Chapter 03: Financial Analysis
400,000
224,000
Less: Depreciation expense ……………………………………………………….
126,000
105,000
SMITH CORPORATION
Current Assets
Liabilities
Cash ……………………………
$ 35,000
Accounts payable ………………
$ 75,000
Marketable securities ……
7,500
Bonds payable (long-term) ….
210,000
Accounts receivable ……..
70,000
Inventory …………………….
75,000
Long-Term Assets
Stockholders’ Equity
Fixed assets …………………
$500,000
Common stock …………………..
$ 75,000
Less: Accum. dep. ………
(250,000)
Paid-in capital ……………………
30,000
Net fixed assets* ………….
250,000
Retained earnings ………………
47,500
Total assets ……………..
$437,500
Total liab. and equity ………..
$437,500
Chapter 03: Financial Analysis
Smith and its lower liquidity ratios could reflect better short-term
asset management. This point was covered in part a.
SMITH CORPORATION
Sales (on credit) ……………………………………
$1,000,000
Cost of goods sold …………………………………
600,000
Gross profit …………………………………………..
400,000
Selling and administrative expense……….
224,000
Less: Depreciation expense …………………..
50,000
Operating profit …………………………………….
126,000
Interest expense …………………………………….
21,000
Earnings before taxes……………………………..
105,000
Tax expense ………………………………………….
52,500
Net income …………………………..……………….
$ 52,500
Includes $7,000 in lease payments.
COMPREHENSIVE PROBLEM
Comprehensive Problem 1.
Lamar Swimwear (trend analysis and industry comparisons)(LO3) Bob Adkins has recently
been approached by his first cousin, Ed Lamar, with a proposal to buy a 15 percent interest in
Lamar Swimwear. The firm manufactures stylish bathing suits and sunscreen products.
Mr. Lamar is quick to point out the increase in sales that has taken place over the last three years
Chapter 03: Financial Analysis
Comprehensive Problem 1 (Continued)
Exhibit 1
LAMAR SWIMWEAR
Income Sheet
20X1
20X2
20X3
Sales (all on credit) ………………………………………
$1,200,000
$1,500,000
$1,875,000
Cost of goods sold ………………………………………..
800,000
1,040,000
1,310,000
Gross profit …………………………………………………
$ 400,000
$ 460,000
$ 565,000
Selling and administrative expense* ……………….
239,900
274,000
304,700
Operating profit (EBIT) ………………………………..
$ 160,100
$ 186,000
$ 260,300
Interest expense ……………………………………………
35,000
45,000
85,000
Net income before taxes ……………………………….
$ 125,100
$ 141,000
$ 175,300
Taxes ………………………………………………………….
36,900
49,200
55,600
Net income ………………………………………………….
$ 88,200
$ 91,800
$ 119,700
Shares …………………………………………………………
30,000
30,000
38,000
Earnings per share ………………………………………..
$ 2.94
$ 3.06
$ 3.15
*Includes $15,000 in lease payments for each year.
Exhibit 2
LAMAR SWIMWEAR
Balance Sheet
Assets
20X1
20X2
20X3
Cash…………………………………………………………..
$ 30,000
$ 40,000
$ 30,000
Marketable securities …………………………………..
20,000
25,000
30,000
Accounts receivable …………………………………….
170,000
259,000
360,000
Inventory ……………………………………………………
230,000
261,000
290,000
Total current assets ………………………………….
$ 450,000
$ 585,000
$ 710,000
Net plant and equipment ………………………………
650,000
765,000
1,390,000
Total assets …………………………………………………
$1,100,000
$1,350,000
$ 2,100,000
Liabilities and Stockholders’ Equity
Accounts payable ………………………………………..
$ 200,000
$ 310,000
$ 505,000
Accrued expenses………………………………………..
20,400
30,000
35,000
Total current liabilities ……………………………..
$ 220,400
$ 340,000
$ 540,000
Long-term liabilities…………………………………….
325,000
363,600
703,900
Total liabilities ………………………………………..
$ 545,400
$ 703,600
$ 1,243,900
Common stock ($2 par) ……………………………….
60,000
60,000
76,000
Capital paid in excess of par …………………………
190,000
190,000
264,000
Retained earnings ………………………………………..
304,600
396,400
516,100
Total stockholders’ equity…………………………
$ 554,600
$ 646,400
$ 856,100
Total liabilities and stockholders’ equity ………..
$1,100,000
$1,350,000
$2, 100,000
Chapter 03: Financial Analysis
Exhibit 3
Selected Industry Ratios
20X1
20X2
20X3
Growth in sales …………………………….
—
10.00%
12.00%
Profit margin ………………………………..
7.71%
7.82%
7.96%
Return on assets (investment) …………
7.94%
8.86%
8.95%
Return on equity ……………………………
14.31%
15.26%
16.01%
Receivable turnover ………………………
9.02x
8.86x
9.31x
Average collection period ………………
39.9 days
40.6 days
38.7 days
Inventory turnover ………………………..
4.24x
5.10x
5.11x
Fixed asset turnover ………………………
1.60x
1.64x
1.75x
Total asset turnover ……………………….
