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 $ 1,020,000 $ 1,260,000 Marketable securities 0 300,000 Accounts receivable, net 2,940,000 2,040,000 Inventory 3,660,000 2,100,000 Prepaid expenses 270,000 210,000 Total current assets 7,890,000 5,910,000 Plant and equipment, net 9,640,000 9,110,000 Total assets $ 17,530,000 $ 15,020,000 Liabilities and Stockholders' Equity Liabilities: Current liabilities $ 4,070,000 $ 3,100,000 Note payable, 10% 3,700,000 3,100,000 Total liabilities 7,770,000 6,200,000 Stockholders' equity: Common stock, $75 par value 7,500,000 7,500,000 Retained earnings 2,260,000 1,320,000 Total stockholders' equity 9,760,000 8,820,000 Total liabilities and stockholders' equity $ 17,530,000 $ 15,020,000 Lydex Company Comparative Income Statement and Reconciliation This Year Last Year Sales (all on account) $ 15,920,000 $ 14,180,000 Cost of goods sold 12,736,000 10,635,000 Gross margin 3,184,000 3,545,000 Selling and administrative expenses 1,014,000 1,628,000 Net operating income 2,170,000 1,917,000 Interest expense 370,000 310,000 Net income before taxes 1,800,000 1,607,000 Income taxes (30%) 540,000 482,100 Net income 1,260,000 1,124,900 Common dividends 320,000 562,450 Net income retained 940,000 562,450 Beginning retained earnings 1,320,000 757,550 Ending retained earnings $ 2,260,000 $ 1,320,000 To begin your assignment you gather the following financial data and ratios that are typical of companies in Lydex Company’s industry: Current ratio 2.3 Acid-test ratio 1.1 Average collection period 32 days Average sale period 60 days Return on assets 9.9 % Debt-to-equity ratio 0.7 Times interest earned ratio 5.9 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: (Round your "Percentage" answers to 1 decimal place and other answers to 2 decimal places.) d. The return on total assets. (Total assets at the beginning of last year were $13,130,000.) e. The return on equity. (Stockholders’ equity at the beginning of last year totaled $8,257,550. There has been no change in common stock over the last two years.) f. Is the company’s financial leverage positive or negative?
Dividend Valuation
Dividend refers to a reward or cash that a company gives to its shareholders out of the profits. Dividends can be issued in various forms such as cash payment, stocks, or in any other form as per the company norms. It is usually a part of the profit that the company shares with its shareholders.
Dividend Discount Model
Dividend payments are generally paid to investors or shareholders of a company when the company earns profit for the year, thus representing growth. The dividend discount model is an important method used to forecast the price of a company’s stock. It is based on the computation methodology that the present value of all its future dividends is equivalent to the value of the company.
Capital Gains Yield
It may be referred to as the earnings generated on an investment over a particular period of time. It is generally expressed as a percentage and includes some dividends or interest earned by holding a particular security. Cases, where it is higher normally, indicate the higher income and lower risk. It is mostly computed on an annual basis and is different from the total return on investment. In case it becomes too high, indicates that either the stock prices are going down or the company is paying higher dividends.
Stock Valuation
In simple words, stock valuation is a tool to calculate the current price, or value, of a company. It is used to not only calculate the value of the company but help an investor decide if they want to buy, sell or hold a company's stocks.
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 | $ | 1,020,000 | $ | 1,260,000 |
Marketable securities | 0 | 300,000 | ||
2,940,000 | 2,040,000 | |||
Inventory | 3,660,000 | 2,100,000 | ||
Prepaid expenses | 270,000 | 210,000 | ||
Total current assets | 7,890,000 | 5,910,000 | ||
Plant and equipment, net | 9,640,000 | 9,110,000 | ||
Total assets | $ | 17,530,000 | $ | 15,020,000 |
Liabilities and |
||||
Liabilities: | ||||
Current liabilities | $ | 4,070,000 | $ | 3,100,000 |
Note payable, 10% | 3,700,000 | 3,100,000 | ||
Total liabilities | 7,770,000 | 6,200,000 | ||
Stockholders' equity: | ||||
Common stock, $75 par value | 7,500,000 | 7,500,000 | ||
2,260,000 | 1,320,000 | |||
Total stockholders' equity | 9,760,000 | 8,820,000 | ||
Total liabilities and stockholders' equity | $ | 17,530,000 | $ | 15,020,000 |
Lydex Company Comparative Income Statement and Reconciliation |
||||
This Year | Last Year | |||
Sales (all on account) | $ | 15,920,000 | $ | 14,180,000 |
Cost of goods sold | 12,736,000 | 10,635,000 | ||
Gross margin | 3,184,000 | 3,545,000 | ||
Selling and administrative expenses | 1,014,000 | 1,628,000 | ||
Net operating income | 2,170,000 | 1,917,000 | ||
Interest expense | 370,000 | 310,000 | ||
Net income before taxes | 1,800,000 | 1,607,000 | ||
Income taxes (30%) | 540,000 | 482,100 | ||
Net income | 1,260,000 | 1,124,900 | ||
Common dividends | 320,000 | 562,450 | ||
Net income retained | 940,000 | 562,450 | ||
Beginning retained earnings | 1,320,000 | 757,550 | ||
Ending retained earnings | $ | 2,260,000 | $ | 1,320,000 |
To begin your assignment you gather the following financial data and ratios that are typical of companies in Lydex Company’s industry:
2.3 | ||
Acid-test ratio | 1.1 | |
Average collection period | 32 | days |
Average sale period | 60 | days |
Return on assets | 9.9 | % |
Debt-to-equity ratio | 0.7 | |
Times interest earned ratio | 5.9 | |
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: (Round your "Percentage" answers to 1 decimal place and other answers to 2 decimal places.)
d. The return on total assets. (Total assets at the beginning of last year were $13,130,000.)
e. The return on equity. (Stockholders’ equity at the beginning of last year totaled $8,257,550. There has been no change in common stock over the last two years.)
f. Is the company’s financial leverage positive or negative?
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