FIN 360 Lecture Notes - Lecture 4: Reserve Requirement, Price–Earnings Ratio, S&P 500 Index
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Data for Barry Computer Co. and its industry averages follow.
Barry Computer Company: | ||||
Balance Sheet as of December 31, 2014 (In Thousands) | ||||
Cash | $139,080 | Accounts payable | $139,080 | |
Receivables | 382,470 | Other current liabilities | 115,900 | |
Inventories | 231,800 | Notes payable | 127,490 | |
Total current assets | $753,350 | Total current liabilities | $382,470 | |
Long-term debt | $266,570 | |||
Net fixed assets | 405,650 | Common equity | 509,960 | |
Total assets | $1,159,000 | Total liabilities and equity | $1,159,000 |
Barry Computer Company: Income Statement for Year Ended December 31, 2014 (In Thousands) | |||
Sales | $1,900,000 | ||
Cost of goods sold | |||
Materials | $779,000 | ||
Labor | 418,000 | ||
Heat, light, and power | 95,000 | ||
Indirect labor | 190,000 | ||
Depreciation | 57,000 | $1,539,000 |
Gross profit | $361,000 | |
Selling expenses | 228,000 | |
General and administrative expenses | 19,000 | |
Earnings before interest and taxes (EBIT) | $114,000 | |
Interest expense | 26,657 | |
Earnings before taxes (EBT) | 87,343 | |
Federal and state income taxes (40%) | 34,937 | |
Net income | $52,406 |
1. Calculate the indicated ratios for Barry. Round your answers to two decimal places.
Ratio | Barry | Industry Average |
Current | x | 1.99x |
Quick | x | 1.35x |
Days sales outstandinga | days | 34.99days |
Inventory turnover | x | 8.44x |
Total assets turnover | x | 1.91x |
Profit margin | % | 2.63% |
ROA | % | 5.02% |
ROE | % | 10.93% |
ROIC | % | 7.90% |
TIE | x | 3.20x |
Debt/Total capital | % | 47.00% |
aCalculation is based on a 365-day year.
2. Construct the Du Pont equation for both Barry and the industry. Round your answers to two decimal places.
FIRM | INDUSTRY | |
Profit margin | % | 2.63% |
Total assets turnover | x | 1.91x |
Equity multiplier |
3. Outline Barry's strengths and weaknesses as revealed by your analysis. Select One below
a. The firm's days sales outstanding is less than the industry average, indicating that the firm should tighten credit or enforce a more stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets decreased, or both. While the company's profit margin is lower than the industry average, its other profitability ratios are high compared to the industry - net income should be higher given the amount of equity and assets. However, the company seems to be in an average liquidity position and financial leverage is similar to others in the industry.
b. The firm's days sales outstanding is more than the industry average, indicating that the firm should tighten credit or enforce a more stringent collection policy. The total assets turnover ratio is well above the industry average so sales should be increased, assets increased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity and assets. However, the company seems to be in an above average liquidity position and financial leverage is similar to others in the industry.
c. The firm's days sales outstanding is comparable to the industry average, indicating that the firm should neither tighten credit nor enforce a more stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets increased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity and assets. However, the company seems to be in a below average liquidity position and financial leverage is similar to others in the industry.
d. The firm's days sales outstanding ratio is more than twice as long as the industry average, indicating that the firm should tighten credit or enforce a more stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets decreased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity and assets. However, the company seems to be in an average liquidity position and financial leverage is similar to others in the industry.
e. The firm's days sales outstanding is more than twice as long as the industry average, indicating that the firm should loosen credit or apply a less stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets increased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity and assets. However, the company seems to be in an average liquidity position and financial leverage is similar to others in the industry.
4. Suppose Barry had doubled its sales as well as its inventories, accounts receivable, and common equity during 2014. How would that information affect the validity of your ratio analysis? (Hint: Think about averages and the effects of rapid growth on ratios if averages are not used. No calculations are needed.)
Select one below
a. If 2014 represents a period of normal growth for the firm, ratios based on this year will be accurate and a comparison between them and industry averages will have substantial meaning. Potential investors who look only at 2014 ratios will be misled, and a return to supernormal conditions in 2013 could hurt the firm's stock price.
b. If 2014 represents a period of supernormal growth for the firm, ratios based on this year will be distorted and a comparison between them and industry averages will have substantial meaning. Potential investors who look only at 2014 ratios will be well informed, and a return to normal conditions in 2013 could hurt the firm's stock price.
c. If 2014 represents a period of supernormal growth for the firm, ratios based on this year will be distorted and a comparison between them and industry averages will have little meaning. Potential investors who look only at 2014 ratios will be misled, and a return to normal conditions in 2013 could hurt the firm's stock price.
d. If 2014 represents a period of supernormal growth for the firm, ratios based on this year will be accurate and a comparison between them and industry averages will have substantial meaning. Potential investors need only look at 2014 ratios to be well informed, and a return to normal conditions in 2013 could help the firm's stock price.
e. If 2014 represents a period of normal growth for the firm, ratios based on this year will be distorted and a comparison between them and industry averages will have little meaning. Potential investors who look only at 2014 ratios will be misled, and a continuation of normal conditions in 2013 could hurt the firm's stock price.
