Question # 5: You are a financial manager in Gama Corporation. You have the task of getting the company back into a sound financial position. Gama Corporation’s 2017 and 2018 balance sheets and income statements, together with projections for 2019, are shown in the following tables. The tables also show the 2017 and 2018 financial ratios, along with the industry average data. Your assignment is to answer the following questions. Provide clear explanations, not yes or no answers. Show your work for the calculations. Balance Sheets Assets 2017 2018 2019 (Projected) Cash $ 9,000 $ 7,282 $ 14,000 Short-Term Investments. 48,600 20,000 71,632 Accounts Receivable 351,200 632,160 878,000 Inventories 715,200 1,287,360 1,716,480 Total Current Assets $ 1,124,000 $ 1,946,802 $ 2,680,112 Gross Fixed Assets 491,000 1,202,950 1,220,000 Less: Accumulated Depreciation 146,200 263,160 383,160 Net Fixed Assets $ 344,800 $ 939,790 $ 836,840 Total Assets $ 1,468,800 $ 2,886,592 $ 3,516,952 Liabilities And Equity 2017 2018 2019 (Projected) Accounts Payable $ 145,600 $ 324,000 $ 359,800 Notes Payable 200,000 720,000 300,000 Accruals 136,000 284,960 380,000 Total Current Liabilities $ 481,600 $ 1,328,960 $ 1,039,800 Long-Term Debt 323,432 1,000,000 500,000 Common Stock (100,000 Shares) 460,000 460,000 1,680,936 Retained Earnings 203,768 97,632 296,216 Total Equity $ 663,768 $ 557,632 $ 1,977,152 Total Liabilities And Equity $ 1,468,800 $ 2,886,592 $ 3,516,952 Income Statements 2017 2018 2019(Projected) Sales $ 3,432,000 $ 5,834,400 $ 7,035,600 COGS except depr. 2,864,000 4,980,000 5,800,000 Depreciation 18,900 116,960 120,000 Other Expenses 340,000 720,000 612,960 Total Operating Costs $ 3,222,900 $ 5,816,960 $ 6,532,960 EBIT $ 209,100 $ 17,440 $ 502,640 Interest Expense 62,500 176,000 80,000 EBT $ 146,600 $ (158,560) $ 422,640 Taxes (40%) 58,640 (63,424) 169,056 Net Income $ 87,960 $ (95,136) $ 253,584 Other Data 2017 2018 2019(Projected) Stock Price $ 8.50 $ 6.00 $ 12.17 Shares Outstanding 100,000 100,000 250,000 EPS (Earnings per share) $ 0.880 $ (0.951) $ 1.014 DPS (Dividend per share) $ 0.220 $ 0.110 $ 0.220 Tax Rate 40% 40% 40% Book Value Per Share $ 6.638 $ 5.576 $ 7.909 Ratio Analysis 2017 2018 2019(Projected) Industry Average Current 2.3 1.5 ? 2.7 Quick 0.8 0.5 ? 1.0 Fixed Assets Turnover 10.0 6.2 ? 7.0 Total Assets Turnover 2.3 2.0 ? 2.5 Debt to Asset Ratio 35.6% 59.6% ? 32.0% TIE 3.3 0.1 ? 6.2 Profit Margin 2.6% -1.6% ? 3.6% Basic Earning Power 14.2% 0.6% ? 17.8% ROA 6.0% -3.3% ? 9.0% ROE 13.3% -17.1% ? 17.9% Price/Earnings (P/E) 9.7 -6.3 ? 16.2 Market/Book 1.3 1.1 ? 2.9 Why are ratios useful? Calculate the 2019 current and quick ratios based on the projected balance sheet and income statement data. What can you say about the company’s liquidity position in 2017, 2018, and as projected for 2019? We often think of ratios as being useful (1) to managers to help run the business, (2) to bankers for credit analysis, and (3) to stockholders for stock valuation. Would these different types of analysts have an equal interest in the liquidity ratios? Calculate the 2019 fixed assets turnover, and total assets turnover. How does the firm’s utilization of assets stack up against other firms in its industry? Calculate the 2019 debt to asset ratio and times-interest-earned. How does the firm compare with the industry with respect to financial leverage? What can you conclude from these ratios? Calculate the 2019 profit margin, basic earning power (BEP), return on assets (ROA), and return on equity (ROE). What can you say about these ratios? Calculate the 2019 price/earnings ratio and market/book ratio. Do these ratios indicate that investors are expected to have a high or low opinion of the company?
