You have just been hired as a financial analyst for Lydex Company, a manufacture
ID: 2474260 • Letter: Y
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 comprehensive analysis of the company’s financial statements, including comparing Lydex’s performance to its major competitors. The company’s financial statements for the last two years are as follows:
To begin your assigment you gather the following financial data and ratios that are typical of companies in Lydex Company’s industry:
You decide first to assess the company’s 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.)
2. You decide next to assess the company’s stock market performance. Assume that Lydex’s 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 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.)
3. You decide, finally, to assess the company’s liquidity and asset management. For both this year and last year, compute: (Use 365 days in a year. Round your intermediate calculations and final answer to 2 decimal places.)
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 company’s financial statements, including comparing Lydex’s performance to its major competitors. The company’s financial statements for the last two years are as follows:
Lydex CompanyComparative 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
Explanation / Answer
Solution:
This Year
Last Year
1.
a.
Earnings before interest and income taxes (a)........................................
$1,000,000
$1,321,000
Interest expense (b)..........................
$362,000
$302,000
Times interest earned (a) ÷ (b)...........
2.76
4.37
b.
Total liabilities (a)...............................
$7,550,000
$5,840,000
Stockholders’ equity (b).....................
$8,830,000
$8,410,000
Debt-to-equity ratio (a) ÷ (b)..............
0.86
0.63
c.
Gross margin (a)...............................
$3,156,000
$3,195,000
Sales (b)..........................................
$15,780,000
$12,780,000
Gross margin percentage (a) ÷ (b)......
20.0%
25.0%
d.
Net income.......................................
$ 700,000
$ 924,700
Add after-tax cost of interest:
$362,000 × (1 – 0.30)......................
253,400
$302,000 × (1 – 0.30)......................
211,400
Total (a)...........................................
$ 953,400
$ 1,136,100
Average total assets (b).....................
$14,685,000
$15,315,000
Return on total assets (a) ÷ (b)..........
6.5%
7.4%
e.
Net income (a)..................................
$ 700,000
$ 924,700
Average total stockholders’ equity (b)..
$ 8,388,825
$ 8,620,000
Return on equity (a) ÷ (b)..................
8.3%
10.7%
f.
Leverage is positive for this year because the return on equity (8.3%) is greater than the return on total assets (6.5%). For last year, leverage is also positive because the return on equity (10.7%) is greater than the return on total assets (7.4%).
This Year
Last Year
2.
a.
Net income (a).................................
$700,000
$924,700
Average number of common shares outstanding (b)..............................
100,000
100,000
Earnings per share (a) ÷ (b)..............
$7.00
$9.25
b.
Dividends per share (a).....................
$2.80
$4.62
Market price per share (b).................
$78.00
$46.00
Dividend yield ratio (a) ÷ (b)..............
3.6%
10.0%
c.
Dividends per share (a).....................
$2.80
$4.62
Earnings per share (b)......................
$7.00
$9.25
Dividend payout ratio (a) ÷ (b)...........
40%
50.0%
d.
Market price per share (a).................
$78.00
$46.00
Earnings per share (b)......................
$7.00
$9.25
Price-earnings ratio (a) ÷ (b).............
11.14
4.97
e.
Stockholders’ equity (a).......................
$8,830,000
$8,410,000
Number of common shares outstanding (b)..................................................
100,000
100,000
Book value per share (a) ÷ (b).............
$88.30
$84.10
This Year
Last Year
1.
a.
Earnings before interest and income taxes (a)........................................
$1,000,000
$1,321,000
Interest expense (b)..........................
$362,000
$302,000
Times interest earned (a) ÷ (b)...........
2.76
4.37
b.
Total liabilities (a)...............................
$7,550,000
$5,840,000
Stockholders’ equity (b).....................
$8,830,000
$8,410,000
Debt-to-equity ratio (a) ÷ (b)..............
0.86
0.63
c.
Gross margin (a)...............................
$3,156,000
$3,195,000
Sales (b)..........................................
$15,780,000
$12,780,000
Gross margin percentage (a) ÷ (b)......
20.0%
25.0%
d.
Net income.......................................
$ 700,000
$ 924,700
Add after-tax cost of interest:
$362,000 × (1 – 0.30)......................
253,400
$302,000 × (1 – 0.30)......................
211,400
Total (a)...........................................
$ 953,400
$ 1,136,100
Average total assets (b).....................
$14,685,000
$15,315,000
Return on total assets (a) ÷ (b)..........
6.5%
7.4%
e.
Net income (a)..................................
$ 700,000
$ 924,700
Average total stockholders’ equity (b)..
$ 8,388,825
$ 8,620,000
Return on equity (a) ÷ (b)..................
8.3%
10.7%
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