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15-3 Assume that two companies in the same industry have equal earnings. Why might these companies have different price-earnings ratios? If a company has a price-earnings ratio of 20 and reports earnings per share for the current year of $4, at what price would you expect to find the stock selling on the market?

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Collen VonLv2
15 Dec 2017
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1) Chastain Company's current ratio for 2015 was 1.42, whichwas slightly above the current ratio for similar companies in itsindustry. Chastain's quick ratio for 2015 was 0.68, which issubstantially lower than for similar companies in its industry.What conclusion would you reach based on this information?


2) Chastain Company's current ratio for 2015 was 1.42, whichwas slightly above the current ratio for similar companies in itsindustry. Chastain's quick ratio for 2015 was 0.68, which issubstantially lower than for similar companies in its industry.What conclusion would you reach based on this information?


3) Chastain Company's current ratio for 2015 was 1.42, whichwas slightly above the current ratio for similar companies in itsindustry. Chastain's quick ratio for 2015 was 0.68, which issubstantially lower than for similar companies in its industry.What conclusion would you reach based on this information?
4) Gleason Company and Henry Company are similar andsimilar-sized companies operating in the same industry. At the endof the most recent year, Gleason's price/earnings ratio was 22.0,and Henry's price/earnings ratio was 14.2. What conclusion wouldyou draw based on the difference in price/earnings ratios for thetwo companies?
5) Discuss the limitations that affect financial statementanalysis.

PROBLEM 15-15 Comprehensive Ratio Analysis (L015-2, L015-3, L015-4, L015-5, L015-6] You have just been hired as a financial analyst for Lydex Company, a manufacturer of safety hel- mets. Your boss has asked you to perform a comprehensive analysis of the company's financial statements, including comparing Lydex's performance to its major competitors. The company's financial statements for the last two years are as follows: Lydex Company Comparative Balance Sheet This Year Last Year $ 960,000 0 2,700,000 3,900,000 240,000 7,800,000 9,300,000 $17,100,000 $ 1,260,000 300,000 1,800,000 2,400,000 180,000 5,940,000 8,940,000 $14,880,000 Assets Current assets: Cash .... Marketable securities ......... Accounts receivable, net ........ Inventory .......... Prepaid expenses.......... Total current assets. ........ Plant and equipment, net ..... Total assets ............. Liabilities and Stockholders' Equity Liabilities: Current liabilities. Note payable, 10% ................. Total liabilities .... .......... Stockholders' equity: Common stock, $78 par value ......... Retained earnings .................. Total stockholders' equity .............. Total liabilities and stockholders' equity.... $ 3,900,000 3,600,000 7,500,000 $2,760,000 3,000,000 5,760,000 7,800,000 1,800,000 9,600,000 $17,100,000 7,800,000 1,320,000 9,120,000 $14,880,000 Lydex Company Comparative Income Statement and Reconciliation This Year Last Year Sales (all on account) $15,750,000 $12,480,000 Cost of goods sold .. 12,600,000 9,900,000 Gross margin ....................... 3,150,000 2,580,000 Selling and administrative expenses ...... 1,590,000 1,560,000 Net operating income.................. 1,560,000 1,020,000 Interest expense ...................... 360,000 300,000 Net income before taxes ............... 1,200,000 720,000 Income taxes (30%) 360,000 216,000 Net income ........................ 840,000 504,000 Common dividends .................. 360,000 252,000 Net income retained 480,000 252,000 Beginning retained earnings ........ 1,320,000 1,068,000 Ending retained earnings ............... $ 1,800,000 $1,320,000 To begin your assigment you gather the following financial data and ratios that are typical of companies in Lydex Company's industry: 2.3 1.2 Current ratio ...................... Acid-test ratio ..... Average collection period ...... Average sale period .... Return on assets .... Debt-to-equity ratio .......... Times interest earned ratio ......... Price-earnings ratio .......... 30 days 60 days 9.5% 0.65 5.7 10 Required: 1. You decide first to assess the company's performance in terms of debt management and profit- ability. Compute the following for both this year and last year: a. The times interest earned ratio. b. The debt-to-equity ratio. c. The gross margin percentage. d. The return on total assets. (Total assets at the beginning of last year were $12.960,000.) e. The return on equity. (Stockholders' equity at the beginning of last year totaled $9,048,000. There has been no change in common stock over the last two years.) f. Is the company's financial leverage positive or negative? Explain. You decide next to assess the company's stock market performance. Assume that Lydex's stock price at the end of this year is $72 per share and that at the end of last year it was $40. For both this year and last year, compute: a. The earnings per share. b. The dividend yield ratio. c. The dividend payout ratio. d. The price-earnings ratio. How do investors regard Lydex Company as compared to other companies in the industry? Explain. e. The book value per share of common stock. Does the difference between market value per share and book value per share suggest that the stock at its current price is a bargain? Explain. 3. You decide, finally, to assess the company's liquidity and asset management. For both this year and last year, compute: a. Working capital. b. The current ratio. The acid-test ratio. d. The average collection period. (The accounts receivable at the beginning of last year totaled $1,560,000.) e. The average sale period. (The inventory at the beginning of last year totaled $1,920,000.) f. The operating cycle. g. The total asset turnover. (The total assets at the beginning of last year totaled $14,500,000.) 4. Prepare a brief memo that summarizes how Lydex is performing relative to its competitors.

