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You have just been hired as a financial analyst for Lydex Company a manufacturer of safety helmets Your boss has asked you to perform a comprehensive analysis of the companyAc cs financial

You have just been hired as a financial analyst for Lydex Company, a manufacturer of safety helmets. Your boss has asked you to perform a comprehensive analysis of the companyAc€?cs financial statements, including comparing LydexAc€?cs performance to its major competitors. The companyAc€?cs financial statements for the last two years are as follows:

Lydex Company
Comparative Balance Sheet
  This Year Last Year
  Assets        
  Current assets:        
     Cash $ 890,000     $ 1,130,000    
     Marketable securities   0       300,000    
     Accounts receivable, net   2,420,000       1,520,000    
     Inventory   3,530,000   2,300,000    
     Prepaid expenses   240,000       180,000    
         
  Total current assets   7,080,000       5,430,000    
  Plant and equipment, net   9,380,000       8,980,000    
         
  Total assets $ 16,460,000     $ 14,410,000    
         
Liabilities and Stockholders' Equity        
  Liabilities:        
     Current liabilities $ 3,940,000     $ 2,840,000    
     Note payable, 10%   3,620,000       3,020,000    
         
  Total liabilities   7,560,000       5,860,000    
         
  Stockholders' equity:        
      Common stock, $70 par value   7,000,000       7,000,000    
      Retained earnings   1,900,000       1,550,000    
         
  Total stockholders' equity   8,900,000       8,550,000    
         
  Total liabilities and stockholders' equity $ 16,460,000     $ 14,410,000    
         
 
Lydex Company
Comparative Income Statement and Reconciliation
  This Year Last Year
  Sales (all on account) $ 15,790,000    $ 12,880,000   
  Cost of goods sold   12,632,000      9,660,000   
         
  Gross margin   3,158,000      3,220,000   
  Selling and administrative expenses   1,796,000      1,576,000   
         
  Net operating income   1,362,000      1,644,000   
  Interest expense   362,000      302,000   
         
  Net income before taxes   1,000,000      1,342,000   
  Income taxes (30%)   300,000      402,600   
         
  Net income   700,000      939,400   
  Common dividends   350,000      469,700   
         
  Net income retained   350,000      469,700  
  Beginning retained earnings   1,550,000      1,080,300   
         
  Ending retained earnings $ 1,900,000    $ 1,550,000   
         
 

       To begin your assigment you gather the following financial data and ratios that are typical of companies in Lydex CompanyAc€?cs industry:

     
  Current ratio 2.3   
  Acid-test ratio 1.0   
  Average collection period 40 days     
  Average sale period 60 days     
  Return on assets 8.5 %          
  Debt-to-equity ratio .69  
  Times interest earned ratio 5.8  
  Price-earnings ratio 10  
Required:
1.

You decide first to assess the companyAc€?cs performance in terms of debt management and profitability. Compute the following for both this year and last year: (Round your intermediate calculations and final percentage answers to 1 decimal place. i.e., 0.123 should be considered as 12.3%. Round the rest of the intermediate calculations and final answers to 2 decimal places.)

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 $13,000,000.)
e. The return on equity. (StockholdersAc€?c equity at the beginning of last year totaled $8,080,300. There has been no change in common stock over the last two years.)
f.

Is the companyAc€?cs financial leverage positive or negative?

2.

You decide next to assess the companyAc€?cs stock market performance. Assume that LydexAc€?cs stock price at the end of this year is $80 per share and that at the end of last year it was $48. For both this year and last year, compute: (Round your intermediate calculations and final percentage answers to 1 decimal place. i.e., 0.123 should be considered as 12.3%. Round the rest of the intermediate calculations and final answers to 2 decimal places.)

a. The earnings per share.
b. The dividend yield ratio.
c. The dividend payout ratio.
d. The price-earnings ratio.
e.

The book value per share of common stock

3.

You decide, finally, to assess the companyAc€?cs liquidity and asset management. For both this year and last year, compute: (Use 365 days in a year. Round your intermediate calculations and final answer to 2 decimal places.)

a. Working capital.
b. The current ratio.
c. The acid-test ratio.
d. The average collection period. (The accounts receivable at the beginning of last year totaled $1,600,000.)
e. The average sale period. (The inventory at the beginning of last year totaled $1,960,000.)
f. The operating cycle.
g. The total asset turnover. (The total assets at the beginning of last year totaled $14,540,000.)

Apr 30 2020 View more View Less

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