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2) The Greek Connection had sales of $32 million and cost of goods sold of $12.8 milion in 2009. A simplified balance sheet for the firm appears​ below: THE GREEK CONNECTION Balance Sheet as of December​ 31, 2009​ (thousands of​ dollars) Assets Liabilities and Equity Cash 2,202 Accounts payable 1,549 Accounts receivable 4,241 Notes payable 1,000 Inventory 1,159 Accruals 1,220 Total Current Assets 7,602 Total current liabilities 3,769 Net property plant and equipment 8,500 Long term debt 3,000 total assets 16,102 Total liabilities 6,769 Common Equity 9,334 Total liabilities and equity 16,102 a. Calculate The Greek​ Connection's net working capital in 2009. b. Calculate the cash conversion cycle of The Greek Connection in 2009. c. The industry average accounts receivable days is 30 days. What would the cash conversion cycle for The Greek Connection have been in 2009 had it matched the industry average for accounts receivable​ days?

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Sixta Kovacek
Sixta KovacekLv2
28 Sep 2019

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The Greek Connection had sales of $32 million in 2009, and a cost of goods sold of $20 million. A simplified balance sheet for the firm appears below:
THE GREEK CONNECTION
Balance Sheet
As of December 31, 2009
(000)
Assets Liabilities and Equity
Cash $2,000 Accounts payable $1,500
Accounts receivable 3,950 Notes payable 1,000
Inventory 1,300 Accruals 1,220
Total current assets $7,250 Total current liabilities $3,720
Net plant, property Long-term debt $3,000
and equipment $8,500 Total liabilities $6,720
Total Assets $15,750 Common equity 9,030
Total liabilities and equity $15,750
a. Calculate The Greek Connection’s net working capital in 2009.
b. Calculate the cash conversion cycle of The Greek Connection in 2009.
c. The industry average days sales outstanding ratio is 30 days. What would the cash conversion cycle for The Greek Connection have been in 2009 had it matched the industry average days sales outstanding?
Sales (000) $32,000 Days in a year 365
Cost of Goods Sold (000) $20,000
a. Calculate The Greek Connection’s net working capital in 2009.
Net working capital (000)
b. Calculate the cash conversion cycle of The Greek Connection in 2009.
Accounts receivable days
Inventory days
Accounts payable days
Cash conversion cycle (days)
c. The industry average days sales outstanding ratio is 30 days. What would the cash conversion cycle for The Greek Connection have been in 2009 had it matched the industry average days sales outstanding?
Industry accounts receivable days 30
Cash conversion cycle (days)

Problem 4-23
Ratio Analysis

Data for Barry Computer Co. and its industry averages follow.

Barry Computer Company:
Balance Sheet as of December 31, 2014 (In Thousands)
Cash $153,615 Accounts payable $167,580
Receivables 516,705 Other current liabilities 139,650
Inventories 391,020 Notes payable 83,790
Total current assets $1,061,340 Total current liabilities $391,020
Long-term debt $349,125
Net fixed assets 335,160 Common equity 656,355
Total assets $1,396,500 Total liabilities and equity $1,396,500
Barry Computer Company:
Income Statement for Year Ended December 31, 2014 (In Thousands)
Sales $2,450,000
Cost of goods sold
Materials $1,102,500
Labor 661,500
Heat, light, and power 73,500
Indirect labor 196,000
Depreciation 98,000 $2,131,500
Gross profit $318,500
Selling expenses 171,500
General and administrative expenses 24,500
Earnings before interest and taxes (EBIT) $122,500
Interest expense 38,404
Earnings before taxes (EBT) 84,096
Federal and state income taxes (40%) 33,638
Net income $50,458
aCalculation is based on a 365-day year.

Construct the Du Pont equation for both Barry and the industry. Round your answers to two decimal places.
1) FIRM INDUSTRY
Profit margin ?% 1.92%
Total assets turnover ?x 1.98x
Equity multiplier ?


2) Outline Barry's strengths and weaknesses as revealed by your analysis.
Select the true statement

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.

Sun Microsystems is a leadingsupplier of computer-related products, including servers,workstations, storage devices, and network switches. In 2009, SunMicrosystems was acquired by Oracle Corporation.

In the letter to stockholders as part of the 2001 annual report,President and CEO Scott G. McNealy offered the followingremarks:

Fiscal 2001 wasclearly a mixed bag for Sun, the industry, and the economy as awhole. Still, we finished with revenue growth of 16 percent—andthat's significant. We believe it's a good indication that Suncontinued to pull away from the pack and gain market share. Forthat, we owe a debt of gratitude to our employees worldwide, whoaggressively brought costs down—even as they continued to bringexciting new products to market.

