2. Problem 4.23 (Ratio Analysis)
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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, the number of
shares is shown in thousands too.
Cash
Receivables
Inventories
Barry Computer Company:
Balance Sheet as of December 31, 2021 (in thousands)
$ 43,470
Accounts payable
$ 86,940
239,085
Other current liabilities
94,185
Notes payable to bank
57,960
Total current liabilities
$239,085
Long-term debt
217,350
Common equity (26,806.5 shares) 268,065
Total liabilities and equity
$724,500
Total current assets
Net fixed assets
Total assets
217,350
$499,905
224,595
$724,500
Barry Computer Company:
Income Statement for Year Ended December 31, 2021 (in thousands)
Sales
$1,150,000
Cost of goods sold
Materials
Labor
Heat, light, and power
Indirect labor
Gross profit
Selling expenses
General and administrative expenses
CENGAGE MINDTAP
Labor
Heat, light, and power
Indirect labor
Ch 04-End-of-Chapter Problems - Analysis of Financial Statements
322,000
57,500
80,500
Gross profit
Selling expenses
General and administrative expenses
Depreciation
Earnings before interest and taxes (EBIT)
Interest expense
$506,000
322,000
57,500
80,500 966,000
$ 184,000
69,000
34,500
Earnings before taxes (EBT)
Federal and state income taxes (25%)
Net income
966,000
$ 184,000
69,000
$
$
$
34,500
34,500
46,000
21,735
24,265
6,066
18,199
L/nPrice per share on December 31, 2021
a. Calculate the indicated ratios for Barry. Do not round intermediate calculations. Round your answers to two decimal places.
Ratio
Barry
Industry Average
Current
Quick
Days sales outstanding
Inventory turnover
Total assets turnover
Profit margin
ROA
ROE
ROIC
TIE
Debt/Total capital
M/B
P/E
CENGAGE MINDTAP
days
X
%
Profit margin
Total assets turnover
Equity multiplier
X
%
%
%
%
X
Ch 04- End-of-Chapter Problems - Analysis of Financial Statements
ROIC
%
TIE
Debt/Total capital
M/B
P/E
EV/EBITDA
*Calculation is based on a 365-day year.
%
12.00
7.40%
2.15x
49.57%
4.20
20.41
9.37
2.02x
1.21x
35 days
5.78x
1.79x
1.48%
2.64%
7.22%
7.40%
2.15x
49.57%
4.20
20.41
b. Construct the DuPont equation for both Barry and the industry. Do not round intermediate calculations. Round your answers to two decimal places.
FIRM
INDUSTRY
1.48%
1.79x
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● x
c. Select the correct option based on Barry's strengths and weaknesses as revealed by your analysis.
1. The firm's days sales outstanding ratio is more than the industry average, indicating that the firm should tighten credit or enforce a more stringent collection policy. The total
assets turnover ratio is well above the industry average so sales should be increased, assets increased, or both. While the company's profit margin is higher than the industry
average, its other profitability ratios are low compared to the industry- net income should be higher given the amount of equity, assets, and invested capital. However, the
company seems to be in an above average liquidity position and financial leverage is similar to others in the industry.
II. The firm's days sales outstanding ratio is comparable to the industry average, indicating that the firm should neither tighten credit nor enforce a more stringent collection
policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets increased, or both. While the company's profit margin is higher
than the industry average, its other profitability ratios are low compared to the industry- net income should be higher given the amount of equity, assets, and invested
capital. However, the company seems to be in a below average liquidity position and financial leverage is similar to others in the industry.
III. The firm's days sales outstanding ratio is more than twice as long as the industry average, indicating that the firm should tighten credit or enforce a more stringent collection
policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets decreased, or both. While the company's profit margin is higher
than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity, assets, and invested
capital. Finally, it's market value ratios are also below industry averages. However, the company seems to be in an average liquidity position and financial leverage is similar to
others in the industry.
IV. The firm's days sales outstanding ratio is more than twice as long as the industry average, indicating that the firm should loosen credit or apply a less stringent collection
policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets increased, or both. While the company's profit margin is higher
than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity, assets, and invested
capital. However, the company seems to be in an average liquidity position and financial leverage is similar to others in the industry.
V. The firm's days sales outstanding ratio is less than the industry average, indicating that the firm should tighten credit or enforce a more stringent collection policy. The total
assets turnover ratio is well below the industry average so sales should be increased, assets decreased, or both. While the company's profit margin is lower than the industry
average, its other profitability ratios are high compared to the industry- net income should be higher given the amount of equity, assets, and invested capital. However, the
company seems to be in an average liquidity position and financial leverage is similar to others in the industry.
L/nCENGAGE MINDTAP
Ch 04- End-of-Chapter Problems - Analysis of Financial Statements
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than the industry average, its other prontacity ratios are low compared to the industry-net income snould be nigner given the amount or equity, assets, and invested
capital. However, the company seems to be in a below average liquidity position and financial leverage is similar to others in the industry.
III. The firm's days sales outstanding ratio is more than twice as long as the industry average, indicating that the firm should tighten credit or enforce a more stringent collection
policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets decreased, or both. While the company's profit margin is higher
than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity, assets, and invested
capital. Finally, it's market value ratios are also below industry averages. However, the company seems to be in an average liquidity position and financial leverage is similar to
others in the industry.
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IV. The firm's days sales outstanding ratio is more than twice as long as the industry average, indicating that the firm should loosen credit or apply a less stringent collection
policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets increased, or both. While the company's profit margin is higher
than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity, assets, and invested
capital. However, the company seems to be in an average liquidity position and financial leverage is similar to others in the industry.
V. The firm's days sales outstanding ratio is less than the industry average, indicating that the firm should tighten credit or enforce a more stringent collection policy. The total
assets turnover ratio is well below the industry average so sales should be increased, assets decreased, or both. While the company's profit margin is lower than the industry
average, its other profitability ratios are high compared to the industry- net income should be higher given the amount of equity, assets, and invested capital. However, the
company seems to be in an average liquidity position and financial leverage is similar to others in the industry.
-Select-
d. Suppose Barry had doubled its sales as well as its inventories, accounts receivable, and common equity during 2021. 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.)
1. If 2021 represents a period of normal growth for the firm, ratios based on this year will be distorted and a comparison between them and industry averages will have little
meaning. Potential investors who look only at 2021 ratios will be misled, and a continuation of normal conditions in 2022 could hurt the firm's stock price.
-Select-
II. If 2021 represents a period of normal growth for the firm, ratios based on this year will be accurate and a comparison between them and industry averages will have
substantial meaning. Potential investors who look only at 2021 ratios will be misled, and a return to supernormal conditions in 2022 could hurt the firm's stock price.
III. If 2021 represents a period of supernormal growth for the firm, ratios based on this year will be distorted and a comparison between them and industry averages will have
substantial meaning. Potential investors who look only at 2021 ratios will be well informed, and a return to normal conditions in 2022 could hurt the firm's stock price.
IV. If 2021 represents a period of supernormal growth for the firm, ratios based on this year will be distorted and a comparison between them and industry averages will have
little meaning. Potential investors who look only at 2021 ratios will be misled, and a return to normal conditions in 2022 could hurt the firm's stock price.
V. If 2021 represents a period of supernormal growth for the firm, ratios based on this year will be accurate and a comparison between them and industry averages will have
substantial meaning. Potential investors need only look at 2021 ratios to be well informed, and a return to normal conditions in 2022 could help the firm's stock price.
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