From the e-Activity, examine each industryâs price-earningsratio and dividend yield. Determine whether or not the differencesmake sense in light of their different stages in the industry lifecycle. Support your position. Choose an industry in which you areinterested, and predict its performance within the next threeyears. Provide support for your prediction.
From the e-Activity, examine each industryâs price-earningsratio and dividend yield. Determine whether or not the differencesmake sense in light of their different stages in the industry lifecycle. Support your position. Choose an industry in which you areinterested, and predict its performance within the next threeyears. Provide support for your prediction.
Related questions
You have just been hired as a financial analyst for LydexCompany, a manufacturer of safety helmets. Your boss has asked youto perform a comprehensive analysis of the companyâs financialstatements, including comparing Lydexâs performance to its majorcompetitors. The companyâs financial statements for the last twoyears are as follows: |
| Lydex Company Comparative Balance Sheet | ||||
| This Year | Last Year | |||
| Assets | ||||
| Currentassets: | ||||
| Cash | $ | 960,000 | $ | 1,260,000 |
| Marketable securities | 0 | 300,000 | ||
| Accounts receivable, net | 2,700,000 | 1,800,000 | ||
| Inventory | 3,900,000 | 2,400,000 | ||
| Prepaid expenses | 240,000 | 180,000 | ||
| Total currentassets | 7,800,000 | 5,940,000 | ||
| Plant and equipment,net | 9,300,000 | 8,940,000 | ||
| Total assets | $ | 17,100,000 | $ | 14,880,000 |
| Liabilities andStockholders' Equity | ||||
| Liabilities: | ||||
| Current liabilities | $ | 3,900,000 | $ | 2,760,000 |
| Note payable, 10% | 3,600,000 | 3,000,000 | ||
| Totalliabilities | 7,500,000 | 5,760,000 | ||
| Stockholders'equity: | ||||
| Common stock, $78 parvalue | 7,800,000 | 7,800,000 | ||
| Retained earnings | 1,800,000 | 1,320,000 | ||
| Total stockholders'equity | 9,600,000 | 9,120,000 | ||
| Total liabilitiesand stockholders' equity | $ | 17,100,000 | $ | 14,880,000 |
| Lydex Company Comparative Income Statement and Reconciliation | ||||
| This Year | Last Year | |||
| Sales (all onaccount) | $ | 15,750,000 | $ | 12,480,000 |
| Cost of goodssold | 12,600,000 | 9,900,000 | ||
| Gross margin | 3,150,000 | 2,580,000 | ||
| Selling andadministrative expenses | 1,590,000 | 1,560,000 | ||
| Net operatingincome | 1,560,000 | 1,020,000 | ||
| Interestexpense | 360,000 | 300,000 | ||
| Net income beforetaxes | 1,200,000 | 720,000 | ||
| Income taxes(30%) | 360,000 | 216,000 | ||
| Net income | 840,000 | 504,000 | ||
| Commondividends | 360,000 | 252,000 | ||
| Net incomeretained | 480,000 | 252,000 | ||
| Beginning retainedearnings | 1,320,000 | 1,068,000 | ||
| Ending retainedearnings | $ | 1,800,000 | $ | 1,320,000 |
To begin yourassigment you gather the following financial data and ratios thatare typical of companies in Lydex Companyâs industry: |
| Current ratio | 2.3 | ||||||||||||
| Acid-test ratio | 1.2 | ||||||||||||
| Average collectionperiod | 30 | days | |||||||||||
| Average saleperiod | 60 | days | |||||||||||
| Return onassets | 9.5 | % | |||||||||||
| Debt-to-equityratio | 0.65 | ||||||||||||
| Times interestearned ratio | 5.7 | ||||||||||||
| Price-earningsratio | 10 | ||||||||||||
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You have just been hired as a financial analyst for LydexCompany, a manufacturer of safety helmets. Your boss has asked youto perform a comprehensive analysis of the companyâs financialstatements, including comparing Lydexâs performance to its majorcompetitors. The companyâs financial statements for the last twoyears are as follows: |
| Lydex Company Comparative Balance Sheet | ||||
| This Year | Last Year | |||
| Assets | ||||
| Currentassets: | ||||
| Cash | $ | 930,000 | $ | 1,170,000 |
| Marketable securities | 0 | 300,000 | ||
| Accounts receivable, net | 2,580,000 | 1,680,000 | ||
| Inventory | 3,570,000 | 2,200,000 | ||
| Prepaid expenses | 250,000 | 190,000 | ||
| Total currentassets | 7,330,000 | 5,540,000 | ||
| Plant and equipment,net | 9,460,000 | 9,020,000 | ||
| Total assets | $ | 16,790,000 | $ | 14,560,000 |
| Liabilities andStockholders' Equity | ||||
| Liabilities: | ||||
| Current liabilities | $ | 3,980,000 | $ | 2,920,000 |
