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Helen McGuire, who just a year ago was appointed president of Lydex Company

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Question;Analysis BasicsComplete P16-15 on page 754 of Managerial Accounting and present your responses in an Excelspreadsheet.Helen McGuire, who just a year ago was appointed president of Lydex Company, argues that although the company has had a ?spotty? record in the past, it has ?turned the corner,? as evidenced by a 25% jump in sales and by a greatly improved earnings picture between last year and this year.McGuire also points out that investors generally have recognized the improving situation at Lydex, as shown by the increase in market value of the company?s common stock, which is currently selling for $72 per share (up from $40 per share last year). McGuire feels that with her leadership and with the modernized equipment that the $3,000,000 loan will permit the company to buy, profits will be even stronger in the future. McGuire has a reputation in the industry for being a good manager who runs a ?tight? ship.Not wanting to botch your first assignment, you decide to generate all the information that you can about the company.You determine that the following ratios are typical of companies in LydexCompany?s industry:Current ratio................ 2.3Acid-test ratio............... 1.2Average collection period...... 30 daysAverage sale period........... 60 daysReturn on assets............. 9.5%Debt-to-equity ratio........... 0.65Times interest earned ratio..... 5.7Price-earnings ratio........... 10Required:1. You decide first to assess the rate of return that the company is generating. Compute the following for both this year andlast year:a. The return on total assets. (Total assets at the beginning of last year were $12,960,000.)b. The return on common stockholders? equity. (Stockholders? equity at the beginning of last year totaled $9,048,000.There has been no change in preferred or common stock over the last two years.)c. Is the company?s financial leverage positive or negative? Explain.2. You decide next to assess the well-being of the common stockholders. For both this year and last year, compute:a. The earnings per share.b. The dividend yield ratio for common stock.c. The dividend payout ratio for common stock.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 pershare suggest that the stock at its current price is a bargain?Explain.f. The gross margin percentage.3. You decide, finally, to assess creditor ratios to determine both short-term and long-term debt paying ability. For both thisyear and last year, compute: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 $1,560,000.)e. The average sale period. (The inventory at the beginning of last year totaled $1,920,000.)f. The debt-to-equity ratio.g. The times interest earned ratio.4. Make a recommendation to your supervisor as to whether the loan should be approved.PROBLEM 16?15 Common-Size Financial Statements [LO1]Refer to the financial statement data for Lydex Company given in Problem 16?14.PROBLEM 16?14 Comprehensive Ratio Analysis [LO2, LO3, LO4]You have just been hired as a loan officer at Slippery Rock State Bank. Your supervisor has given you a file containing arequest from Lydex Company, a manufacturer of safety helmets,?How Well Am I Doing?? Financial Statement Analysis 753 for a $3,000,000, five-year loan. Financial statement data on thecompany for the last two years follow:Lydex CompanyComparative Balance SheetThis Year Last YearAssetsCurrent assets:Cash.............................. $ 960,000 $ 1,260,000Marketable securities................. 0 300,000Accounts receivable, net.............. 2,700,000 1,800,000Inventory........................... 3,900,000 2,400,000Prepaid expenses.................... 240,000 180,000Total current assets.................... 7,800,000 5,940,000Plant and equipment, net................ 9,300,000 8,940,000Total assets.......................... $17,100,000 $14,880,000Liabilities and Stockholders? EquityLiabilities:Current liabilities..................... $ 3,900,000 $ 2,760,000Note payable, 10%.................. 3,600,000 3,000,000Total liabilities......................... 7,500,000 5,760,000Stockholders? equity:Preferred stock, 8%, $30 par value...... 1,800,000 1,800,000Common stock, $80 par value.......... 6,000,000 6,000,000Retained earnings................... 1,800,000 1,320,000Total stockholders? equity................ 9,600,000 9,120,000Total liabilities and stockholders? equity..... $17,100,000 $14,880,000Lydex CompanyComparative Income Statement and ReconciliationThis Year Last YearSales (all on account).................. $15,750,000 $12,480,000Cost of goods sold..................... 12,600,000 9,900,000Gross margin......................... 3,150,000 2,580,000Selling and administrative expenses....... 1,590,000 1,560,000Net operating income................... 1,560,000 1,020,000Interest expense...................... 360,000 300,000Net income before taxes................ 1,200,000 720,000Income taxes (30%).................... 360,000 216,000Net income........................... 840,000 504,000Dividends paid:Preferred dividends.................. 144,000 144,000Common dividends.................. 216,000 108,000Total dividends paid.................... 360,000 252,000Net income retained.................... 480,000 252,000Retained earnings, beginning of year...... 1,320,000 1,068,000Retained earnings, end of year........... $ 1,800,000 $ 1,320,000

 

Paper#50752 | Written in 18-Jul-2015

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