You have just been hired as a financial analyst for Lydex Company, a manufacture

ID: 2480731 • 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:

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

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.)

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: (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.)

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.)

Explanation / Answer

The times interest earned ratio. = EBIT / Interest

For this year = 1200000 / 360000 = 3.33 times

Last Year = 720000 / 300000 = 2.4 times

The debt-to-equity ratio = Debt / Equity

For this year = 3600000 / 9600000 = 0.375

Last Year = 3000000 / 9120000 = 0.329

The gross margin percentage = Gross Profit/ Sales * 100

For this year = 3150000 / 15750000 * 100 = 20%

Last Year = 2580000 / 12480000 * 100 = 20.67%

The return on total assets = Net Income / Average Assets * 100

For this year = 840000 / 15990000 * 100 = 5.25%

Last Year = 504000 / 13920000 * 100 = 3.62%

The return on equity = Net Income / Average Equity * 100

This Year = 840000 / 9360000 * 100 = 8.97%

Last Year = 504000 / 9084000 * 100 = 5.55%

If return on equity is higher than after tax cost of debt then financial leverage is positive and vice versa.

After tax cost of debt = 10% (1-.3) = 7%

This Year ROE = 8.97%, Financila Leverage is positive

Last Year ROE = 5.55%, Financila Leverage is negative

2. a Earnings per share = Net Income / Number of shares

This Year = $840000 / 100000 = $8.40

Last Year = $504000 / 100000 = $5.04

b. Dividend Yield Ratio = Dividend / Price *100

This Year = $3.60 / 72 *100 = 5%

Last Year = $2.52 / 40 * 100 = 6.3%

c. Dividend Payout Ratio = Dividend / EPS * 100

This Year = 3.60 / 8.40 * 100 = 42.86%

Last Year = 2.52 / 5.04 * 100 = 50%

d. Price Earnings Ratio = Price / EPS

This Year = 72 / 8.40 = 8.57

Last Year = 40 / 5.04 = 7.94

e. The book value per share of common stock = Book Value of equity / number of shares

This Year = $9600000 / 100000 = $9.60

Last Year = $9120000 / 100000 = $9.12

3. a. Working Capital = Current Assets - Current liabilities

This Year = $7800000 - $3900000 = $3900000

Last Year = $5940000 - $2760000 = $3180000

b. Current raio = Current Assets / Current liabilities

This Year = $7800000 / $3900000 = 2

Last Year = $5940000 / $2760000 = 2.15

c. Acid Test Ratio = (Current Assets - Inventory) / Current liabilities

This Year = ($7800000 - $3900000) / $3900000 = 1

Last Year = ($5940000 - $2400000) / $2760000 = 1.28

d. Average Collection Period = 365 * Average Accounts Receivable / Sales

This Year = 365 * 2250000 /15750000 = 52 days

Last Year = 365 * 1680000 / 12480000 = 49 days

e. The average sale period = 365 / Inventory Turnover

Inventory Turnover = Sales / Average Inventory

This Year = 15750000 / 3150000 = 5

Last Year = 12480000 / 2160000 = 5.78

Average Sale period: This Year = 365 / 5 = 73 days

Last Year = 365/5.78 = 63 days

f. The operating cycle = 365 * Average Inventory / Purchase + 365 * Average Accounts Reecivable / Sales

This Year = (365 * 3150000) / 14100000 + (365 * 2250000) / 15750000 = 133.68 days

Last Year = (365 * 2160000) / 10380000 + (365 * 1680000) / 12480000 = 125.08 days

g. The total asset turnover = Sales / Average Total Assets

This Year = $15750000 / 15990000 = .98

Last Year = $12480000 / 13920000 = .897

Notes:

1. No. of shares = $7800000 / $78 = 100000

2. Average Total Assets = (Opening + Closing) / 2

3. Purchases = COGS + Closing Inventory - Opening inventory

This Year = 12600000 + 3900000 - 2400000 = $14100000

Last Year = 9900000 + 2400000 - 1920000 = $10380000

The times interest earned ratio. = EBIT / Interest

For this year = 1200000 / 360000 = 3.33 times

Last Year = 720000 / 300000 = 2.4 times

The debt-to-equity ratio = Debt / Equity

For this year = 3600000 / 9600000 = 0.375

Last Year = 3000000 / 9120000 = 0.329

The gross margin percentage = Gross Profit/ Sales * 100

For this year = 3150000 / 15750000 * 100 = 20%

Last Year = 2580000 / 12480000 * 100 = 20.67%

The return on total assets = Net Income / Average Assets * 100

For this year = 840000 / 15990000 * 100 = 5.25%

Last Year = 504000 / 13920000 * 100 = 3.62%

The return on equity = Net Income / Average Equity * 100

This Year = 840000 / 9360000 * 100 = 8.97%

Last Year = 504000 / 9084000 * 100 = 5.55%

If return on equity is higher than after tax cost of debt then financial leverage is positive and vice versa.

After tax cost of debt = 10% (1-.3) = 7%

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You have just been hired as a financial analyst for Lydex Company, a manufacture

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