The statement would not appear to betelling you enough. For example, McNealy says the year was a mixedbag with revenue growth of 16 percent. But what about earnings? Youcan delve further by examining the income statement in Exhibit 4.Also, for additional analysis of other factors, consolidatedbalance sheet(s) are presented in Exhibit 5.

Exhibit 1

2001Dollars 2000Dollars 1999Dollars 1998Dollars
Netrevenues $ 18,375 $ 15,718 $11,845 $9,878
Costs andexpenses:

Cost of sales

$ 10,044

$ 7,547

$ 5,661

$ 3,865

Research and development

2,018

1,625

1,281

1,029

Selling, general andadministrative

4,542

4,073

3,198

2,811

Goodwill amortization

260

64

19

0.6

In-process research anddevelopment

 81 12 120 174
Total costs andexpenses $ 16,945 $ 13,321 $10,279 $7,879.6
OperatingIncome $ 1,430 $ 2,397 $1,566 $1,998.4
Gain (loss) onstrategic investments $ -90 $ 207 - -
Interest income,net $ 361 $ 166 $84 $46
Litigationsettlement - - - -
Income beforetaxes $ 1,701 $ 2,770 $1,650 $2,044.4
Provision forincome taxes $ 794.36 $ 906.05 $635.37 $1,247.9
Cumulative effectof change in accounting principle, net $ -56 - - -
Netincome $ 962.64 $ 1,863.95 $1,014.63 $796.5
Net income percommon share-diluted $ 0.28 $ 0.55 $0.31 $0.25
Shares used inthe calculation of net income per common share-diluted 3,438 3,389 3,273 3,186

Exhibit 2

Assets 2001 2000
Currentassets:
Cash and cashequivalents $ 1,474 $ 1,842
Short-term investments 390 623
Accounts receivable, net allowancesof $410 in 2001 and $534 in 2000 2,955 2,682
Inventories 1,049 552
Deferred tax assets 1,000 674
Prepaids and other currentassets 971 475
Totalcurrent assets 7,839 6,848
Property, plantand equipment, net 2,695 2,096
Long-terminvestments 4,671 4,492
Goodwill, net ofaccumulated amortization of $349 in 2001 and $88 in2000 2,036 161
Other assets,net 831 516
18,072 14,113
Liabilities andStockholders' Equity
Currentliabilities:
Short-term borrowings 4 7
Accounts payable 1,045 923
Accrued payroll-relatedliabilities 491 753
Accrued liabilities andother 1,379 1,154
Deferred revenues and customerdeposits 1,822 1,291
Warranty reserve 314 214
Income taxes payable 91 219
Totalcurrent liabilities 5,146 4,561
Deferred incometaxes 743 582
Long-term debtand other obligations 1,705 1,723
Totaldebt 7,594 6,866
Commitments andcontingencies
Stockholders'equity:
Preferred stock, $0.001 par value,10 shares authorized (1 sahre which has been designated as Series APreferred participating stock): no shares issued andoutstanding - -
Common stock andadditional paid-in-capital, $0.00067 par value, 7,200 sharesauthorized; issued: 3,536 shares in 2001 and 301 shares in2000 6,241 2,731
Treasury stock,at cost: 288 shares in 2001 and 301 shares in 2000 -2,434 -1,439
Deferred equitycompensation -70 -13
Retainedearnings 6,769 5,891
Accumulated othercomprehensive income (loss) -28 77
Total stockholders'equity 10,478 7,247
18,072 14,113

Part A

Referring to Exhibit 1, compute theannual percentage change in net income per common share-diluted(second numerical line from the bottom) for 1998–1999, 1999–2000,and 2000–2001.

Rate of change, 1998to 1999:

Rate of change, 1999to 2000:

Rate of change, 2000to 2001:

Part B

Also in Exhibit 1, compute netincome/net revenue (sales) for each of the four years. Begin with1998.

1998 ProfitMargin:

1999 ProfitMargin:

2000 ProfitMargin:

2001 ProfitMargin:

Part C

Compute return on stockholders’equity for 2000 and 2001 using data from Exhibits 1 and2.

2000 Return onStockholders' Equity:

2001 Return onStockholders' Equity:

Part D

Analyze your results to Question 2more completely by computing ratios 1, 2a, 2b,and 3b (all from this chapter) for 2000 and 2001.Actually, the answer to ratio 1 can be found as part of the answerto question 2, but it is helpful to look at it again.

Ratio 2000 2001
1
2a
2b

Part E

The average stock prices for each ofthe four years shown in Exhibit 1 were as follows:

1998 11¼

1999 16¾

2000 28½

2001 9½

Compute the price/earnings (P/E)ratio for each year. That is, take the stock price shown above anddivide by net income per common stock-dilution from Exhibit1.

1998 P/ERatio:

1999 P/ERatio:

2000 P/ERatio:

2001 P/ERatio:

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