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: Lydex Company Comparative Balance Sheet This Year Last Year Assets Current assets:

Cash $ 970,000 $ 1,210,000 Marketable securities 0 300,000 Accounts receivable, net 2,740,000 1,840,000 Inventory 3,610,000 2,100,000 Prepaid expenses 260,000 200,000 Total current assets 7,580,000 5,650,000 Plant and equipment, net 9,540,000 9,060,000 Total assets $ 17,120,000 $ 14,710,000 Liabilities and Stockholders' Equity Liabilities: Current liabilities $ 4,020,000 $ 3,000,000 Note payable, 10% 3,680,000 3,080,000 Total liabilities 7,700,000 6,080,000 Stockholders' equity: Common stock, $70 par value 7,000,000 7,000,000 Retained earnings 2,420,000 1,630,000 Total stockholders' equity 9,420,000 8,630,000 Total liabilities and stockholders' equity $ 17,120,000 $ 14,710,000 Lydex Company Comparative Income Statement and Reconciliation This Year Last Year Sales (all on account) $ 15,870,000 $ 13,680,000 Cost of goods sold 12,696,000 10,260,000 Gross margin 3,174,000 3,420,000 Selling and administrative expenses 1,106,000 1,608,000 Net operating income 2,068,000 1,812,000 Interest expense 368,000 308,000 Net income before taxes 1,700,000 1,504,000 Income taxes (30%) 510,000 451,200 Net income 1,190,000 1,052,800 Common dividends 400,000 526,400 Net income retained 790,000 526,400 Beginning retained earnings 1,630,000 1,103,600 Ending retained earnings $ 2,420,000 $ 1,630,000 To begin your assigment you gather the following financial data and ratios that are typical of companies in Lydex Company’s industry: Current ratio 2.4 Acid-test ratio 1.1 Average collection period 40 days Average sale period 60 days Return on assets 9.4 % Debt-to-equity ratio .67 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 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.) a. The times interest earned 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 $13,080,000.) e. The return on equity. (Stockholders’ equity at the beginning of last year totaled $8,103,600. There has been no change in common stock over the last two years.) f. Is the company’s financial leverage positive or negative? 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 $96 per share and that at the end of last year it was $64. For both this year and last year, compute: (Round your intermediate calculations and final answers to 2 decimal places. For percentages 0.1234 should be considered as 12.34%.) a. The earnings per share. b. The dividend yield ratio. c. The dividend payout ratio. d. The price-earnings ratio. e. The book value per share of common stock. 3. 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.) 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 $1,680,000.) e. The average sale period. (The inventory at the beginning of last year totaled $2,040,000.) f. The operating cycle. g. The total asset turnover. (The total assets at the beginning of last year totaled $13,080,000.)

Explanation / Answer

1-

Debt Equity Ratio of Company is good as it lower than Industry D/E Ratio and ROA of the company is poor in comprision with Industry.

Industry PE Ratio is 10 times hence Stock price of Company should be $119 in current year and $105.28 in last year while share of company trading at less than fair value, hence stock of company is underpriced.

Current ratio of the company is less than Industry Current ratio, hence liquidity ratio is week in comprision to Industry. Average Collection and Sales period of company also more than Industry period hance Operating cycle has been effected.

Organized DATA

Current Year Last Year Industry Sales $15,870,000.00 $13,680,000.00 Operating Income $2,068,000.00 $1,812,000.00 Interest Expense $368,000.00 $308,000.00 Debt $3,680,000.00 $3,080,000.00 Equity $9,420,000.00 $8,630,000.00 Gross Margin $3,174,000.00 $3,420,000.00 Net Income $1,190,000.00 $1,052,800.00 Average total Assets $15,915,000.00 $13,895,000.00 Average Equity $9,025,000.00 $8,366,800.00 Interest Coverage(times) 5.62 5.88 5.70 Debt to Equity Ratio 0.39 0.36 0.67 Gross Margin ratio 20.0% 25.0% Return on Total Assets 7.5% 7.6% 9.40% Return on Equity 13.2% 12.6% Financial Leverage 1.22 1.20

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