1. Use the attached balance sheet and income statement to compute the required financial ratios for 2012. Use 360 for the number of days in a year. The computations for 2011 are already done for you.
Current ratio_________________________
Quick ratio__________________________
Inventor turnover____________________
Average Collection Period_____________
Total asset turnover__________________
Net profit margin____________________
Operating profit margin_______________
Times Interest Earned_________________
Debt/Net Worth Ratio_________________
Return on Equity ratio__________________
2. Using the computed financial ratios from question 1, compare Grounds Keeperâs performance from 2011 to 2012. Address what areas the company has improved and what areas it has not
A.)Liquidity
B.) Activity / turnover / efficiency
C.) Profitability
D.) Leverage / use of debt / solvency
3. If you were the CEO of Grounds Keeper, what area(s) would you concentrate on to improve the performance of the company?
4. Define the terms capital structure, cost of capital, and working capital. Focus on how they are different from each other and impact both profitability and risk.
5. Determine Grounds Keeperâs capital structure and working capital.
6. If Grounds Keeper has a required rate of return on its long-term debt of 9% (before taxes) and a required rate of return on its common stock, a tax rate of 40%, what is its weighted average cost of capital (WACC) for 2012? How could Grounds Keeper lower its WACC? (HINT: you will need to look at the balance sheet to determine the weight of debt to equity.
7. What are the advantages to Grounds Keeper in using money market instruments as financing? How does this related to financing net working capital?
8. Explain what Grounds Keeper should consider when deciding whether to issue stocks or bonds? Answer using at least 3 different characteristics comparing and contrasting stocks and bonds.
9. Define money market instruments; list at least one type of security that would be considered a money market instrument. What are the advantages to Grounds Keeper in using money market instruments as financing? What are the disadvantages?
Grounds Keeper | ||
Consolidated Balance Sheets | ||
(Dollars in thousands) | ||
2012 | 2011 | |
Assets | ||
Current assets: | ||
Cash and cash equivalents | 78,240 | 44,395 |
Receivables | 399,891 | 340,062 |
Inventories | 844,737 | 736,677 |
Total current assets | 1,322,868 | 1,121,133 |
Fixed assets, net | 1,244,384 | 889,613 |
Other long-term assets | 1,048,537 | 1,187,141 |
Total assets | 3,615,789 | 3,197,887 |
Liabilities and Stockholdersâ Equity | ||
Current liabilities: | ||
Accounts payable | 309,222 | 319,465 |
Accruals | 201,017 | 145,240 |
Notes payable | 9,748 | 6,669 |
Total current liabilities | 519987 | 471374 |
Long-term debt | 834574 | 814298 |
Total liabilities | 1,354,561 | 1,285,672 |
Stockholdersâ equity: | ||
Common stock, $0.10 par value: | 15,268 | 15,447 |
Additional paid-in capital | 1,464,560 | 1,499,616 |
Retained earnings | 781400 | 397152 |
Total stockholdersâ equity | 2,261,228 | 1,912,215 |
Total liabilities and stockholdersâ equity | 3,615,789 | 3,197,887 |
Grounds Keeper | |||||
Consolidated Statements of Operations | |||||
(Dollars in thousands except per share data) | |||||
| 2011 | ||||
Net sales | 3,889,426 | 2,642,390 | |||
Cost of sales | 2,589,799 | 1,746,274 | |||
Gross profit | 1,299,627 | 896,116 | |||
Selling and operating expenses | 481,493 | 348,696 | |||
General and administrative expenses | 219,010 | 187,016 | |||
Operating income | 599,124 | 360,404 | |||
Interest expense | 22,983 | 57,657 | |||
Income before income taxes | 576,141 | 302,747 | |||
Income tax expense | 212,641 | 101,699 | |||
Net Income | 363,500 | 201,048 | |||
Basic income per share: | |||||
Average shares outstanding | 154,933,948 | 146,214,860 | |||
Earnings per common share | 2.35 | 1.38 |
Current Ratio | Current assets/ Current liabilities |
