In order to bring you up to speed with Garcia Energy’s current situation, you ha

Question

In order to bring you up to speed with Garcia Energy’s current situation, you have been asked to assess Garcia Energy’s financial performance during 2017 and its financial position at year-end 2017. To complete this assignment, you have gathered the firm’s 2017 financial statements (below). In addition, your assistant obtained the firm’s ratio values for 2015 and 2016, along with the 2017 industry average ratios. During the year, lease payments were $50,000, while sinking fund payments were $25,000.

To Do:

1. a.Calculate the firm’s 2017 financial ratios, and then fill in the table given at the bottom of this section. (ASSUME a 365-day year)

b.In between 200 and 300 words, analyze the firm’s current financial position from both a comparative and a trend standpoint. Break your analysis down into evaluations of the firm’s liquidity, asset management, debt, profitability, and market ratios.  

c. In between 100 and 200 words, summarize the firm’s overall financial position on the basis of your findings in Part I.1 and Part I.2.  

Garcia Energy Income Statement Year Ending December 31, 2017 Sales revenue Less: Cost of goods sold Gross Profit Less: Opcrating Expenses $6,075,000 4,000,200 $2,074,800 Selling expenses General and administrative exnenses Lcase payments Depreciation expense $650,000 326,000 50,000 152,000 $1,178,000 $896,800 99,500 $797,300 318.920 $ 478,380 Total operating expense Operating Profit (EBIT) Less : Interest expense Net profit before taxes Less: Taxes (rate 40%) Net Profit after taxes Earnings per share: Dividends per share: $4.78 $4.58

Explanation / Answer

a Current condition:

Last dividend=$4.58

Growth rate=g=4%=0.04

Required rate of return=R=13%=0.13

Next year’s expected dividend=D1=4.58*1.04=$4.76

Current Value per share(without projects acceptance)=D1/(R-g)=4.76/(0.13-0.04)= $    52.92

Current Value per share

$    52.92

.b. Best Case:

Expected Growth rate=g=7%=0.07

Required rate of return=R=14%=0.14

Next year’s expected dividend=D1=4.58*1.07=$4.90

Value of common stock in best case =D1/(R-g)=4.90/(0.14-0.07)=$70.01

Value of common stock in best case

$    70.01

,c.Anticipated case:

Expected Growth rate=g=7%=0.07 for two years

Year 1 dividend=D1=$4.9

Year2 Dividend D2=4.9*1.07=$5.24

Thereafter, growth rate expected, 4% per year for ever

g=4%=0.04

R=Required rate of return=14%

Year 3 Dividend=D3=5.24*1.04=$5.45

Price in year 2=P2=D3/(E-g)=5.45/(0.14-0.04)=$54.5

Current Price in anticipated case=(D1/1.14)+(D2/(1.14^2))+(P2/(1.14^2))

Current Price in anticipated case=(4.9/1.14)+(5.24/(1.14^2))+(54.5/(1.14^2))=$50.27

Current Price in anticipated case

$    50.27

.d.Worst Case

Required rate of return=R=14%=0.14

Next year’s expected dividend=D1=4.58*1.02=$4.67

Value of common stock in worst case =D1/(R-g)=4.67/(0.14-0.02)=$38.93

Current Price in Worst Case

$    38.93

Current Value per share

$    52.92

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