assets ...... . . . . . . STUD CLOTHIERS Balance Sheet 200X $ 60,000 240,000 350,000 410,000 $1,060,000 liabilities and Equity Accounts payable . , .. . Accrued taxes ................ . Bonds payable (long-term) .... . . . Common stock ... . Paid-in capital ............. . Retained earnings . ........ . Total liabilities and equity .. . Compute the fo llowing ratios: a. Current ratio. b. Quick ratio. c. Debt-to-total-assets ratio. $ 220,000 30,000 150,000 60,000 200,000 360,000 $1 ,060,000 Turnover ralios (L02) Overall ratio analysis (L02) 79 80 Part 2 Financial Analysis Gnd Planning d. Asset turnover. e. Average collection period. Debt utilizati on ~ 21. Neeley Office Supplies income statement is given below. ratios (L02) a. What is the times interest earned ratio? b. What would be the fixed charge coverage ratio? NEELEY OFFICE SUPPLIES Sales ......... . . Cost of goods sold Gross profit ........................ . . Fixed charges (other than interest) . Income before interest and taxes . .. . .. . . . Interest Income before taxes .... .. . . . . • . ... . . Taxes . . . . .. . .... . .... . .. . . Income after taxes. - $200,000 115,000 85,000 25,000 60,000 15,000 45,000 15,300 $ 29,700 Debt utilization ~ 22. Using the income statement for Times Mirror and Glass Co., compute the and Du Pont system of analysis (L03) following ratios: a. The interest coverage. b. The fixed charge coverage. The total assets for this company equal $80,000. Set up the equation for the Du Pont system of ratio analysis, and compute c, d, and e. c. Profit margin. d. Total asset turnover. e. Return on assets (investment). TIMES MIRROR AND GLASS CO. Sales . . . Less: Cost of goods sold . Gross profit . .. . . .. . ... .. .... . .. . .. . .. . . . .. . ... . Less: Selling and administrative expense . . Less: Lease expense. Operating profit* .. Less: Interest expense. Earnings before taxes. . . . . .. . . . .. , ...... . . . .. .. .. . .. . . Less: Taxes (30%) . .. .... . .. . .. . . . . Earnings after taxes . . *Equals income before interest and taxes. $126,000 93,000 33,000 11 ,000 4,000 $ 18,000 3,000 $ 15,000 4,500 $ 10,500 Chapter 3 Financial Analysis 23. A firm has net income before interest and taxes of $120,000 and interest expense of $24,000. a. What is the times-interest-earned ratio? · b. If the firm's lease payments are $40,000, what is the fixed charge coverage? 24. In January 1999, the Status Quo Company was formed. Total assets were $500,000, of which $300,000 consisted of depreciable fixed assets. Status Quo uses straight-line depreciation, and in 1999 it estimated its fixed assets to have useful lives of 10 years. Aftertax income has been $26,000 per year each of the last 10 years. Other assets have not changed since 1999. a. Compute return on assets at year-end for 1999, 2001, 2004, 2006, and 2008. (Use '$26,000 in the numerator for each year.) b. To what do you attribute the phenomenon shown in part a? c. Now assume income increased by 10 percent each year. What effect would this have on your above answers? Merely comment. 25. Calloway Products has the following data. Industry information is also shown: Industry Data on Net Year Net Income Total Assets IncomefTotal Assets 2006 $ 360,000 $3,000,000 11 % 2007 380,000 3,400,000 8 2008 380,000 3,800,000 5 Industry Data on Year Debt Total Assets DebVTotal Assets 2006 $1 ,600,000 $3,000,000 52% 2007 1,750,000 3,400,000 40 2008 1,900,000 3,800,000 31 As an industry analyst comparing the firm to the industry, are you likely to praise or criticize the firm in terms of: a. Net incomeffotal assets. b, Debtffotal assets. 26. Jodie Foster Care Homes, Inc., shows the following data: Year Net Income Total Assets Stockholders' Equity Total Debt 2005 $118,000 $1 ,900,000 $ 700,000 $1,200,000 2006 131,000 1,950,000 950,000 1,000,000 2007 148,000 2,010,000 1,100,000 910,000 2008 175,700 2,050,000 1,420,000 630,000 Q, Compute the ratio of net income to total assets for each year and comment on the trend. b, Compute the ratio of net income to stockholders' equity and conunent on the trend, Explain why there may be a difference in the trends between parts Q and b. Debt utilization ratios (L02) Return on assets analysis (L02) Trend analysis (LOI) Trend anal ysi s (L04) 81 82 Analysis by divisions (L02) Analysis by affi liates (L01) Inflation and inventory accounting effect (LOS) Part 2 Financial Analysis and Planning 27. The United World Corporation has three subsidiaries. Computers Magazines Cable TV Sales . . . . . . . . . . . . . . $16,000,000 $4,000,000 $8,000,000 Net income (after taxes) 1,000,000 160,000 600,000 Assets ... . .. . . ... . . . 