You have just been hired as a financial analyst for Lydex Company, a manufacture

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 assignment you gather the following financial data and ratios that are typical of companies in Lydex Company’s industry:

Required:

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 "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 company’s financial leverage positive or negative?

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 "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.

3. You decide, finally, to assess the company’s 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 answer 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 answer to 2 decimal place.)

f. The operating cycle. (Round your intermediate calculations and final answer to 2 decimal place.)

g. The total asset turnover. (The total assets at the beginning of last year totaled $14,530,000.) (Round your final answers to 2 decimal places.)

1. Present the balance sheet in common-size format.

2. Present the income statement in common-size format down through net income.

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

Explanation / Answer

1) a) This Year

Times Interest Earned Ratio = Earning Before Interest and Tax/Interest Expense

Earning Before Interest and Tax in the given income statement is equal to net operating income.

Times Interest Earned Ratio = $1,362,000/$362,000 = 3.76

Last Year

Times Interest Earned Ratio = Earning Before Interest and Tax/Interest Expense

Times Interest Earned Ratio = $1,623,000/$302,000 = 5.37

b) This Year

Debt to Equity Ratio = Total Liabilities/Stockholder's Equity

= $7,550,000/$8,830,000 = 0.86

Last Year

Debt to Equity Ratio = Total Liabilities/Stockholder's Equity

= $5,840,000/$8,410,000 = 0.69

c) This Year

Gross Margin Percentage = Gross Margin/Sales

= $3,156,000/$15,780,000 = 0.20 or 20%

Last Year

Gross Margin Percentage = Gross Margin/Sales

= $3,195,000/$12,780,000 = 0.25 or 25%

d) This Year

Return on Total Assets = Earning before Interest and tax/Average Total Assets

Average Total Assets = (Total Assets This Year+Total Assets Last Year)/2

= ($16,380,000+$14,250,000)/2 = $15,315,000

Return on Total Assets = $1,362,000/$15,315,000 = 8.9%

(Earning before interest and tax is equal to net operating income given in the income statement)

Last Year

Return on Total Assets = Earning before Interest and tax/Average Total Assets

Average Total Assets = (Total Assets Last Year End+Total Assets Last Year Beginning)/2

= ($14,250,000+$12,990,000)/2 = $13,620,000

Return on Total Assets = $1,623,000/$13,620,000 = 11.9%

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