Problem 16-15 | Accounting homework help

Analysis Basics
Complete P16-15 on page 754 of Managerial Accounting and present your responses in an Excel
spreadsheet.
Helen McGuire, who just a year ago was appointed president of Lydex Company, argues that although the company has
had a “spotty” record in the past, it has “turned the corner,” as evidenced by a 25% jump in sales and by a greatly
improved earnings picture between last year and this year.
McGuire also points out that investors generally have recognized the improving situation at Lydex, as shown by the
increase in market value of the company’s common stock, which is currently selling for $72 per share (up from $40 per
share last year). McGuire feels that with her leadership and with the modernized equipment that the $3,000,000 loan will
permit the company to buy, profits will be even stronger in the future. McGuire has a reputation in the industry for being a
good manager who runs a “tight” ship.
Not wanting to botch your first assignment, you decide to generate all the information that you can about the company.
You determine that the following ratios are typical of companies in Lydex
Company’s industry:
Current ratio . . . . . . . . . . . . . . . . 2.3
Acid-test ratio . . . . . . . . . . . . . . . 1.2
Average collection period . . . . . . 30 days
Average sale period. . . . . . . . . . . 60 days
Return on assets . . . . . . . . . . . . . 9.5%
Debt-to-equity ratio . . . . . . . . . . . 0.65
Times interest earned ratio . . . . . 5.7
Price-earnings ratio . . . . . . . . . . . 10
Required:

1. You decide first to assess the rate of return that the company is generating. Compute the following for both this year and
last year:
a. The return on total assets. (Total assets at the beginning of last year were $12,960,000.)
b. The return on common stockholders’ equity. (Stockholders’ equity at the beginning of last year totaled $9,048,000.
There has been no change in preferred or common stock over the last two years.)
c. Is the company’s financial leverage positive or negative? Explain.
2. You decide next to assess the well-being of the common stockholders. For both this year and last year, compute:
a. The earnings per share.
b. The dividend yield ratio for common stock.
c. The dividend payout ratio for common stock.
d. The price-earnings ratio. How do investors regard Lydex Company as compared to other companies in the industry?
Explain.
e. The book value per share of common stock. Does the difference between market value per share and book value per
share suggest that the stock at its current price is a bargain?
Explain.
f. The gross margin percentage.
3. You decide, finally, to assess creditor ratios to determine both short-term and long-term debt paying ability. For both this
year and last year, compute:
a. Working capital.
b. The current ratio.
c. The acid-test ratio.
d. The average collection period. (The accounts receivable at the beginning of last year totaled $1,560,000.)
e. The average sale period. (The inventory at the beginning of last year totaled $1,920,000.)
f. The debt-to-equity ratio.
g. The times interest earned ratio.
4. Make a recommendation to your supervisor as to whether the loan should be approved.
PROBLEM 16–15 Common-Size Financial Statements [LO1]

Refer to the financial statement data for Lydex Company given in Problem 16–14.
PROBLEM 16–14 Comprehensive Ratio Analysis [LO2, LO3, LO4]

You have just been hired as a loan officer at Slippery Rock State Bank. Your supervisor has given you a file containing a
request from Lydex Company, a manufacturer of safety helmets,

“How Well Am I Doing?” Financial Statement Analysis 753 for a $3,000,000, five-year loan. Financial statement data on the

company for the last two years follow:
Lydex Company
Comparative Balance Sheet
This Year Last Year
Assets
Current assets:
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 960,000 $ 1,260,000
Marketable securities . . . . . . . . . . . . . . . . . 0 300,000
Accounts receivable, net . . . . . . . . . . . . . . 2,700,000 1,800,000
Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . 3,900,000 2,400,000
Prepaid expenses. . . . . . . . . . . . . . . . . . . . 240,000 180,000
Total current assets . . . . . . . . . . . . . . . . . . . . 7,800,000 5,940,000
Plant and equipment, net. . . . . . . . . . . . . . . . 9,300,000 8,940,000
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . $17,100,000 $14,880,000
Liabilities and Stockholders’ Equity
Liabilities:
Current liabilities . . . . . . . . . . . . . . . . . . . . . $ 3,900,000 $ 2,760,000
Note payable, 10% . . . . . . . . . . . . . . . . . . 3,600,000 3,000,000
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . 7,500,000 5,760,000
Stockholders’ equity:
Preferred stock, 8%, $30 par value . . . . . . 1,800,000 1,800,000
Common stock, $80 par value . . . . . . . . . . 6,000,000 6,000,000
Retained earnings . . . . . . . . . . . . . . . . . . . 1,800,000 1,320,000
Total stockholders’ equity . . . . . . . . . . . . . . . . 9,600,000 9,120,000
Total liabilities and stockholders’ equity . . . . . $17,100,000 $14,880,000
Lydex Company
Comparative Income Statement and Reconciliation
This Year Last Year
Sales (all on account) . . . . . . . . . . . . . . . . . . $15,750,000 $12,480,000
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . 12,600,000 9,900,000
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . 3,150,000 2,580,000
Selling and administrative expenses . . . . . . . 1,590,000 1,560,000
Net operating income . . . . . . . . . . . . . . . . . . . 1,560,000 1,020,000
Interest expense . . . . . . . . . . . . . . . . . . . . . . 360,000 300,000
Net income before taxes . . . . . . . . . . . . . . . . 1,200,000 720,000
Income taxes (30%) . . . . . . . . . . . . . . . . . . . . 360,000 216,000
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . 840,000 504,000
Dividends paid:
Preferred dividends . . . . . . . . . . . . . . . . . . 144,000 144,000
Common dividends . . . . . . . . . . . . . . . . . . 216,000 108,000
Total dividends paid . . . . . . . . . . . . . . . . . . . . 360,000 252,000
Net income retained. . . . . . . . . . . . . . . . . . . . 480,000 252,000
Retained earnings, beginning of year . . . . . . 1,320,000 1,068,000
Retained earnings, end of year . . . . . . . . . . . $ 1,800,000 $ 1,320,000

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