FI 4020 Lecture Notes - Lecture 2: Balance Sheet, Working Capital
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Problem 4-23 Data for Barry Computer Co. and its industry averages follow.
Construct the Du Pont equation for both Barry and the industry. Round your answers to two decimal places.
a)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. b)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. c)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. d)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. e)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. 3) 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 true statement a) 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. b) 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. c) 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. d) 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. e) 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. |
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.
need some help filling out my balance and income statement using the following information given.
Using a Percentage of Sales method from 2017 results and the Given Information below, derive the 2018 Pro Forma (forecast) Income Statement and Balance Sheet (i.e. fill in the 2018 cells with the appropriate amounts).
Is there a âplugâ needed? If so, how much is it? What does it tell you about Scarletâs forecasted 2018 financial projections and what could Scarlet do to remedy the situation?
Based on Scarletâs 2017 & 2016 financials, what is her businessâs Sustainable Growth Rate (SGR)?
Given Information:
Scarlet believes that her 2018 Revenue figure will be 12% higher than her 2017 Revenue.
She estimates that her SG&A will go up by $1,000 from 2016-2017 since she plans on getting a part-time employee.
She doesnât intend to pay any dividends for 2018.
For her Balance Sheet forecasted items she uses only 2017 results, rather than taking an average of the results (average of the % of sales) from 2016 and 2017.
Scarlet assumes Interest Expense, Curr Portion of LT Debt, and Bank Loan Payable will remain the same in 2018 as they were in 2017.
Scarlet plans on issuing $1,000 of (new) Common Stock in 2018.
Scarlet determines that she will need to spend $3,700 for a new Lemon Press machine, which will be her entire CAPEX for 2018. We will assume depreciation will be $200 for this item for 2018, and the yearly depreciation/amortization expense for the rest of Scarletâs PPE will remain the same as it was in 2017 (and assume no asset sales were made in 2017).
Intangibles and Goodwill will remain unchanged in 2018.
She is not planning on disposing of any of her assets (i.e. no asset sales).
Income Statement | ||
2018 | 2017 | |
Sales / Revenue | 46,592 | 41,600 |
Cost of Goods Sold (COGS) | ? | 24,960 |
Gross Profit | ? | 16,640 |
Selling, General & Administrative (SG&A) | 13,940 | 12,940 |
Operating Profit | ? | 3,700 |
Interest Expense | ? | 2,000 |
Income Before Taxes | ? | 1,700 |
Income Tax Expense | ? | 595 |
Net Income | ? | 1,105 |
Assume No Dividends Paid |
Balance Sheet | |||||||||||
Assets | Liabilities and Stockholders' Equity | ||||||||||
Current Assets: | 2018 | 2017 | 2016 | Current Liabilities: | 2018 | 2017 | 2016 | ||||
Cash | ? | 2,500 | 5,495 | A/P | ? | 1,100 | 300 | ||||
A/R | ? | 800 | 1,300 | Deferred Revenue | ? | 700 | 1,000 | ||||
Inventory | ? | 2,900 | 1,600 | Curr Portion of LT Debt | ? | 2,200 | 5,300 | ||||
Prepaid Rent | ? | 2,200 | 1,800 | Wages Payable | ? | 2,600 | 4,600 | ||||
Prepaid Insurance | ? | 1,400 | 1,900 | Tot Curr Liab | ? | 6,600 | 11,200 | ||||
Tot Curr Assets | ? | 9,800 | 12,095 | ||||||||
LT Liab | |||||||||||
LT Assets | Bank Loan Payable | ? | 5,500 | 3,300 | |||||||
PPE, Gross | ? | 9,500 | 5,500 | Tot Liab | ? | 12,100 | 14,500 | ||||
Accumul Depr | ? | 2,800 | 2,000 | ||||||||
PPE, Net | ? | 6,700 | 3,500 | Stockholders' Equity | |||||||
Common Stock | 4,300 | 3,300 | 1,100 | ||||||||
Intangibles | ? | 3,000 | 3,000 | Retained Earnings | ? | 5,100 | 3,995 | ||||
Goodwill | ? | 1,000 | 1,000 | Total Stockholders' Equity | ? | 8,400 | 5,095 | ||||
Total Assets | ? | 20,500 | 19,595 | Total Liab + Stockholders' Equity | ? | 20,500 | 19,595 | ||||
2a. | PLUG (if necessary): | ? | |||||||||
What it tells you: | ? | ||||||||||
2b. | Sustainable Growth Rate (SGR): | ? |