You have just been hired as a financial analyst for Lydex Company, a manufacture
ID: 2469953 • 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:
Lydex Company
Comparative Balance Sheet
This Year Last Year
Cash . . . . . . . . . . . . . . . . . . . . . .
$ 960,000
$ 1,260,000
Marketable securities . . . . . . . . .... ... .
0
300,000
Accounts receivable, net . . . . . . . ... . . .
2,700,000
1,800,000
Inventory . . . . ..... ... . . . . . . . .... ..
3,900,000
2,400,000
Prepaid expenses .... ... . . ... . . . . . ..
240,000
180,000
Total current assets . ... ..... . . . . . . . . . .
7,800,000
5,940,000
Plant and equipment, net . . . ... . . ... .
9,300,000
8,940,000
Total assets . ...... . . ... . . ... . . ... . . .
$17,100,000
$14,880,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities . .... . ... . . . ... . . . .
$ 3,900,000
$ 2,760,000
Note payable, 10% . . . . . . . . . . . . . . .
3,600,000
3,000,000
Total liabilities . . . . . . . . . . . . . . . . . .
7,500,000
5,760,000
Stockholders' equity:
Common stock, $78 par value .. . . .
7,800,000
7,800,000
Retained earnings ..... . . . . . . ... . . . .
1,800,000
1,320,000
Total stockholders' equity . . . . . . . . . .: . . .
9,600,000
9,120,000
Total liabilities and stockholders' equity . . . .
$17,100,000
$14,880,000
Lydex Company
Comparative Income Statement and Reconciliation
Sales (all on account) . . . . . . . . . . . . .
This Year
$15,750,000
Last Year
$12,480,000
Cost of goods sold . . . . . . . . . . . . . .
12,600,000
9,900,000
Gross margin . ... . ..... ..... . . ... . . . .
3,150,000
2,580,000
Selling and administrative expenses . . ..
1,590,000
1,560,000
Net operating income . .. . . . . ..... . .. .
1,560,000
1,020,000
Interest expense . . .. . . . . ... ..... . .....
360,000
300,000
Net income before taxes .... . . . ... ... . .
1,200,000
720,000
Income taxes (30%) . . . . . . . . . . . . . .
360,000
216,000
Net income . . . . . . . . ... . .... . . ..... . .
840,000
504,000
Common dividends . . . ... . .... . .......
360,000
252,000
Net income retained .... ... . .... . ... . . .
480,000
252,000
Beginning retained earnings . . .. . . . ... .
1,320,000
1,068,000
Ending retained earnings . . ... . .... . . . .
$ 1,800,000
$ 1,320,000
To begin your assigment you gather the following financial data and ratios that are typical of companies in Lydex Company's industry:
Current Ratio....................................2.3
Acid-test ratio . . . . . ..... . ......... . . . . 1.2
Average collection period ... ... . . . . . . . . 30 days
Average sale period . . . . . ... . . . . . . ..... . ..60 days
Return on assets . ... . . . ... . . . . . . . ...... .9.5%
Debt-to-equity ratio . . . . . . . . . . . . . . . . . . . . . .0.65
Times interest earned ratio . ...... . . . . . . . . . .5.7
Price-earnings ratio ..... . ... . ...... . . ... .10
1. You decide first to assess the company's performance in terms of debt management and profit ability. Compute the following for both this year and last year:
a.The times interest eruned 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 $12,960,000.)
e. The return on equity. (Stockholders' equity at the begimring of last year totaled $9,048,000.
There has been no change incommon stock over the last two years.)
f. Is the company's financial leverage positive or negative? Explain.
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 $72 per share and that at the end of last year it was $40. For both this year and last year, compute:
a.The earnings per share.
b. The dividend yield ratio.
c.The dividend payout ratio.
d. The price-earnings ratio. How do investors regard Lydex Company as compared to other companies in the industry? Explain.
e. The book value per share of common stock. Does the difference between market value per share and book value per share suggest that the stock at its cun·ent price is a bargain? Explain.
