You have just been hired as a financial analyst for Lydex Company, a manufacture
ID: 2496910 • 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:
1.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 $92 per share and that at the end of last year it was $60. 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.)
The book value per share of common stock.
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.)
Lydex CompanyComparative Balance Sheet This Year Last Year Assets Current assets: Cash $ 950,000 $ 1,190,000 Marketable securities 0 300,000 Accounts receivable, net 2,660,000 1,760,000 Inventory 3,590,000 2,400,000 Prepaid expenses 260,000 200,000 Total current assets 7,460,000 5,850,000 Plant and equipment, net 9,500,000 9,040,000 Total assets $ 16,960,000 $ 14,890,000 Liabilities and Stockholders' Equity Liabilities: Current liabilities $ 4,000,000 $ 2,960,000 Note payable, 10% 3,660,000 3,060,000 Total liabilities 7,660,000 6,020,000 Stockholders' equity: Common stock, $70 par value 7,000,000 7,000,000 Retained earnings 2,300,000 1,870,000 Total stockholders' equity 9,300,000 8,870,000 Total liabilities and stockholders' equity $ 16,960,000 $ 14,890,000
Explanation / Answer
Formula Current year Last year a. The times interest earned ratio. Earnings before interest & taxes / Interest 1864000/364000=5.12 1686000/304000 = 5.54 b. The debt-to-equity ratio. Long term debt/ equity 3640000/9030000= 0.4031 3040000/8320000 = 0.3654 c. The gross margin percentage. Gross profit/ Sales 3162000/15810000 = 20% 3270000/13080000= 25% d. The return on total assets. (Total assets at the beginning of last year were $13,020,000.) Net income / Average Assets of the year 1050000/[(16630000+14240000)/2] = 6.80% 967400/[(14240000+13020000)/2] = 7.1% e. The return on equity. (Stockholders’ equity at the beginning of last year totaled $7,836,300. There has been no change in common stock over the last two years.) Net income/ Average equity of the year 1050000/[9030000+14240000)/2]=9.02% 967400/[14240000+7836300)/2] = 8.76% f. Is the company’s financial leverage positive or negative? The company's financial leverage has increased compared to last year due to higher use of debt Formula Current year Last year a. The earnings per share. Net income after preferance dividend / no of shares 1050000/10000= 10.5 967400/10000 = 9.67 b. The dividend yield ratio. dividend / Market price per share 34/84 = 0.41% 48.73/52 = 0.94% c. The dividend payout ratio. dividend / Earning per share 340000/1050000 = 32.38% 483700/967400 = 50% d. The price-earnings ratio. Market price/ Earning per share 84/10.5 = 8 times 52/9.67 = 5.377 times e. The book value per share of common stock. Total asset - Total liabilties/No of shares (16630000-7600000)/10000 = 903 (14240000-5920000)/10000 = 832 a. Working capital. Current asset - current liabilty 7210000-3960000 = 3250000 5240000 - 2880000=2400000 b. The current ratio. Current asset/current liabilty 1.82 1.82 c. The acid-test ratio. Current asset - inventory/ current liability (7210000 - 3550000)/3960000 = 0.9242 (5240000-2000000)/2880000 = 1.13 d. The average collection period. (The accounts receivable at the beginning of last year totaled $1,620,000.) Receivable turnover = sales / average receivable 15810000/(2500000+1600000)/2 = 6.3 times 13080000/(1600000+1620000)/2 = 8.12 times Collection period = 365/ Receivable turnover 365/6.3 = 57 days 365/8.12 = 45days e. The average sale period. (The inventory at the beginning of last year totaled $1,980,000.) Turnover = cost of good sold / average inventory 12648000/(3550000+2000000)/2 = 4.56 times 9810000/(200000+1980000)/2 = 4.92 times Sales period = 365/ turnover 365/4.56 = 80days 74days f. The operating cycle. collecion period + sales period 57+80 = 137days 45+74 = 11days g. The total asset turnover. (The total assets at the beginning of last year totaled $14,560,000.) Sales / average asset for the year 15810000/(16630000+14240000)/2 = 1.02 13080000/(14240000+14560000)/2 = 0.9083times
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