Question # 5:
You are a
|
Balance Sheets |
|||||
|
Assets |
2017 |
|
2018 |
|
2019 (Projected) |
|
Cash |
$ 9,000 |
|
$ 7,282 |
|
$ 14,000 |
|
Short-Term Investments. |
48,600 |
|
20,000 |
|
71,632 |
|
Accounts Receivable |
351,200 |
|
632,160 |
|
878,000 |
|
Inventories |
715,200 |
|
1,287,360 |
|
1,716,480 |
|
Total Current Assets |
$ 1,124,000 |
|
$ 1,946,802 |
|
$ 2,680,112 |
|
Gross Fixed Assets |
491,000 |
|
1,202,950 |
|
1,220,000 |
|
Less: |
146,200 |
|
263,160 |
|
383,160 |
|
Net Fixed Assets |
$ 344,800 |
|
$ 939,790 |
|
$ 836,840 |
|
Total Assets |
$ 1,468,800 |
|
$ 2,886,592 |
|
$ 3,516,952 |
|
|
|
|
|
|
|
|
Liabilities And Equity |
2017 |
|
2018 |
|
2019 (Projected) |
|
Accounts Payable |
$ 145,600 |
|
$ 324,000 |
|
$ 359,800 |
|
Notes Payable |
200,000 |
|
720,000 |
|
300,000 |
|
Accruals |
136,000 |
|
284,960 |
|
380,000 |
|
Total Current Liabilities |
$ 481,600 |
|
$ 1,328,960 |
|
$ 1,039,800 |
|
Long-Term Debt |
323,432 |
|
1,000,000 |
|
500,000 |
|
Common Stock (100,000 Shares) |
460,000 |
|
460,000 |
|
1,680,936 |
|
|
203,768 |
|
97,632 |
|
296,216 |
|
Total Equity |
$ 663,768 |
|
$ 557,632 |
|
$ 1,977,152 |
|
Total Liabilities And Equity |
$ 1,468,800 |
|
$ 2,886,592 |
|
$ 3,516,952 |
|
Income Statements |
|||||
|
|
2017 |
|
2018 |
|
2019(Projected) |
|
Sales |
$ 3,432,000 |
|
$ 5,834,400 |
|
$ 7,035,600 |
|
COGS except depr. |
2,864,000 |
|
4,980,000 |
|
5,800,000 |
|
Depreciation |
18,900 |
|
116,960 |
|
120,000 |
|
Other Expenses |
340,000 |
|
720,000 |
|
612,960 |
|
Total Operating Costs |
$ 3,222,900 |
|
$ 5,816,960 |
|
$ 6,532,960 |
|
EBIT |
$ 209,100 |
|
$ 17,440 |
|
$ 502,640 |
|
Interest Expense |
62,500 |
|
176,000 |
|
80,000 |
|
EBT |
$ 146,600 |
|
$ (158,560) |
|
$ 422,640 |
|
Taxes (40%) |
58,640 |
|
(63,424) |
|
169,056 |
|
Net Income |
$ 87,960 |
|
$ (95,136) |
|
$ 253,584 |
|
|
|
|
|
|
|
|
Other Data |
2017 |
|
2018 |
|
2019(Projected) |
|
Stock Price |
$ 8.50 |
|
$ 6.00 |
|
$ 12.17 |
|
Shares Outstanding |
100,000 |
|
100,000 |
|
250,000 |
|
EPS (Earnings per share) |
$ 0.880 |
|
$ (0.951) |
|
$ 1.014 |
|
DPS (Dividend per share) |
$ 0.220 |
|
$ 0.110 |
|
$ 0.220 |
|
Tax Rate |
40% |
|
40% |
|
40% |
|
Book Value Per Share |
$ 6.638 |
|
$ 5.576 |
|
$ 7.909 |
|
Ratio Analysis |
2017 |
|
2018 |
|
2019(Projected) |
Industry Average |
|
Current |
2.3 |
|
1.5 |
|
? |
2.7 |
|
Quick |
0.8 |
|
0.5 |
|
? |
1.0 |
|
Fixed Assets Turnover |
10.0 |
|
6.2 |
|
? |
7.0 |
|
Total Assets Turnover |
2.3 |
|
2.0 |
|
? |
2.5 |
|
Debt to Asset Ratio |
35.6% |
|
59.6% |
|
? |
32.0% |
|
TIE |
3.3 |
|
0.1 |
|
? |
6.2 |
|
Profit Margin |
2.6% |
|
-1.6% |
|
? |
3.6% |
|
Basic Earning Power |
14.2% |
|
0.6% |
|
? |
17.8% |
|
ROA |
6.0% |
|
-3.3% |
|
? |
9.0% |
|
ROE |
13.3% |
|
-17.1% |
|
? |
17.9% |
|
Price/Earnings (P/E) |
9.7 |
|
-6.3 |
|
? |
16.2 |
|
Market/Book |
1.3 |
|
1.1 |
|
? |
2.9 |
- Why are ratios useful?
- Calculate the 2019 current and quick ratios based on the projected balance sheet and income statement data. What can you say about the company’s liquidity position in 2017, 2018, and as projected for 2019?
- We often think of ratios as being useful (1) to managers to help run the business, (2) to bankers for credit analysis, and (3) to stockholders for stock valuation. Would these different types of analysts have an equal interest in the
liquidity ratios ? - Calculate the 2019 fixed assets turnover, and total assets turnover. How does the firm’s utilization of assets stack up against other firms in its industry?
- Calculate the 2019 debt to asset ratio and times-interest-earned. How does the firm compare with the industry with respect to financial leverage? What can you conclude from these ratios?
- Calculate the 2019 profit margin, basic earning power (BEP), return on assets (ROA), and return on equity (ROE). What can you say about these ratios?
- Calculate the 2019 price/earnings ratio and market/book ratio. Do these ratios indicate that investors are expected to have a high or low opinion of the company?
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