Quick Ratio | Current assets â inventory/ Current liabilities |
Inventory Turnover | Cost of goods sold/ Inventory |
Receivables Turnover | Sales/ Accounts receivables |
Average Collection Period | Receivables/ Sales per day |
Fixed Asset Turnover | Sales/ Fixed assets |
Total Asset Turnover | Sales/ Total Assets |
Gross Profit Margin | Revenues - Cost of goods sold/ Sales |
Operating Profit Margin | Earnings before interest and taxes/ Sales |
Net Profit Margin | Net income/ Sales |
Return on Total Assets | Net income/ Total assets |
Debt/Net Worth Ratio | Total Debt/ Total Equity |
Times-Interest-Earned | Operating Income/ Interest expense |
Return on Equity | Net income/ Total equity |
Please check and make sure all of these are correct. Only need 2015
Current ratio= CA/CL
2015: 63278000/65272000 = 0.97
Total debt ratio= TD/TA=(TA-TE)/TA;
2015: (203706000-85937000)/203706000 = 0.57
TIE=EBIT/Interest;
2015: 27147000/2461000 = 11.03
Cash coverage ratio=(EBIT+ Depreciation)/Interest
2015: (27147000+5,390,000)/2,461,000 = 13.22 times
Receivable turnover=sales/AR
2015: 482229000/6778000 = 71.14
Days sales in receivables=365/receivable turnover
2015: 365/74.14=4.92 days
PM=NI/sales
2015: 16363000/482229000 = 0.03
TAT=sales/TA
2015: 482229000/203706000 = 2.36
ROA=NI/TA
2015: 16363000/203706000 = 0.08
ROE=NI/OE
2015: 16363000/71394000=0.2292
Wal-Mart Stores, Inc. (NYS: WMT) | |||
Balance Sheet | |||
Exchange rate used is that of the Year End reported date | |||
As Reported Annual Balance Sheet | |||
Report Date | 01/31/2015 | 01/31/2014 | 01/31/2013 |
Currency | USD | USD | USD |
Audit Status | Not Qualified | Not Qualified | Not Qualified |
Consolidated | Yes | Yes | Yes |
Scale | Thousands | Thousands | Thousands |
Cash & cash equivalents | 9135000 | 7281000 | 7781000 |
Receivables, net | 6778000 | 6677000 | 6768000 |
Inventories | 45141000 | 44858000 | 43803000 |
Prepaid expenses & other current assets | 2224000 | 1909000 | 1588000 |
Current assets of discontinued operations | - | 460000 | - |
Total current assets | 63278000 | 61185000 | 59940000 |
Land | 26261000 | 26184000 | 25612000 |
Buildings & improvements | 97496000 | 95488000 | 90686000 |
Fixtures & equipment | 45044000 | 42971000 | 40903000 |
Transportation equipment | 2807000 | 2785000 | 2796000 |
Construction in progress | 5787000 | 5661000 | 5828000 |
Property & equipment, at cost | 177395000 | 173089000 | 165825000 |
Less: accumulated depreciation | 63115000 | 57725000 | 51896000 |
Property & equipment, net | 114280000 | 115364000 | 113929000 |
Property under capital leases | 5239000 | 5589000 | 5899000 |
Less: accumulated amortization | 2864000 | 3046000 | 3147000 |
Property under capital leases, net | 2375000 | 2543000 | 2752000 |
Goodwill | 18102000 | 19510000 | 20497000 |
Other assets & deferred charges | 5671000 | 6149000 | 5987000 |
Total assets | 203706000 | 204751000 | 203105000 |
Short-term borrowings | 1592000 | 7670000 | 6805000 |
Accounts payable | 38410000 | 37415000 | 38080000 |
Accrued wages & benefits | 4954000 | 4652000 | 5059000 |
Self-insurance | 3306000 | 3477000 | 3373000 |
Accrued taxes | 2592000 | 2554000 | 2851000 |
Other accrued liabilities | 8300000 | 8110000 | 7525000 |
Accrued liabilities | 19152000 | 18793000 | 18808000 |
Accrued income taxes | 1021000 | 966000 | 2211000 |
Long-term debt due within one year | 4810000 | 4103000 | 5587000 |
Obligations under capital leases due within one year | 287000 | 309000 | 327000 |
Current liabilities of discontinued operation | - | 89000 | - |
Total current liabilities | 65272000 | 69345000 | 71818000 |
Unsecured debt | 45443000 | 45073000 | 42882000 |
Other debt | 453000 | 801000 | 1099000 |
Total long-term debt | 45896000 | 45874000 | 43981000 |
Less: current portion | 4810000 | 4103000 | 5587000 |
Long-term debt | 41086000 | 41771000 | 38394000 |
Long-term obligations under capital leases | 2606000 | 2788000 | 3023000 |
Deferred income taxes & other liabilities | 8805000 | 8017000 | 7613000 |
