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

rev: 09_17_2014_QC_54324, 12_11_2014_QC_CS-386

1.

value:
10.00 points

Required information

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 intermediate calculations and final percentage answers to 1 decimal place. i.e., 0.123 should be considered as 12.3%. Round the rest of the intermediate calculations and final answers to 2 decimal places.)

Is the company’s financial leverage positive or negative?

You decide next to assess the company’s stock market performance. Assume that Lydex’s stock price at the end of this year is $90 per share and that at the end of last year it was $58. For both this year and last year, compute: (Round your intermediate calculations and final percentage answers to 1 decimal place. i.e., 0.123 should be considered as 12.3%. Round the rest of the intermediate calculations and final answers to 2 decimal places.)

The book value per share of common stock.

You decide, finally, to assess the company’s liquidity and asset management. For both this year and last year, compute: (Use 365 days in a year. Round your intermediate calculations and final answer to 2 decimal places.)

Lydex Company
Comparative Balance Sheet This Year Last Year   Assets   Current assets:      Cash $ 940,000     $ 1,180,000          Marketable securities 0     300,000          Accounts receivable, net 2,620,000     1,720,000          Inventory 3,580,000 2,300,000          Prepaid expenses 250,000     190,000       Total current assets 7,390,000     5,690,000       Plant and equipment, net 9,480,000     9,030,000       Total assets $ 16,870,000     $ 14,720,000     Liabilities and Stockholders' Equity   Liabilities:      Current liabilities $ 3,990,000     $ 2,940,000          Note payable, 10% 3,660,000     3,060,000       Total liabilities 7,650,000     6,000,000       Stockholders' equity:       Common stock, $75 par value 7,500,000     7,500,000           Retained earnings 1,720,000     1,220,000       Total stockholders' equity 9,220,000     8,720,000       Total liabilities and stockholders' equity $ 16,870,000     $ 14,720,000    

Explanation / Answer

Answer:1

a. The times interest earned ratio=EBIT/Interest charges

This year=1,566,000/366,000 =4.28 times

Last year=1,749,000/306000=5.72 times

b.The debt-to-equity ratio=Debt/Equity

This year=3,660,000/9,220,000=0.396 times

Last year=3,060,000/8,720,000=0.351 times

c. The gross margin percentage=(gross profit/Sales)*100

This year=(3,168,000/15,840,000)*100=20%

Last year=(3,345,000/13380000)*100=25%

d. The return on total assets=(Net income/Average assets)*100

This year=(840,000 /((16,870,000+14720000)/2))*100

=(840000/15795,000)*100=5.32%

Last year=(1,010,100/((14,720,000 +$13,050,000)/2))*100

=(1010100/13885000)*100

=7.27%

e. The return on equity=(Net income/Average equity)*100

This year=(840000/((9,220,000 +8,720,000 )/2))*100=9.36%

Last year=(1010100/(8720000+$8,214,950)/2))*100=(1010100/8467475)*100=11.93%

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