5,000,000 2,000,000 5,000,000 a. Which division has the lowest return on sales? b. Which division has the highest return on assets? c. Compute the return on assets for the entire corporation. d. If the $5,000,000 investment in the cable TV division is sold off and redeployed in the computer division at the same rate of return on assets currently achieved in the computer division, what will be the new return on assets for the entire corporation? 28. Omni Technology Holding Company has the following three affiliates: Personal Foreign Software Computers Operations Sales. $40,000,000 $60,000,000 $100,000,000 Net income (after taxes) . . ...... - . 2,000,000 2,000,000 8,000,000 Assets . . .. . . . . .. . . 5,000,000 25,000,000 60,000,000 Stockholders' equity . .. . . . 4,000,000 10,000,000 50,000,000 a. Which affiliate has the hi ghest return on sales? b. Which affiliate has the lowest return on assets? c. Which affiliate has the hi ghest total asset turnover? d. Which affiliate has the hi ghest return on stockholders' equity? e. Which affiliate has the highest debt ratio? (Assets minus stockholders' equity equals debt.) f Returning to question b, explain why the software affi liate has the highest return on total assets. g. Returning to question d, explain why the personal computer affi liate has a higher return on stockholders' equity than the foreign operations affi liate even though it has a lower return on total assets. 29. Bard Corporation shows the following income statement. The firm uses FIFO inventory accounting. BARD CORPORATION Income Statement for 2008 Sales. . . . . . . . . . . . . . . . . $200,000 (10,000 units at $20) Cost of goods sold Gross profit .. . .. . Selling and administrative expense . . .....• . ... . Depreciation ... . . . . . . . . . . . . . . ... . •••. . . . .... . Operating profit ...... . .. .. . • . . ... . . . ...•.. . . . . . . . . Taxes (30%) ..... . .. . . .................... .. Aftertax income . ... .. . . . ...•......... . •.. .. . .. 100,000 (10,000 units at $10) 100,000 10,000 20,000 70,000 21,000 $ 49,000 Chapter 3 Financial Analysis a. Assume in 2009 the same 1O.oo0-unit volume is maintained, but that the sales price increases by 10 percent. Because of FIFO inventory policy, old inventory will still be charged off at $ 10 per unit. Also assume that selling and administrative expense will be 5 percent of sales and depreciation will be unchanged. The tax rate is 30 percent. Compute aftertax income for 2009. b. In part a, by what percent did aftertax income increase as a result of a 10 percent increase in the sales price? Explain why this impact occurred. c. Now assume that in 2010 the volume remains constant at 10,000 units, but the sales price decreases by 15 percent from its year 2009 level. Also, because of FIFO inventory policy, cost of goods sold reflects the inflation­ ary conditions of the prior year and is $11 per unit. Further, assume selling and administrative expense will be 5 percent of sales and depreciation will be unchanged. The tax rate is 30 percent. Compute the aftertax income. 30. Construct the current assets section of tbe balance sheet from the following data. (Use cash as a plug figure after computing the other values.) Yearly sales (credit) . Inventory turnover. Current liabilities Current ratio Average collection period ..... ..•.............. Current assets: Cash $-- Accounts receivable .. Inventory . . Total current assets . .... . . ...... . $720.000 6 times $105.000 2 35 days 31. The Griggs Corporation has credit sales of $1,200,000. Given the following ratios, fill in the balance sheet below. Total assets turnover . .. . . . Cash to total assets . ........... .. . . Accounts receivable turnover . . ... . • . Inventory turnover . . Current ratio Debt to total assets .... . . . . . GRIGGS CORPORATION Balance Sheet 2008 2.4 times 2.0% 8.0 times 10.0 times 2.0 times 61.0% Assets Liabilities and Stockholders' Equity Current debt . Cash ... . .. ......... .. Accounts receivable .. Inventory . . Total current assets Fixed assets . Total assets Long-term debt tolal debt. Equity Total debt and . ....... . stockholders' equity .. 