1. Williams Furniture Company has the following data: 70 points Williams Furnitu
ID: 2528060 • Letter: 1
Question
1. Williams Furniture Company has the following data: 70 points
Williams Furniture
Balance Sheet
December 31, 201x
Assets:
Cash $50,000
Marketable Securities 80,000
Accounts Receivable 3,000,000
Inventory 1,000,000
Gross plant &
Equipment 6,000,000
Less Accum
Depreciation 2,000,000
Total Assets 8,130,000
Liabilities And Equity
Accounts Payable $2,200,000
Accrued Expense 150,000
Notes Payable (current) 400,000
Bonds Payable 2,500,000
Common Stock (1.7
Million shares, par $1) 1,700,000
Retained Earnings 1,180,000
Total Liabilities &
Equity 8,130,000
Williams Furniture
Income Statement
Year ended Dec 31, 201x
Sales (credit) $7,000,000
Fixed costs* 2,100,000
Variable costs (.60) 4,200,000
Earnings before interest and
Taxes 700,000
Less interest 250,000
Earnings before taxes 450,000
Less Taxes (35%) 157,500
Earnings after taxes 292,500
Dividends (40% payout) 117,000
Increased retained earnings 175,500
*Fixed costs include a) lease expense of $200,000 and 9b) depreciation of $500,000.
Williams Furniture has a $65,000 per year sinking fund obligation associated with its bond issues. The sinking fund represents an annual repayment of the principal amount of the bond. It is not tax deductible.
a. Calculate the following and compare to industry average. Be thorough and specific with weak points, strong points and your recommendation on how to improve the company’s performance. 40 points including recommendations
Williams Industry
Profit Margin 5.75%
Return on Assets 6.90%
Return on Equity 9.20%
Receivables Turnover 4.35x
Inventory Turnover 6.50x
Fixed Asset Turnover 1.85x
Current Ratio 1.45x
Quick Ratio 1.10x
Interest Coverage 5.35x
Debt to total assets 25.05%
b. Calculate break even in sales dollars. 5 points
c. What is the risk associated with this company? Should a bank issue a bank loan to Williams Furniture? Provide recommendations to Williams Furniture on what to do to improve loan offerings. 25 points
d. calculate DOL
PLEASE SHOW ALL WORK
Explanation / Answer
Ratio Analysis
Ratio Analysis
Profit Margin $292,500/$7,000,000 4.18% 5.75% Return on Assets $292,500/$8,130,000 3.60% 6.90% Return on Equity $292,500/$2,880,000 10.16% 9.20% Receivables turnover $7,000,000/$3,000,000 2.33 4.35x Inventory Turnover $7,000,000/$1,000,000 7.00 6.50x Fixed Asset Turnover $7,000,000/$4,000,000 1.75 1.85x Current Ratio $4,130,000/$2,750,000 1.50 1.45x Quick Ratio $3,130,000/$2,750,000 1.14 1.10x Interest Coverage $700,000/$250,000 2.80 5.35x Debt To total assets $5,250,000/$8,130,000 65% 25.05% The company has a lower profit margin than the industry and the problem is further compounded by the slow turnover of assets (.86x versus an industry norm of 1.20x). This leads to a much lower return on assets. The company has a higher return on equity than the industry, but this is accomplished through the firm's heavy debt ratio rather than through superior profitability. The slow turnover of assets can be directly traced to the unusually high level of accounts receivable. The firm's accounts receivable turnover ratio is only 2.33x, versus an industry norm of 4.35x. Actually the firm does quite well with receivable turnover and its only slightly below the industry in fixed asset turnover.The previously mentioned heavy debt position becomes more apparent when we examine times interest earned and fixed charge coverage. The latter is particularly low due to lease expenses and sinking fund obligations.Related Questions
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