Problem IV — Analysis of Financial Statements. (16 points) The market value of F
ID: 2499614 • Letter: P
Question
Problem IV — Analysis of Financial Statements. (16 points)
The market value of Farmington Corp.'s common shares was quoted at $54 per share at December 31, 2015, and 2014. Planetarium 's balance sheet at December 31, 2015, and 2014, and statement of income and retained earnings for the years then ended are presented below:
Farmington Corp.
Balance Sheet
December 31
2015 2014
Assets:
Current assets:
Cash $ 9,000,000 $ 5,200,000
Short-term investments 17,200,000 15,400,000
Accounts receivable (net) 109,000,000 111,000,000
Inventories, lower of cost or market 122,000,000 140,000,000
Prepaid expenses 4,000,000 2,800,000
Total current assets $261,200,000 $274,400,000
Property, plant, and equipment (net) 350,000,000 315,000,000
Investments, at equity 2,800,000 3,500,000
Long-term receivables 15,000,000 20,000,000
Copyrights and patents (net) 6,000,000 7,000,000
Other assets 8,000,000 9,100,000
Total assets $643,000,000 $629,000,000
Liabilities and Stockholders' Equity:
Current liabilities:
Notes payable $ 7,000,000 $ 17,000,000
Accounts payable 55,000,000 52,000,000
Accrued expenses 27,500,000 30,000,000
Income taxes payable 1,500,000 2,000,000
Current portion of long-term debt 10,000,000 9,500,000
Total current liabilities 101,000,000 110,500,000
Long-term debt 180,000,000 190,000,000
Deferred income taxes 69,000,000 65,000,000
Other liabilities 15,000,000 9,500,000
Total liabilities 365,000,000 375,000,000
Stockholders' equity:
Common stock, par value $1; authorized 20,000,000 shares; issued and outstanding 12,000,000 shares
12,000,000 12,000,000
10% cumulative preferred shares, par value $100; $100 liquidating value; authorized 100,000 shares; issued and outstanding 60,000 shares
6,000,000 6,000,000
Additional paid-in capital 119,000,000 119,000,000
Retained earnings 141,000,000 117,000,000
Total stockholders' equity 278,000,000 254,000,000
Total liabilities and stockholders' equity $643,000,000 $629,000,000
Problem IV (continued)
Farmington Corp.
Statement of Income and Retained Earnings
Year ended December 31
2015 2014
Net sales $540,000,000 $500,000,000
Cost and expenses:
Cost of goods sold 390,900,000 400,000,000
Selling, general, and administrative expenses 70,000,000 65,000,000
Other, net 9,100,000 6,000,000
Total costs and expenses 470,000,000 471,000,000
Income before income taxes 70,000,000 29,000,000
Income taxes 21,000,000 11,600,000
Net income 49,000,000 17,400,000
Retained earnings at beginning of period 117,000,000 113,100,000
Dividends on common stock (24,400,000) (12,900,000)
Dividends on preferred stock (600,000) (600,000)
Retained earnings at end of period $141,000,000 $117,000,000
Instructions
Based on the above information, compute the following (for the year 2015 only):
(a) Current ratio.
(b) Acid-test (quick) ratio.
(c) Receivables turnover.
(d) Inventory turnover.
(e) Book value per share of common stock.
(f) Earnings per share on common stock.
(g) Price-earnings ratio on common stock.
(h) Payout ratio on common stock.
Answer template for the exam over Chapters 22 through 24 Hover here! Name: 0 Problem IV (a) Current ratio: #DIV/0! : 1 ¾¾¾¾¾¾ (b) Acid-test (quick) ratio: #DIV/0! : 1 ¾¾¾¾¾¾ (c) Receivables turnover: #DIV/0! times ¾¾¾¾¾¾ (d) Inventory turnover: #DIV/0! times ¾¾¾¾¾¾ (e) Book values per share: #DIV/0! per share ¾¾¾¾¾¾ shares (f) Earnings per share: #DIV/0! per share ¾¾¾¾¾¾ shares (g) per share Price-Earnings ratio: #DIV/0! ¾¾¾¾¾¾ #DIV/0! per share (h) Payout ratio: #DIV/0! ¾¾¾¾¾¾Explanation / Answer
Calculation of Ratios for the year 2015
Ratio
Formula
Calculation
Ratio
(a)
Current Ratio
Total Current Assets / Total Current Liabilities
261200000 /101000000
2.59
(b)
Acid test Ratio
(Total Current Assets-Inventory - Prepaid Expense) / Total Current Liabilities
(261200000-122000000-4000000) /101000000
1.34
(c)
Receivables turnover
Net Credit Sales / Average Accounts Receivables
540000000 / ((109000000+111000000)/2)
4.91
(d)
Inventory turnover
Cost of Goods sold / Average Inventory
390900000 / ((122000000+140000000)2)
2.98
Calculation of Ratios for the year 2015
Ratio
Formula
Calculation
Ratio
(a)
Current Ratio
Total Current Assets / Total Current Liabilities
261200000 /101000000
2.59
(b)
Acid test Ratio
(Total Current Assets-Inventory - Prepaid Expense) / Total Current Liabilities
(261200000-122000000-4000000) /101000000
1.34
(c)
Receivables turnover
Net Credit Sales / Average Accounts Receivables
540000000 / ((109000000+111000000)/2)
4.91
(d)
Inventory turnover
Cost of Goods sold / Average Inventory
390900000 / ((122000000+140000000)2)
2.98
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