Finance: New Mexico Lumber recently reported analysis
New Mexico Lumber recently reported that its earnings per share were $3.00. The company has 400,000 shares of stock outstanding. The company’s interest expense was $500,000. The corporate tax rate is 40 percent. What was the company’s operating income (EBIT)?
Humphrey Hotels’ operating income (EBIT) is $40 million. The company’s times-interest-earned (TIE) ratio is 8.0, its tax rate is 40 percent, and its basic earning power (BEP) ratio is 10 percent. What is the company’s return on assets (ROA)?
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A firm has a debt/equity ratio of 50 percent. Currently, it has interest expense of $500,000 on $5,000,000 of total debt outstanding, and a tax rate of 40 percent. If the firm’s ROA is 6 percent, by how many percentage points is the firm’s ROE greater than its ROA?
You are considering adding a new product to your firm’s existing product line. It should cause a 15% increase in your profit margin (i.e., new PM = old PM × 1.15), but it will also require a 50% increase in total assets (i.e., new TA = old TA × 1.5). You expect to finance this asset growth entirely by debt. If the following ratios were computed before the change, what will be the new ROE if the new product is added and sales remain constant?
Ratios before new product
Profit margin = 0.10
Total assets turnover = 2.00
Equity multiplier = 2.00
The Amer Company has the following characteristics:
Total assets $1,000
Total debt/Total assets 35%
Basic Earning Power (BEP) ratio 20%
Tax rate 40%
Interest rate on total debt 4.57%
What is Amer’s ROE?
A firm which has an equity multiplier of 6.0 will have a debt ratio of
Alumbat Corporation has $800,000 of debt outstanding, and it pays an interest rate of 10 percent annually on its bank loan. Alumbat’s annual sales are $3,200,000; its average tax rate is 40 percent; and its net profit margin on sales is 6 percent. If the company does not maintain a TIE ratio of at least 4 times, its bank will refuse to renew its loan, and bankruptcy will result. What is Alumbat’s current TIE ratio?
Manufacturer’s Inc. estimates that its interest charges for this year will be $700 and that its net income will be $3,000. Assuming its average tax rate is 30 percent, what is the company’s estimated times-interest-earned ratio?
Kansas Office Supply had $24,000,000 in sales last year. The company’s net income was $400,000. Its total assets turnover was 6.0. The company’s ROE was 15 percent. The company is financed entirely with debt and common equity. What is the company’s debt ratio?
The Merriam Company has determined that its return on equity is 15 percent. Management is interested in the various components that went into this calculation. You are given the following information: total debt/total assets = 0.35 and total assets turnover = 2.8. What is the profit margin?
Harvey Supplies Inc. has a current ratio of 3.0, a quick ratio of 2.4, and an inventory turnover ratio of 6. Harvey’s total assets are $1 million and its debt ratio is 0.20. The firm has no long-term debt. What is Harvey’s sales figure?
Given the following information, calculate the market price per share of WAM Inc.
Net income = $200,000
Earnings per share = $2.00
Stockholders’ equity = $2,000,000
Market/Book ratio = 0.20
The Wilson Corp.has the following relationships. What is Wilson’s profit margin and debt ratio?
Sales/Total assets 2.0
Return on assets (ROA) 4%
Return on equity (ROE) 6%
Company A has sales of $1,000, assets of $500, a debt ratio of 30 percent, and an ROE of 15 percent. Company B has the same sales, assets, and net income, but its ROE is 30 percent. What is B’s debt ratio? (Hint: Begin by looking at the Du Pont equation.)
Lone Star Plastics has the following data. What is Lone Star’s EBIT?
Assets: $100,000; Profit margin: 6.0%; Tax rate: 40%; Debt ratio: 40.0%;
Interest rate: 8.0%: Total assets turnover: 3.0.
Melissa Hampton was reviewing the recent performance of the EASY Chair Company, a company with a reputation for producing high-quality home furniture. Over the years, the name EASY had become synonymous with a kind of chair called a recliner. By 2000, the company was producing a variety of home furnishings, including reclining sofas, sleep sofas, living room cabinets, upholstered furniture, and solid-wood dining room furniture. In the past decade, the company had also entered the office furniture business by producing office systems and patient seating for clinics and hospitals. To determine the impact that diversification and expansion had on EASY, Ms. Hampton collected the following data for the company:
EASY CHAIR COMPANY
(dollars in millions)
2000 1999 1998 1997 1996
Sales $592.3 $553.2 $486.8 $420.0 $341.7
Net Income $28.3 $27.5 $26.5 $24.7 $23.0
Dividends per share $0.5 $0.5 $0.4 $0.4 $0.4
Number of shares 17.9 17.9 18.3 18.4 18.3
Total Assets $361.9 $349.0 $336.6 $269.9 $233.0
Total equity $214.6 &194.3 $178.8 $165.3 $147.0
How had EASY’s sustainable growth rate changed over time? What caused any changes you found?
The home furniture industry had the following ratios over the same time. How did EASY compare with the industry?
HOME FURNITURE INDUSTRY RATIOS
2000 1999 1998 1997
Return on equity 15.12% 15.54% 15.31% 15.74%
Retention rate 71.00% 71.00% 71.00% 72.00%
Sustainable growth rate 10.73% 11.03% 10.87% 11.33%
Perplexed by the declining profit margin and the rate of growth of EASY’s net income, Melissa Hampton pressed the company management for more detailed information. The management asks you, one of EASY’s financial analysts, to compute component and percentage changes for the following statements and determine if there were any positive or negative trends.
