Landers Corporation Use the information obtained from the comparative financial
ID: 2376491 • Letter: L
Question
Landers Corporation
Use the information obtained from the comparative financial statements included in the Landers Corporation's 2012 annual report that is presented below to answer the questions tha follow. All amounts are in thousands of dollars.
December 31, 2012 December 31, 2011
Total assets $800,000 $975,000
Total common stockholders' equity 405,000 578,000
Total stockholders' equity 504,000 702,000
December 31
FOR THE FISCAL YEARS ENDED 2012 2011
Interest expense, net of tax $5,000 $4,700
Interest expense 6,100 5,800
Income tax expense 22,600 32,600
Net income 110,000 27,000
Common dividends 12,600 7,200
Net sales 2,667,600 1,971,000
Preferred dividends 9,000 14,400
Refer to the financial information for Landers Corporation.
A) Identify the two components of the return on assets ratio for Landers. Explain the change in the return on assets ratio during 2012 as it relates to these components.
B) During 2012, how much is Landers' average cost of borrowed capital as compared to the cost of the money provided by te preferred stockholders? Which is more profitable? Explain.
Explanation / Answer
A. ROA = Net margin * asset turnover
Net margin for 2012 = net income / net sales = 110,000/2,667,600 = 4.124%
Asset turnover for 2012 = net sales / total assets = 2,667,600 / 800,000 = 3.335
So ROA for 2012 = 4.124% * 3.335 = 13.75%
Net margin for 2011 = net income / net sales = 27,000/1,971,000 = 1.37%
Asset turnover for 2011 = net sales / total assets = 1,971,000 / 975,000 = 2.022
So ROA for 2011 = 1.37% * 2.022 = 2.77%
The total ROA has increased from 2011 to 2012. This is driven by both the increase in net margin % as well as the increased asset turnover.
b. Total debt for 2012 = total assets - total stockholders equity = 800,000-504,000 = 296,000
Total debt for 2011 = total assets - total stockholders equity = 975,000-702,000 = 273,000
Average debt during 2012 = (296,000+273,000)/2 = 284,500
Interest expense net of tax = 5,000
Average cost of debt = 5,000/284,500 = 1.76%
Preferred stock for 2012 = 504,000-405,000 = 99,000
Preferred stock for 2011 = 702,000-578,000 = 124,000
Average preferred stock = (99,000+124,000)/2 = 111,500
Average cost of preferred stock = 9,000/111,500 = 8.07%
As cost of debt is lower, debt is more profitable for the company.
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