d. The return on total assets. (Total assets at the beginning of last year were $13,050,000.) e. The return on equity. (Stockholders’ equity at the beginning of last year totaled $8,214,950. There has been no change in common stock over the last two years.) f. Is the company’s financial leverage positive or negative?
Help to solve these 3 questions
d. The return on total assets. (Total assets at the beginning of last year were $13,050,000.)
e. The return on equity. (
f. Is the company’s financial leverage positive or negative?
Required information
[The following information applies to the questions displayed below.]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 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 | |||
| Assets | ||||
| Current assets: | ||||
| Cash | $ | 940,000 | $ | 1,180,000 |
| Marketable securities | 0 | 300,000 | ||
| 2,620,000 | 1,720,000 | |||
| Inventory | 3,580,000 | 2,300,000 | ||
| Prepaid expenses | 250,000 | 190,000 | ||
| Total current assets | 7,390,000 | 5,690,000 | ||
| Plant and equipment, net | 9,480,000 | 9,030,000 | ||
| Total assets | $ | 16,870,000 | $ | 14,720,000 |
| Liabilities and Stockholders' Equity | ||||
| Liabilities: | ||||
| Current liabilities | $ | 3,990,000 | $ | 2,940,000 |
| Note payable, 10% | 3,660,000 | 3,060,000 | ||
| Total liabilities | 7,650,000 | 6,000,000 | ||
| Stockholders' equity: | ||||
| Common stock, $75 par value | 7,500,000 | 7,500,000 | ||
| 1,720,000 | 1,220,000 | |||
| Total stockholders' equity | 9,220,000 | 8,720,000 | ||
| Total liabilities and stockholders' equity | $ | 16,870,000 | $ | 14,720,000 |
| Lydex Company Comparative Income Statement and Reconciliation |
||||
| This Year | Last Year | |||
| Sales (all on account) | $ | 15,840,000 | $ | 13,380,000 |
| Cost of goods sold | 12,672,000 | 10,035,000 | ||
| Gross margin | 3,168,000 | 3,345,000 | ||
| Selling and administrative expenses | 1,602,000 | 1,596,000 | ||
| Net operating income | 1,566,000 | 1,749,000 | ||
| Interest expense | 366,000 | 306,000 | ||
| Net income before taxes | 1,200,000 | 1,443,000 | ||
| Income taxes (30%) | 360,000 | 432,900 | ||
| Net income | 840,000 | 1,010,100 | ||
| Common dividends | 340,000 | 505,050 | ||
| Net income retained | 500,000 | 505,050 | ||
| Beginning retained earnings | 1,220,000 | 714,950 | ||
| Ending retained earnings | $ | 1,720,000 | $ | 1,220,000 |
To begin your assignment you gather the following financial data and ratios that are typical of companies in Lydex Company’s industry:
| 2.4 | ||
| Acid-test ratio | 1.1 | |
| Average collection period | 40 | days |
| Average sale period | 60 | days |
| Return on assets | 9.1 | % |
| Debt-to-equity ratio | 0.7 | |
| Times interest earned ratio | 5.7 | |
| Price-earnings ratio | 10 | |
rev: 04_27_2020_QC_CS-209476
Required:
1. You decide first to assess the company’s performance in terms of debt management and profitability. Compute the following for both this year and last year:
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