83 Using ratios to construct financial statements (L02) Using ratios to construct financial statements (L02) 84 Using ratios to determine account balances (L02) Using ratios to construct financial statements (L02) Part 2 Financial AnaLysis and Plannitig 32. We are given the following information for tbe Coleman Machine Tools Corporation. Sales (credrt) ...... ...• •••.. Cash ...... ... .... . .. . .•. . Inventory ...... . Current liabilities Asset turnover. Current ratio ...........• • .. Debt·le-assets ratio . . Receivables turnover. $7,200,000 300,000 2,150,000 1,400,000 1.20 times 2.50 times 40% Slimes Current assets are composed of cash, marketable securities, accounts receivable, and inventory. Calculate the following balance sheet items. a. Accounts receivable. b. Marketable securities. c. Fixed assets. d. Long-term debt. 33. The following data are from Sharon Stone and Gravel, Inc., financial statements. The firm manufactures home decorative material. Sales (all credit) were $60 mil­ lion for 2008. Sales to total assets ..... Total debt to total assets ........•.. Current ratio ....... . ..... . Inventory turnover . . Average collection period ......•... Fixed asset turnover 3.0 times 40% 2.0 times 10.0 times 18.0 days 7.5 times Fill in tbe balance sheet: Cash ....... . Accounts receivable Inventory . . Total current assets Fixed assets ..... . Total assets .... . . .. . . .•. Current debt Long-term debt .....••.. _ .. .. _ . Total debt .. ............. . Equity ... .... ..... . Total debt and stockholders' equity Computing all tbe ratios (L02) ~ 34. Using tbe financial statements for the Goodyear Calendar Company, calculate the 13 basic ratios found in tbe chapter. Chapter 3 Financial Analysis GOODYEAR CALENDAR COMPANY Balance Sheet December 31 , 2008 Assets Current assets: Cash ........... . Marketable securities . .. ... ... .... . ... ..... • .• . . . .... Accounts receivable (net) Inve ntory . ..... . . . Total current assets . . ... .................. . . .. . .. . . Investments . . . . . .. ............ . . . . . .. . .. . , . . . . . . . Plant and equipment ..... . . . .. .. . .. . ... . . . . .......... . Less: Accumulated depreciation . ........... . ......... . Net plant and equipment . .. . . . ..•• . . . . ..... ••. . .. .. T otal assets ..... ..... . .. . . _ .. ........ . ... . ......... . Current liabilities: Accounts payable GOODYEAR CALENDAR COMPANY Liabilities and Stockholders' Equity Notes payable ....... . Accrued taxes ... .. .. . ....... .. . . . ••....... . .• . . . . . Total current liabilities . ... .... .. . .. . ... ...•.. ..... Long-term liabilities: Bonds payable . .. . . . .... . .. ..... . .... . . . . . . . .... . . . Total liabilities . Stockholders' equity Preferred stock, $100 par value ..... . . .••.. . . . . . . .• , .. . Common stock, $1 par value . .. . . .. .. . ...... . .. • •..... Capital paid in excess of par . .. . .. . .......... .. . .. .. . . . . Retained earnings . .. . . . Total stockholders' equity . . .... .. . . . ... _ Total liabilities and stockholders' equity . . ................. . GOODYEAR CALENDAR COMPANY Income Statement For the Year Ending December 31 , 2008 Sales (on credit) . . . . . . . . . . . . ....... . . ... . .. . Less: Cost of goods sold . ..... . .... . . . ... . ........ . . . Gross profit ...... . Less: Se lling and administrative expenses Operating profit (EBIT) . . ........ . Less: Interest expense . . . . ...• < • •• • • • •• • • •• •• •• • ••• , • Earnings before taxes (EBT) .. .. , ....... ... • .. . ...... ••. Less:T axes ....... . .. . Earnings after taxes (EA T) .. . . . . . 'Includes $10,000 in lease payments. $ 40,000 30,000 120,000 180,000 $ 370,000 40,000 450,000 (100.000) 350,000 $ 760,000 $ 90,000 10,000 10,000 110,000 170,000 280,000 90,000 60,000 230,000 100,000 480,000 $ 760,000 $2,000,000 1,300,000 700,000 400,000' 300,000 20,000 280,000 112,000 $ 168,000 85 86 Part 2 Financial Analysis and Planning Ratio Z4 35. Given the financial statements for Jones Corporation and Smith Corporation: computation and analysis a. To which company would you, as credit manager for a supplier, approve the extension of (short-term) trade credit? Why? Compute all ratios before answering. (L02) b. In which one would you buy stock? Why? JONES CORPORATION Current Assets Liabilities Cash ........ . $ 20,000 Accounts payable .. ... . .. Accounts receivable .. 80,000 Bonds payable (long term) Inventory . ... ... . .. . . 50,000 Long-Term Assets Stockholders' Equity Fixed assets ... . .... .. . .. . . .... . $ 500,000 Common stock . . . ..... Less: Accumulated Paid-in capital depreciation ............. . . . (150,000) Retained earnings. . . . . ... . " Net fixed assets . ....•......... 350,000 Totalliabililies and equity . . . . . . . . . . . Total assets $ 500,000 Sales (on credit) $1,250,000 Cost of goods sold 750,000 Gross profit .......... .... _ ..... . 500,000 tSelling and administrative expense . ... 257,000 Less: Depreciation expense . . 50,000 Operating profit . ... . .... , .. 193,000 Interest expense . . . 8,000 Earnings before taxes . .... . . .. ..... • • .. ... . .. . •••. . .. . ... . . . ... . . . . . . •. 185,000 Tax expense ................................. _ .... ...... . .......... _ . Net income 'Use net fixed assets in computing fixed asset turnover. tlncludes $7.000 in lease payments. SMITH CORPORATION Current Assets Cash. Marketable securities .... . .. . . .. . . Accounts receivable .... . Inventory . . . . .. .... . . . . $ 35,000 7,500 70,000 75,000 Liabilities Accounts payable Bonds payable (long-term) 92,500 $ 92,500 Long-Term Assets Stockholders' Equity Fixed assets Less: Accumulated depreciation *Net fixed assets . . Total assets $ 500,000 (250,000) 250,000 $ 437,500 'Use net fIXed assets in computing fixed asset turnove r. Common stock Paid-in capital . Retained earnings. Total liabilities and equity $100,000 80,000 $150,000 70,000 100,000 $500,000 $ 75,000 210,000 $ 75,000 30,000 47,500 $437,500 continued Chapter 3 Financial Analysis SMITH CORPORATION Sales (on credit) ............ • ••............. _ ..................••..... Cost of goods sold Gross profit ... tSelling and administrative expense . . . . . _ .••.. _ ......••• , ........ ••. • ... Less: Depreciation expense .............••.. ..... ..••.. Operating profit ................ . •• ... . .. ••••• •... . . • ••.•....... • •. Interest expense .. Earnings before taxes ........••........ Tax expense .. , ........ ........ . .. . Net income ............ .. . ..... •... .. ... •...... . ... ••....... . . • . • . tlndudes $7,000 in lease payments. $1,000,000 600,000 400,000 224,000 50,000 126,000 21,000 105,000 52,500 $ 52,500 AI Thomas has recently been approacbed by his brother-in-law, Robert Watson, with a pro­ posal to buy a 20 percent interest in Watson Leisure Tune Sporting Goods, The company manufactures golf clubs, baseball bats, basketball goals, and other similar items. Mr. Watson is quick to point out the increase in sales over the last three years as indicated in the income statement, Exhibit I. The annual growth rate is 20 percent. A balance sheet for a similar time period is shown in Exhibit 2, and selected industry ratios are presented in Exhibit 3. Note the industry growth rate in sales is only approxi­ mately 10 percent per year. There was a steady real growth of 2 to 3 percent in gross domestic product during the period under study. The rate of inflation was in the 3 to 4 percent range. The stock in the corporation has become available due to the ill health of a current stockholder, who needs cash. The issue here is not to determine the exact price for the WAlSON LEl8URE1IIIE SPURiihCl GOODS 1ncom8-.-nt 200X 200Y Sales (aD on credit) ............... '" . . . • . $1,500,000 $1,800,000 Cost of goods sold .. . .... ............. . . 950,000 1,120,000 Gross profit . . •......•.. ,., • • , ..•. , ,., ,. 550,000 680,000 Selling and adminlstrallve expense' .•.... . .. 380,000 490,000 Operating profit .... , •. , ••. •.....• , .••••. 170,000 190,000 Interest expense • •.•.•.••••••• .• ·jU , · ••••• • 30,000 40,000 Netincome before _ , .. , . , ........... . 140,000 150,000 Taxes .......... . .......... . ... . ... , .. . 46,120 46,720 Net income ...•..•.• • .• • . . ••••••••.•••• $ 9S,88D $ 101,280 Shares .. ..... , .....•....•••.•.•.....•• 40,000 40,000 Earnings per share •. . •.•...••.•••..• .•.. $2.35 $2.53 "_ $20,000 In lease payment&loreachyoar. 200Z $2,190;000 1,3OQ;OOO 880,000 590,000 270,000 85,000 185,000 84,850 $ 120,150 46,000 $2.81 Watson Leisure Time SpOlting Goods (Trend analysis and industry compari son) (L03) exhibit 1