Mrs. Assala has recently been approached by her first cousin, Mrs. Rehab, with a
ID: 2577546 • Letter: M
Question
Mrs. Assala has recently been approached by her first cousin, Mrs. Rehab, with a proposal to buy a 15 percent minority interest in Assala Corporation.
Mrs. Assala is quick to point out the increase in sales that has taken place over the last three years as indicated in the income statement, Exhibit 1. The annual growth rate is 25 percent. A balance sheet for a similar time period is shown in Exhibit 2, and selected industry ratios are presented in Exhibit 3. Note the industry growth rate in sales is only 10 to 12 percent per year.
There was a steady real growth of 3 to 4 percent in gross domestic product during the period under study.
Exhibit 1
ASSALA Corporation
Income Statement (AED)
201X
201Y
201Z
Sales (all on credit).............................................
1,200,000
1,500,000
1,875,000
Cost of goods sold..............................................
800,000
1,040,000
1,310,000
Gross profit.........................................................
400,000
460,000
565,000
Selling and administrative expense*...................
239,900
274,000
304,700
Operating profit (EBIT)......................................
160,100
186,000
260,300
Interest expense..................................................
35,000
45,000
85,000
Net income before taxes.....................................
125,100
141,000
175,300
Taxes...................................................................
36,900
49,200
55,600
Net income..........................................................
88,200
91,800
119,700
Shares..................................................................
30,000
30,000
38,000
Earnings per share...............................................
AED 2.94
AED 3.06
AED 3.15
*Includes AED 15,000 in lease payments for each year.
Exhibit 2
ASSALA Corporation
Balance Sheet (AED)
Assets
201X
201Y
201Z
Cash....................................................................
30,000
40,000
30,000
Marketable securities..........................................
20,000
25,000
30,000
Accounts receivable............................................
170,000
259,000
360,000
Inventory............................................................
230,000
261,000
290,000
Total current assets.........................................
450,000
585,000
710,000
Net plant and equipment....................................
650,000
765,000
1,390,000
Total assets..........................................................
1,100,000
1,350,000
2,100,000
Liabilities and Stockholders’ Equity
Accounts payable................................................
200,000
310,000
505,000
Accrued expenses...............................................
20,400
30,000
35,000
Total current liabilities....................................
220,400
340,000
540,000
Long-term liabilities............................................
325,000
363,600
703,900
Total liabilities.................................................
545,400
703,600
1,243,900
Common stock (AED2 par)................................
60,000
60,000
76,000
Capital paid in excess of par...............................
190,000
190,000
264,000
Retained earnings...............................................
304,600
396,400
516,100
Total stockholders’ equity..............................
554,600
646,400
856,100
Total liabilities and stockholders’ equity............
1,100,000
1,350,000
2, 100,000
Exhibit 3
Selected Industry Ratios
201X
201Y
201Z
Growth in sales...................................
—
10.00%
12.00%
Profit margin.......................................
7.71%
7.82%
7.96%
Return on assets (investment).............
7.94%
8.86%
8.95%
Return on equity.................................
14.31%
15.26%
16.01%
Receivable turnover............................
9.02x
8.86x
9.31x
Average collection period...................
39.9 days
40.6 days
38.7 days
Inventory turnover..............................
4.24x
5.10x
5.11x
Fixed asset turnover............................
1.60x
1.64x
1.75x
Total asset turnover.............................
1.05x
1.10x
1.12x
Current ratio........................................
1.96x
2.25x
2.40x
Quick ratio..........................................
1.37x
1.41x
1.38x
Debt to total assets.............................
43.47%
43.11%
44.10%
Times interest earned..........................
6.50x
5.99x
6.61x
Fixed charge coverage........................
4.70x
4.69x
4.73x
Growth in EPS....................................
—
10.10%
13.30%
The stock in the corporation has become available due to the ill health of a current stockholder, who is in need of cash. The issue here is not to determine the exact price for the stock, but rather whether Assala Corporation represents an attractive investment situation. Although Mrs. Rehab has a primary interest in the profitability ratios, he will take a close look at all the ratios. He has no fast and firm rules about required return on investment, but rather wishes to analyze the overall condition of the firm. The firm does not currently pay a cash dividend, and return to the investor must come from selling the stock in the future.
Required
After doing a thorough analysis (including ratios for each year and comparisons to the industry), what comments and recommendations do you offer to Mrs. Rehab?
Note : the Answer should be computerized
ASSALA Corporation
Income Statement (AED)
201X
201Y
201Z
Sales (all on credit).............................................
1,200,000
1,500,000
1,875,000
Cost of goods sold..............................................
800,000
1,040,000
1,310,000
Gross profit.........................................................
400,000
460,000
565,000
Selling and administrative expense*...................
239,900
274,000
304,700
Operating profit (EBIT)......................................
160,100
186,000
260,300
Interest expense..................................................
35,000
45,000
85,000
Net income before taxes.....................................
125,100
141,000
175,300
Taxes...................................................................
36,900
49,200
55,600
Net income..........................................................
88,200
91,800
119,700
Shares..................................................................
30,000
30,000
38,000
Earnings per share...............................................
AED 2.94
AED 3.06
AED 3.15
*Includes AED 15,000 in lease payments for each year.
Explanation / Answer
I Suggest that this company is good for long term investment, as it can fetch good decent amount of return for its investors in coming years.
Selected Industry Ratios 201X 201Y 201Z Growth in sales — 10.00% 12.00% Sales is growing by 2% every year, sales is in increasing trend year on year Profit margin 7.71% 7.82% 7.96% Company is earning approximately $7.8 profit per every $1 sales, this is increasing trend year on year Return on assets (investment) 7.94% 8.86% 8.95% Company is earning approximately $.8 cents profit per every $1 invested on assets, this is increasing trend year on year which is good sign Return on equity 14.31% 15.26% 16.01% Return on equity is good and which is in increasing trend year on year, which can fetch decent amount of returns for investors Receivable turnover 9.02x 8.86x 9.31x On an overage of 9 times the company receivable is collected in an year which is good, however this needs to increased Average collection period 39.9 days 40.6 days 38.7 days Company is collecting cash from its customers in every 39 days, credit policy needs to be strengthen Inventory turnover 4.24x 5.10x 5.11x Company has good inventory turnover ratio, it is bale to sell the goods quickly, this ratio is in increasing trend Fixed asset turnover 1.60x 1.64x 1.75x Company has invested huge amount on its capital assets and its not efficiently generating sales Total asset turnover 1.05x 1.10x 1.12x Company is generating $1.1 sales for every $1 spent on total assets, which is very efficient Current ratio 1.96x 2.25x 2.40x Company has very good current ratio, however more than 2 indicates that company excess cash which can be re invested Quick ratio 1.37x 1.41x 1.38x Company has very good quick ratio, company is in position to pay its bills without selling its inventory Debt to total assets 43.47% 43.11% 44.10% Company is taking more outside debts, more interest to be paid to debt holders, resulting less profits to investors Times interest earned 6.50x 5.99x 6.61x Company is generation good amount from its operations to meet its interest obligation, which is good sign for investors Fixed charge coverage 4.70x 4.69x 4.73x Company income is average 4times greater than its fixed cost, which is positive sign for investors Growth in EPS — 10.10% 13.30% Company has good EPS rate, which is in increasing trend which is a good signRelated Questions
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