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Calculate the indicated ratios for barry

08/01/2021 Client: saad24vbs Deadline: 24 Hours

RATIO ANALYSIS Data for Barry Computer Co. and its industry averages follow. The firm’s debt is priced at par, so the market value of its debt equals its book value. Since dollars are in thousands, number of shares are shown in thousands too.


a. Calculate the indicated ratios for Barry.


b. Construct the DuPont equation for both Barry and the industry.


c. Outline Barry’s strengths and weaknesses as revealed by your analysis.


d. Suppose Barry had doubled its sales as well as its inventories, accounts receivable, and common equity during 2018. How would that information affect the validity of your ratio analysis? (Hint: Think about averages and the effects of rapid growth on ratios if averages are not used. No calculations are needed.)


Barry Computer Company: Balance Sheet as of December 31, 2018 (in Thousands)


Cash


$ 77,500


Accounts payable


$129,000


Receivables


336,000


Other current liabilities


117,000


Inventories


241,500


Notes payable to bank


84,000


   Total current assets


$ 655,000


   Total current liabilities


$330,000


Long-term debt


256,500


Net fixed assets


292,500


Common equity (36,100 shares)


361,000


Total assets


$ 947,500


Total liabilities and equity


$947,500


Barry Computer Company: Income Statement for Year Ended December 31, 2018 (in Thousands)


Sales


$1,607,500


Cost of goods sold


      Materials


$717,000


      Labor


453,000


      Heat, light, and power


68,000


      Indirect labor


113,000


      Depreciation


41,500


1,392,500


Gross profit


$ 215,000


Selling expenses


115,000


General and administrative expenses


30,000


      Earnings before interest and taxes (EBIT)


$ 70,000


Interest expense


24,500


      Earnings before taxes (EBT)


$ 45,500


Federal and state income taxes (40%)


18,200


Net income


$ 27,300


Earnings per share


$ 0.75623


Price per share on December 31, 2018


$ 12.00


Ratio


Barry


Industry Average


Current


___


2.0×


Quick


___


1.3×


Days sales outstandinga


___


35 days


Inventory turnover


___


6.7×


Total assets turnover


___


3.0×


Profit margin


___


1.2%


ROA


___


3.6%


ROE


___


9.0%


ROIC


___


7.5%


TIE


___


3.0×


Debt/Total capital


___


47.0%


M/B


___


4.22


P/E


___


17.86


EV/EBITDA


___


9.14


aCalculation is based on a 365-day year.


4-24 DuPONT ANALYSIS A firm has been experiencing low profitability in recent years. Perform an analysis of the firm’s financial position using the DuPont equation. The firm has no lease payments but has a $2 million sinking fund payment on its debt. The most recent industry average ratios and the firm’s financial statements are as follows:


Industry Average Ratios


Current ratio




Fixed assets turnover




Debt-to-capital ratio


20%


Total assets turnover




Times interest earned




Profit margin


3%


EBITDA coverage




Return on total assets


9%


Inventory turnover


10×


Return on common equity


12.86%


Days sales outstandinga


24 days


Return on invested capital


11.50%


aCalculation is based on a 365-day year.


Balance Sheet as of December 31, 2018 (Millions of Dollars)


Cash and equivalents


$ 78


Accounts payable


$ 45


Accounts receivable


66


Other current liabilities


11


Inventories


159


Notes payable


29


   Total current assets


$303


   Total current liabilities


$ 85


Long-term debt


50


   Total liabilities


$135


Gross fixed assets


225


Common stock


114


   Less depreciation


78


Retained earnings


201


Net fixed assets


$147


   Total stockholders’ equity


$315


Total assets


$450


Total liabilities and equity


$450


Income Statement for Year Ended December 31, 2018 (Millions of Dollars)


Net sales


$795.0


Cost of goods sold


660.0


   Gross profit


$135.0


Selling expenses


73.5


EBITDA


$ 61.5


Depreciation expense


12.0


   Earnings before interest and taxes (EBIT)


$ 49.5


Interest expense


4.5


   Earnings before taxes (EBT)


$ 45.0


Taxes (40%)


18.0


Net income


$ 27.0


a. Calculate the ratios you think would be useful in this analysis.


b. Construct a DuPont equation, and compare the company’s ratios to the industry average ratios.


c. Do the balance sheet accounts or the income statement figures seem to be primarily responsible for the low profits?


d. Which specific accounts seem to be most out of line relative to other firms in the industry?


e. If the firm had a pronounced seasonal sales pattern or if it grew rapidly during the year, how might that affect the validity of your ratio analysis? How might you correct for such potential problems?