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.
c. The acid-test ratio.
d. The average collection period. (The accounts receivable at the beginning of last year totaled $1,560,000.)
e. The average sale period. (The inventory at the beginning of last year totaled $1,920,000.)
f. The operating cycle.
g. The total asset turnover. (The total assets atthe beginning oflast year totaled $14,500,000.)
4. Prepare a brief memo that summaiizes how Lydex is perfo1ming relative to its competitors.
Refer to the financial statement data for Lydex Company given in Problem 15-15.
Required:
For both this year and last year:
1. Present the balance sheet incommon-size format.
2. Present the income statement in common-size format down through net income.
3. Comment on the results of your analysis.
Sales trend . . . . . . ' ...... . . ... . 128.0 115.0 1Q0.0
Current ratio . . . . . . . . . . . ... . ... 2.5 2.3 2.2
Acid-test ratio ..' . ..... . . . ..... 0.8 0.9 1.1
Accounts receivable turnover . . . ... 9.4 10.6 12.5
Inventory turnover . ... . . . . . . . . . . 6.5 7.2 8.0
Dividend yield . . . ........ . ... . ' 7.1% 6.5% 5.8%
Dividend payout ratio ............ 40% 50% 60%
Return on total assets . . . .... . ... 12.5% 11.0% 9.5%
Return on equity . . ..... . . ... ... 14.0% 10.0% 7.8%
Dividends paid per share* . . . . . . .. $1.50 $1.50 $1.50
*There have been no changes in common stock outstanding over the three-year period.
Cash . . . . . . . . . . . . . . . . . . . . . .
$ 960,000
$ 1,260,000
Marketable securities . . . . . . . . .... ... .
0
300,000
Accounts receivable, net . . . . . . . ... . . .
2,700,000
1,800,000
Inventory . . . . ..... ... . . . . . . . .... ..
3,900,000
2,400,000
Prepaid expenses .... ... . . ... . . . . . ..
240,000
180,000
Total current assets . ... ..... . . . . . . . . . .
7,800,000
5,940,000
Plant and equipment, net . . . ... . . ... .
9,300,000
8,940,000
Total assets . ...... . . ... . . ... . . ... . . .
$17,100,000
$14,880,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities . .... . ... . . . ... . . . .
$ 3,900,000
$ 2,760,000
Note payable, 10% . . . . . . . . . . . . . . .
3,600,000
3,000,000
Total liabilities . . . . . . . . . . . . . . . . . .
7,500,000
5,760,000
Stockholders' equity:
Common stock, $78 par value .. . . .
7,800,000
7,800,000
Retained earnings ..... . . . . . . ... . . . .
1,800,000
1,320,000
Total stockholders' equity . . . . . . . . . .: . . .
9,600,000
9,120,000
Total liabilities and stockholders' equity . . . .
$17,100,000
$14,880,000
Explanation / Answer
(1) This year Last year
a Time interest earned ratio 1560000/360000 1020000/300000
( Net operating income / interest )
= 4.33 =3.4
b debt equity ratio 7500000/9600000 5760000 /9120000
(Total liabilities / total shareholder equity)
=0.78 =0.63
c Gross margin percentage 3150000/15750000 2580000/12480000
(gross margin / sale *100)
=20% =20.67%
d Return on total assets 840000/[17100000+14880000/2] 504000/[14880000+12960000/2]
(Net income / average total assets)
=840000/15990000 =504000/13920000
=5.25% =3.62%
e return on equity 840000 / 9600000 504000/9120000
(Net income / total shareholder equity)
=8.75% =5.53%
f positive financial leverage is after tax return on equity is greater than the after tax return on debt(cost of debt) And if after tax cost of debt is greater than the after tax return on equity ,then negative financial leverage
This year last year
Return on equity 8.75% 5.53%
Cost of debt
[interest(1-tax) / net proceed] $1000*10%(1-0.30)/$1000 $1000*10%(1-0.30)/$1000
= $100 *.70 /$1000 = $100 *.70 /$1000
= 7% =7%
Positive Financial leverage Negative Financial leverage
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