EASY CHAIR COMPANY
(dollars in millions)
2000 1999 1998 1997
Net sales $592.3 $553.2 $486.8 $420.0
Cost of sales (430.4) (397.8) (352.1) (289.8)
Gross profit 161.9 135.4 134.7 130.2
Selling, general, and administrative expenses (111.6) (106.9) (91.4) (85.5)
Income from operations 50.3 48.5 43.3 44.7
Interest expense (7.2) (7.6) (4.0) (1.9)
Other income 2.5 3.1 2.7 2.1
Income before taxes 45.6 44.0 42.0 44.9
Taxes (17.3) (16.5) (15.5) (20.3)
Net income $28.3 $27.5 $26.5 $24.6
Hampton was not satisfied with EASY’s performance. She believed that the company could achieve the following ratios:
EASY CHAIR COMPANY
MS. HAMPTON’S TARGET RATIOS
Dividend payout 45.0% Profit margin 5.1%
Market price $15.00 Gross margin 27.6%
Dividend yield 5.2% Return on assets 9.4%
Number of shares outstanding 18,000 Inventory turnover 733.3%
Return on equity 13.7% Operating profit 8.7%
Long-term debt/equity 27.3% Accounts receivable collection period 92.5 days
Current ratio 551.0% Accounts payable payment period 28.7 days
Acid-test ratio 407.3% Tax rate 34.0%
Using Ms. Hampton’s target ratios for EASY, complete the following financial statements:
EASY CHAIR COMPANY
MS. HAMPTON’S REVISED FINANCIAL STATEMENTS
Cost of sales
Selling, general, and administrative expenses
Earnings before taxes
Total current assets
Net property, plant, and equipment
Other current liabilities
Total current liabilities
Total liabilities and owners’ equity
Dividends per share
As the new financial analyst for Peterson’s Chemicals, you have been asked to analyze the profitability problems encountered during the last two years. Current financial statements and selected industry averages are as follows:
(dollars in millions)
Income Statement 2000 1999
Cost of goods sold (1,182) (1,076)
Gross profit 296 359
Selling and administrative expenses (443) (445)
Operating profit (147) (86)
Interest expense (27) (29)
Net income $(174) $(115)
Cash and equivalent
Accounts receivable (net) 432 437
Inventory 324 284
Other current assets 37 38
Total current assets 913 835
Plant, property, and equipment 300 376
Total assets $1,213 $1,210
Accounts payable $500 $412
Other current liabilities 309 98
Total current liabilities 809 510
Long-term debt 178 300
Total liabilities 987 810
Owners’ equity 226 400
Total liabilities and owners’ equity $1,213 $1,210
Using your analysis of the financial statements, how does Peterson’s compare to the following industry averages?
CHEMICAL INDUSTRY AVERAGES
Current ratio 150%
Acid-test ratio 90%
Receivables collection period 65 days
Payables payment period 60 days
Return on assets 7%
Return on equity 19%
Peterson’s management has decided to reexamine the company’s short-term credit policies. The chief financial officer estimates that reducing the receivables collection period to 78 days would result in a sales decrease of 3 percent. The purchasing department reports that by reducing the payables period to 68.5 days, discounts would be available that would reduce the cost of goods by 9 percent. Initially the cash required to finance these changes would come from additional long-term debt, resulting in a debt to equity ratio of 100 percent. As an analyst:
Determine whether Peterson’s Chemicals would have been profitable if management had made these changes at the beginning of 2000.
Determine how the ROE and ROA would have been affected.
Prepare new financial statements to reflect these changes.
Lacey Harmoniski had just moved to the Endura Republic as a part of a business school summer internship. His mentor and supervisor, Mr. Rickki, had handed him THE FASTNER CO. income statements and asked him to analyze them. His mentor was proud of the progress the company had made. Lacey knew that the analysis would show how well the joint fastener company had done over the past five years, and that his analysis was his introduction to a company of which his mentor was proud. Mr. Rickki had described the economic environment as one that was difficult: inflation had been high and variable. The company, he said, had coped with the inflation, and prospered.
THE FASTNER CO.
(currency in millions)
1999 1998 1997 1996 1995
Volume (in units) 54,518 55,631 54,540 54,000 50,000
Revenues 10,119 8,294 6,480 4,800 4,000
Cost of goods sold:
Labor 2,255 1,762 1,456 1,120 1,000
Material 4,588 3,584 2,636 1,856 1,600
Gross profit 3,276 2,948 2,388 1,824 1,400
Marketing expenses 873 715 559 414 345
Administrative expenses 539 435 334 385 282
Operating profit 1,864 1,798 1,495 1,166 855
Taxes 615 593 493 385 282
Net Income 1,249 1,205 1,002 781 573
Calculate common-size statements for the income statements of THE FASTNER CO. On the basis of this analysis, determine how well the company did.
What was the price per unit of the goods being sold by mE FASTNER co.?
Rickki has asked that Lacey calculate and comment on the growth rates of the various items on the income statement. Lacey asks that you draft the report. Please do so.
In spite of the fact that Mr. Rickki had not asked, Lacey decided to put one of his new business school tools to use: an analysis of real growth rates. In addition to the nominal growth rates of the various items, please help him by calculating and commenting on the real growth rates the company has achieved over the past four years. Inflation was as follows:
1999 1998 1997 1996
Inflation 28% 26% 40% 12%
Draft a report to Mr. Rickki stating your conclusions regarding how well THE FASTNER co. has done.
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