| Note payable, 10% | 3,640,000 | 3,040,000 | ||
| Totalliabilities | 7,620,000 | 5,960,000 | ||
| Stockholders'equity: | ||||
| Common stock, $70 parvalue | 7,000,000 | 7,000,000 | ||
| Retained earnings | 2,170,000 | 1,600,000 | ||
| Total stockholders'equity | 9,170,000 | 8,600,000 | ||
| Total liabilitiesand stockholders' equity | $ | 16,790,000 | $ | 14,560,000 |
| Lydex Company Comparative Income Statement and Reconciliation | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| This Year | Last Year | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sales (all onaccount) | $ | 15,830,000 | $ | 13,280,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cost of goodssold | 12,664,000 | 9,960,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Gross margin | 3,166,000 | 3,320,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Selling andadministrative expenses | 1,402,000 | 1,592,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net operatingincome | 1,764,000 | 1,728,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interestexpense | 364,000 | 304,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income beforetaxes | 1,400,000 | 1,424,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income taxes(30%) | 420,000 | 427,200 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | 980,000 | 996,800 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commondividends | 410,000 | 498,400 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net incomeretained | 570,000 | 498,400 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Beginning retainedearnings | 1,600,000 | 1,101,600 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Ending retainedearnings | $ | 2,170,000 | $ | 1,600,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
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You have just been hired as a loan officer at Fairfield StateBank. Your supervisor has given you a file containing a requestfrom Hedrick Company, a manufacturer of auto components, for a$1,000,000 five-year loan. Financial statement data on the companyfor the last two years are given below: |
| Hedrick Company | ||||
| Comparative Balance Sheet | ||||
| This Year | Last Year | |||
| Assets | ||||
| Current assets: | ||||
| Cash | $ | 336,000 | $ | 426,000 |
| Marketablesecurities | 0 | 104,000 | ||
| Accounts receivable,net | 905,000 | 596,000 | ||
| Inventory | 1,390,000 | 860,000 | ||
| Prepaid expenses | 78,000 | 63,000 | ||
| Total currentassets | 2,709,000 | 2,049,000 | ||
| Plant and equipment,net | 3,181,100 | 3,108,300 | ||
| Total assets | $ | 5,890,100 | $ | 5,157,300 |
| Liabilitiesand Stockholders' Equity | ||||
| Liabilities: | ||||
| Current liabilities | $ | 1,260,000 | $ | 800,000 |
| Bonds payable, 10% | 1,160,000 | 1,110,000 | ||
| Totalliabilities | 2,420,000 | 1,910,000 | ||
| Stockholders'equity: | ||||
| Preferred stock, 8%, $30par value | 600,000 | 600,000 | ||
| Common stock, $40 parvalue | 2,000,000 | 2,000,000 | ||
| Retained earnings | 870,100 | 647,300 | ||
| Total stockholders'equity | 3,470,100 | 3,247,300 | ||
| Total liabilitiesand stockholders' equity | $ | 5,890,100 | $ | 5,157,300 |
| Hedrick Company | ||||
| Comparative Income Statement and Reconciliation | ||||
| This Year | Last Year | |||
| Sales (all onaccount) | $ | 5,260,000 | $ | 4,290,000 |
| Cost of goodssold | 4,120,000 | 3,120,000 | ||
| Gross margin | 1,140,000 | 1,170,000 | ||
| Selling andadministrative expenses | 520,000 | 520,000 | ||
| Net operatingincome | 620,000 | 650,000 | ||
| Interestexpense | 116,000 | 111,000 | ||
| Net income beforetaxes | 504,000 | 539,000 | ||
| Income taxes(30%) | 151,200 | 161,700 | ||
| Net income | 352,800 | 377,300 | ||
| Dividends paid: | ||||
| Preferred stock | 48,000 | 48,000 | ||
| Common stock | 82,000 | 41,000 | ||
| Total dividendspaid | 130,000 | 89,000 | ||
| Net incomeretained | 222,800 | 288,300 | ||
| Retained earnings,beginning of year | 647,300 | 359,000 | ||
| Retained earnings,end of year | $ | 870,100 | $ | 647,300 |