The following will hopefully help you with your Du Ponts:


First, please note that the third and last ratio of the Du Pont equation (p. 124) is Total Assets/Total Common Equity. This ratio is what we refer to as the "Equity Multiplier." People often get confused about the denominator in this ratio. If you look at Table 3-1 on page 68, you will see that Total Common Equity is the TOTAL of the common stock and retained earnings. For the company that number is $940mm. Now, go back to the Du Pont on page 124 and look at the equity multiplier. They use that same $940mm. They do not just use the "common stock" number.


Now, look at problem 4-24 where they use some slightly different wording. It shows that "total stockholder equity" = $315mm. That is your number for the Du Pont. It is a common (no pun intended!) error for learners to think "total common equity" (for the DuPont)? That must mean "Common stock"! They then use only the $114mm instead of the total $315mm and incorrectly calculate the Du Pont.


Second, remember (read page 124) that the Du Pont should calculate the very same number that you derive by calculating the ROE ratio. Du Pont does not give you a different ROE, it helps you understand more about that same number (such as, why is the ratio the way it is). So, if your ROE ratio and your Du Pont are different, you have an error somewhere in either your ratio or your equation.


Third, here is a major hint on how to calculate the industry Du Pont in 4-23(b):


To get the EM for the industry, recognize that ROE/ROA = (NI/E)/(NI/A) = NI/E × A/NI = A/E = Equity multiplier = 2.5.




I hope all this helps!




Thanks


RATIO ANALYSIS


Data for Barry Computer Co. and its industry averages follow. The firm’s


debt is priced at par, so the market value of its debt equals its book value. Since dollars are in


thousands, number of shares are shown in thousands too.


a.


Calculate the indicated ratios for Barry.


b.


Construct the DuPont equation for both Barry and the industry.


c.


Outline Barry’s strengths and weaknesses as revealed by your analysis.


d.


Suppose Barry had doubled its sales as well as its inventories, accounts receivable, and


common equity during 2018. How would that information affect the validity of your ratio


analysis? (Hint: Think about averages and the effects of rapid growth on ratios


if averages are


not used. No calculations are needed.)


Barry Computer Company: Balance Sheet as of December 31, 2018 (in Thousands)


Cash


$ 77,500


Accounts payable


$129,000


Receivables


336,000


Other current liabilities


117,000


Inventories


241,500


Notes payable to bank


84,000


Total current assets


$ 655,000


Total current liabilities


$330,000


Long


-


term debt


256,500


Net fixed assets


292,500


Common equity (36,100 shares)


361,000


Total assets


$ 947,500


Total liabilities and equity


$947,500


Barry Computer Company: Income Statement for Year Ended December 31, 2018 (in


Thousands)


Sales


$1,607,500


Cost of goods sold


Materials


$717,000


Labor


453,000


Heat, light, and power


68,000


Indirect labor


113,000


Depreciation


41,500


1,392,500


Gross profit


$ 215,000


Selling expenses


115,000


General and administrative expenses


30,000


Earnings before interest and taxes (EBIT)


$ 70,000


Interest expense


24,500


Earnings before taxes (EBT)


$ 45,500


Federal and state income taxes (40%)


18,200


Net income


$ 27,300


Earnings per share


$ 0.75623


RATIO ANALYSIS Data for Barry Computer Co. and its industry averages follow. The firm’s


debt is priced at par, so the market value of its debt equals its book value. Since dollars are in


thousands, number of shares are shown in thousands too.


a. Calculate the indicated ratios for Barry.


b. Construct the DuPont equation for both Barry and the industry.


c. Outline Barry’s strengths and weaknesses as revealed by your analysis.


d. Suppose Barry had doubled its sales as well as its inventories, accounts receivable, and


common equity during 2018. How would that information affect the validity of your ratio


analysis? (Hint: Think about averages and the effects of rapid growth on ratios if averages are


not used. No calculations are needed.)


Barry Computer Company: Balance Sheet as of December 31, 2018 (in Thousands)


Cash $ 77,500 Accounts payable $129,000


Receivables 336,000 Other current liabilities 117,000


Inventories 241,500 Notes payable to bank 84,000


Total current assets $ 655,000 Total current liabilities $330,000


Long-term debt 256,500


Net fixed assets 292,500 Common equity (36,100 shares) 361,000


Total assets $ 947,500 Total liabilities and equity $947,500


Barry Computer Company: Income Statement for Year Ended December 31, 2018 (in


Thousands)


Sales


$1,607,500


Cost of goods sold


Materials $717,000


Labor 453,000


Heat, light, and power 68,000


Indirect labor 113,000


Depreciation 41,500 1,392,500


Gross profit


$ 215,000


Selling expenses


115,000


General and administrative expenses


30,000


Earnings before interest and taxes (EBIT)


$ 70,000


Interest expense


24,500


Earnings before taxes (EBT)


$ 45,500


Federal and state income taxes (40%)


18,200


Net income


$ 27,300


Earnings per share


$ 0.75623

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