5) The 2011 financial statements for Leggett & Platt, Inc. report the following

Question

5) The 2011 financial statements for Leggett & Platt, Inc. report the following information: Year ended December 31, 2011 2010 (In millions) Depreciation and amortization expense $ 98.1 $ 103.0 Property and equipment, net 580.6 624.2 Land 45.2 48.5 Accumulated depreciation and amortization 1,193.2 1.173.9 (Be careful – the Land is included in the Property and Equipment!) a. By what percentage are the assets ‘used up’ at the year-end 2011? What implication does this ratio have for future cash flows at Leggett & Platt? b. Estimate the useful life on average for the Leggett & Platt depreciable assets.

Explanation / Answer

Answer:a Percent used up = Accumulated depreciation / Depreciable asset cost

= $1,193.2 / ($ 580.6 + $1,193.2 - $45.2) = 69%

On average, we expect a company’s assets to be about 50% used up (if the company replaces assets evenly over their lives). Legett & Platt’s percent used up exceed the average. The implication is that the company will probably soon have to replace these assets.

Answer:b Average useful life = Depreciable asset cost / Depreciation expense

=($ 580.6 + $1,193.2 - $45.2) / $98.1 = 17.6 years

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