Marva Rossen, who just two yearsago was appointed president of Hedrick Company, admits that thecompany has been âinconsistentâ in its performance over the pastseveral years. But Rossen argues that the company has its costsunder control and is now experiencing strong sales growth, asevidenced by the more than 22% increase in sales over the lastyear. Rossen also argues that investors have recognized theimproving situation at Hedrick Company, as shown by the jump in theprice of its common stock from $31 per share last year to $47 pershare this year. Rossen believes that with strong leadership andwith the modernized equipment that the $1,000,000 loan will enablethe company to buy, profits will be even stronger in thefuture. |
Anxious to impress yoursupervisor, you decide to generate all the information you canabout the company. You determine that the following ratios aretypical of companies in Hedrickâs industry: |
| Current ratio | 2.3 | |
| Acid-test ratio | 1.2 | |
| Average collectionperiod | 31 | days |
| Average saleperiod | 60 | days |
| Return onassets | 9.5 | % |
| Debt-to-equityratio | 0.65 | |
| Times interestearned | 5.7 | |
| Price-earningsratio | 10 | |
| Required: |
| 1. | You decide first to assess the rate of return that the companyis generating. Compute the following for both this year and lastyear: |
| a. | The return on total assets. (Total assets at the beginning oflast year were $4,330,000.) (Round your answers to 1decimal place.) |
| This year | Lastyear | |
| Return on totalassets | % | % |
| b. | The return on common stockholdersâ equity. (Stockholders' equityat the beginning of last year totaled $4,974,022. There has been nochange in preferred or common stock over the last twoyears.)(Round your intermediate calculations to wholenumbers and final answer to 1 decimal place) |
| This year | Last year | |
| Return on commonstockholders' equity | % | % |
| c. | Is the companyâs financial leverage positive or negative? |
| This year | (Click toselect)PositiveNegative |
| Last year | (Click toselect)NegativePositive |
| 2. | You decide next to assess the well-being of the commonstockholders. For both this year and last year, compute: |
| a. | The earnings per share. (Round your answers to 2 decimalplaces.) |
| This year | Last year | |
| Earnings pershare | $ | $ |
| b. | The dividend yield ratio for common stock. (Round yourintermediate calculations to 2 decimal places and final answers to1 decimal place.) |
| This year | Last year | |
| Dividend yieldratio | % | % |
| c. | The dividend payout ratio for common stock.(Round your intermediate calculations to 2decimal places and final answers to 1 decimalplace.) |
| This year | Last year | |
| Dividend payoutratio | % | % |
| d. | The price-earnings ratio. (Round your intermediatecalculations to 2 decimal places and final answers to 1 decimalplace.) |
| This year | Last year | |
| Price-earningsratio | times | times |
| e. | The book value per share of common stock. (Round youranswers to 2 decimal places.) |
| Thisyear | Lastyear | |
| Book value pershare | $ | $ |
| f. | The gross margin percentage.(Round your answers to 1decimal place.) |
| This year | Last year | |
| Gross marginpercentage | % | % |
| 3. | You decide, finally, to assess creditor ratios to determine bothshort-term and long-term debt paying ability. For both this yearand last year, compute: |
| a. | Working capital. |
| Thisyear | Lastyear | |
| Working capital | $ | $ |
| b. | The current ratio.(Round your answers to 2 decimal places.) |
| Thisyear | Lastyear | |
| Current ratio | ||
| c. | The acid-test ratio.(Round your answers to 2 decimal places.) |
| Thisyear | Lastyear | |
| Acid-test ratio | ||
| d. | The average collection period. (The accounts receivable at thebeginning of last year totaled $527,000.) (Use 365 days ina year. Round your intermediate calculations to 2 decimal placesand final answers to the nearest whole number.) |
| This year | Last year | |
| Average collectionperiod | days | days |
| e. | The average sale period. (The inventory at the beginning of lastyear totaled $660,000.) (Use 365 days in ayear.Round your intermediate calculations to 2decimal places and final answers to the nearest wholenumber.) |
| This year | Last year | |
| Average saleperiod | days | days |
| f. | The debt-to-equity ratio.(Round your answers to 2 decimal places.) |
| Thisyear | Lastyear | |
| Debt-to-equityratio | ||
| g. | The times interest earned.(Round your answers to 1 decimal place.) |
| Thisyear | Lastyear | |
| Times interestearned | ||
PLEASE SHOW WORK! Need Help in the concepts!
Thank you