PROBLEM 15-18 Common-Size Statements and Financial Ratios for a Loan Application (2015-1, L015-2, L015-3, L015-4] Paul Sabin organized Sabin Electronics 10 years ago to produce and sell several electronic devices on which he had secured patents. Although the company has been fairly profitable, it is now expe- riencing a severe cash shortage. For this reason, it is requesting a $500,000 long-term loan from Gulfport State Bank, $100,000 of which will be used to bolster the Cash account and S400,000 of which will be used to modemize equipment. The company's financial statements for the two most recent years follow: Sabin Electronics Comparative Balance Sheet This Year Last Year Assets Current assets: Cash Marketable securities ........ Accounts receivable, net ... Inventory ... Prepaid expenses............ Total current assets ........... Plant and equipment, net ........ $ 70,000 0 480,000 950,000 20,000 1,520,000 1,480,000 $3,000,000 $ 150,000 18,000 300,000 600,000 22,000 1,090,000 1,370,000 $2,460,000 ssets ......................... $ 800,000 600,000 1,400,000 $430,000 600,000 1,030,000 Liabilities and Stockholders' Equity Liabilities: Current liabilities .................... Bonds payable, 12% ................ Total liabilities ........................ Stockholders' equity: Common stock, $15 par.. Retained earnings Total stockholders' equity ............ Total liabilities and equity ....... 750,000 850,000 1,600,000 $3,000,000 750,000 680,000 1,430,000 $2,460,000 Sabin Electronics Comparative Income Statement and Reconciliation This Year Last Year Sales .... $5,000,000 $4,350,000 Cost of goods sold ................... 3,875,000 3,450,000 Gross margin ........................ 1,125,000 900,000 Selling and administrative expenses .... 653,000 548,000 Net operating income . 472,000 352,000 Interest expense ... 72,000 72,000 Net income before taxes ... 400,000 280,000 Income taxes (30%) .... 120,000 84,000 Net income ..................... 280,000 196,000 Common dividends ......... 110,000 95,000 Net income retained .................. 170,000 101.000 Beginning retained earnings .......... 680,000 579,000 Ending retained earnings ............... $ 850,000 $ 680,000 During the past year, the company introduced several new product lines and raised the selling prices on a number of old product lines in order to improve its profit margin. The company also hired a new sales manager, who has expanded sales into several new territories. Sales terms are 2/10, n/30. All sales are on account. PROBLEM 15-19 Financial Ratios for Assessing Profitability and Market Performance (L015-2] Refer to the financial statements and other data in Problem 15-18. Assume that Paul Sabin has asked you to assess his company's profitability and stock market performance. Required: 1. You decide first to assess the company's stock market performance. For both this year and last year, compute: a. The earnings per share. There has been no change in common stock over the last two years. b. The dividend yield ratio. The company's stock is currently selling for $40 per share; last year it sold for $36 per share. c. The dividend payout ratio. d. The price-earnings ratio. How do investors regard Sabin Electronics as compared to other companies in the industry if the industry norm for the price-earnings ratio is 12? Explain. e. The book value per share of common stock. Does the difference between market value and book value suggest that the stock is overpriced? Explain. 2. You decide next to assess the company's profitability. Compute the following for both this year and last year: a. The gross margin percentage. b. The net profit margin percentage. c. The return on total assets. (Total assets at the beginning of last year were $2,300,000.) d. The return on equity. (Stockholders' equity at the beginning of last year was $1,329,000.) e. Is the company's financial leverage positive or negative? Explain. Comment on the company's profit performance and stock market performance over the two- year period. 3.

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