Redeemable noncontrolling interest | - | 1491000 | 519000 |
Common stock | 323000 | 323000 | 332000 |
Capital in excess of par value | 2462000 | 2362000 | 3620000 |
Retained earnings (accumulated deficit) | 85777000 | 76566000 | 72978000 |
Currency translation & other | -6355000 | -2722000 | 47000 |
Derivative instruments | -134000 | 336000 | 129000 |
Minimum pension liability | -679000 | -610000 | -763000 |
Accumulated other comprehensive income (loss) | -7168000 | -2996000 | -587000 |
Total Walmart shareholders' equity | 81394000 | 76255000 | 76343000 |
Noncontrolling interests | - | 5084000 | 5395000 |
Nonredeemable noncontrolling interest | 4543000 | - | - |
Total equity | 85937000 | 81339000 | 81738000 |
Income Statement | |||
Exchange rate used is that of the Year End reported date | |||
As Reported Annual Income Statement | |||
Report Date | 01/31/2015 | 01/31/2014 | 01/31/2013 |
Currency | USD | USD | USD |
Audit Status | Not Qualified | Not Qualified | Not Qualified |
Consolidated | Yes | Yes | Yes |
Scale | Thousands | Thousands | Thousands |
Net sales | 482229000 | 473076000 | 466114000 |
Membership & other income | 3422000 | 3218000 | 3048000 |
Total revenues | 485651000 | 476294000 | 469162000 |
Cost of sales | 365086000 | 358069000 | 352488000 |
Operating, selling, general & administrative expenses | 93418000 | 91353000 | 88873000 |
Operating income (loss) | 27147000 | 26872000 | 27801000 |
Interest expense on debt | 2161000 | 2072000 | 1977000 |
Interest expense on capital leases | 300000 | 263000 | 274000 |
Interest income | 113000 | 119000 | 187000 |
Interest income (expense), net | -2348000 | -2216000 | -2064000 |
Income (loss) from continuing operations before income taxes & minority interest - United States | 18610000 | 19412000 | 19352000 |
Income (loss) from continuing operations before income taxes & minority interest - international | 6189000 | 5244000 | 6385000 |
Income (loss) from continuing operations before income taxes | 24799000 | 24656000 | 25737000 |
Current federal income taxes provision (benefit) | 6165000 | 6377000 | 5611000 |
Current state & local income taxes provision (benefit) | 810000 | 719000 | 622000 |
Current international income taxes provision (benefit) | 1529000 | 1523000 | 1766000 |
Current provision (benefit) for income taxes | 8504000 | 8619000 | 7999000 |
Deferred federal income taxes provision (benefit) | -387000 | -72000 | 38000 |
Deferred state & local income taxes provision (benefit) | -55000 | 37000 | -8000 |
Deferred international income taxes provision (benefit) | -77000 | -479000 | -48000 |
Deferred provision (benefit) for income taxes | -519000 | -514000 | -18000 |
Provision (benefit) for income taxes | 7985000 | 8105000 | 7981000 |
Income (loss) from continuing operations | 16814000 | 16551000 | 17756000 |
Income (loss) from discontinued operations, net of income taxes | 285000 | 144000 | - |
Consolidated net income (loss) | 17099000 | 16695000 | 17756000 |
Less consolidated net income attributable to noncontrolling interest | -736000 | -673000 | -757000 |
Consolidated net income attributable to Walmart | 16363000 | 16022000 | 16999000 |
Weighted average shares outstanding - basic | 3230000 | 3269000 | 3374000 |
Weighted average shares outstanding - diluted | 3243000 | 3283000 | 3389000 |
Year end shares outstanding | 3228000 | 3233000 | 3314000 |
Income (loss) per share-continuing operations - basic | 5.01 | 4.87 | 5.04 |
Income (loss) per share-discontinued operations - basic | 0.06 | 0.03 | - |
Net income (loss) per share - basic | 5.07 | 4.9 | 5.04 |
Income (loss) per share-continuing operations - diluted | 4.99 | 4.85 | 5.02 |
Income (loss) per share-discontinued operations - diluted | 0.06 | 0.03 | - |
Net income (loss) per share - diluted | 5.05 | 4.88 | 5.02 |
Dividends declared per common share | 1.92 | 1.88 | 1.59 |
Total number of employees | 2200000 | 2200000 | 2200000 |
Number of common stockholders | 249876 | 255758 | 263499 |