1.05x
1.10x
1.12x
Current ratio …………………………………
1.96x
2.25x
2.40x
Quick ratio …………………………………..
1.37x
1.41x
1.38x
Debt to total assets ………………………..
43.47%
43.11%
44.10%
Times interest earned …………………….
6.50x
5.99x
6.61x
Fixed charge coverage …………………..
4.70x
4.69x
4.73x
Growth in EPS ……………………………..
—
10.10%
13.30%
The stock in the corporation has become available due to the ill health of a current stockholder,
who is in need of cash. The issue here is not to determine the exact price for the stock, but rather
Chapter 03: Financial Analysis
Chapter 03: Financial Analysis
Comprehensive Problem 2 (Continued)
Exhibit 1
SUN MICROSYSTEMS INC.
Summary Consolidated Statement of Income (in millions)
2001
2000
1999
1998
Dollars
Dollars
Dollars
Dollars
Net revenues ………………………………………..
$18,250
$15,721
$11,806
$9,862
Costs and expenses:
Cost of sales …………………………………..
10,041
7,549
5,670
4,713
Research and development ………………
2,016
1,630
1,280
1,029
Selling, general and administrative ……
4,544
4,072
3,196
2,826
Goodwill amortization …………………….
261
65
19
.4
In-process research and development ..
77
12
121
176
Total costs and expenses ………………………..
16,939
13,328
10,286
8,748
Operating Income …………………………………
1,311
2,393
1,520
1,114
Gain (loss) on strategic investments ………..
(90)
208
–
–
Interest income, net ……………………………….
363
170
85
48
Litigation settlement ……………………………..
–
–
–
–
Income before taxes ………………………………
1,584
2,771
1,605
1,162
Provision for income taxes …………………….
603
917
575
407
Cumulative effect of change
in accounting principle, net …………………
(54)
–
–
–
Net income …………………………………………..
$ 927
$ 1,854
$ 1,030
$ 755
Net income per common share—diluted ….
$ 0.27
$ 0.55
$ 0.31
$ 0.24
Shares used in the calculation of net
income per common share—diluted ………..
3,417
3,379
3,282
3,180
5. Analyze your results to Question 4 more completely by computing ratios 1, 2a, 2b, and 3b
6. The average stock prices for each of the four years shown in Exhibit 1 were as follows:
1998 11¼
a. Compute the price/earnings (P/E) ratio for each year. That is, take the stock price shown
Chapter 03: Financial Analysis
Comprehensive Problem 2 (Continued)
Exhibit 2
SUN MICROSYSTEMS, INC
Consolidated Balance Sheets (in millions)
Assets
2001
2000
Current assets:
Cash and cash equivalents ……………………………………………………………
$ 1,472
$ 1,849
Short-term investments ………………………………………………………………..
387
626
Accounts receivable, net allowances of $410 in 2001 and
$534 in 2000 ……………………………………………………………………………
2,955
2,690
Inventories………………………………………………………………………………….
1,049
557
Deferred tax assets ………………………………………………………………………
1,102
673
Prepaids and other current assets …………………………………………………..
969
482
Total current assets …………………………………………………………………..
$7,934
$6,877
Property, plant and equipment, net ……………………………………………………
2,697
2,095
Long-term investments ……………………………………………………………………
4,677
4,496
Goodwill, net of accumulated amortization of $349 in 2001 and
$88 in 2000 ………………………………………………………………………………..
2,041
163
Other assets, net ……………………………………………………………………………..
832
521
$18,181
$14,152
Liabilities and Stockholders’ Equity
Current liabilities:
Short-term borrowings …………………………………………………………………
$ 3
$ 7
Accounts payable ………………………………………………………………………..
1,050
924
Accrued payroll-related liabilities ………………………………………………….
488
751
Accrued liabilities and other …………………………………………………………
1,374
1,155
Deferred revenues and customer deposits ……………………………………….
1,827
1,289
Warranty reserve …………………………………………………………………………
314
211
Income taxes payable …………………………………………………………………..
90
209
Total current liabilities ………………………………………………………………
$5,146
$4,546
Deferred income taxes …………………………………………………………………….
744
577
Long-term debt and other obligations………………………………………………..
1,705
1,720
Total debt ………………………………………………………………………………..
$ 7,595
$ 6,843
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.001 par value, 10 shares authorized (1 share which
has been designated as Series A Preferred participating stock): no
shares issued and outstanding …………………………………………………….
–
–
Common stock and additional paid-in–capital, $0.00067 par value, 7,200
shares authorized; issued: 3,536 shares in 2001 and 3,495 shares in 2000 …
6,238
2,728
Treasury stock, at cost: 288 shares in 2001 and 301 shares in 2000 ………
(2,435)
(1,438)
Deferred equity compensation ………………………………………………………….
(73)
(15)
Retained earnings……………………………………………………………………………
6,885
5,959
Accumulated other comprehensive income (loss) ……………………………….
(29)
75
Total stockholders’ equity ……………………………………………………………..
$10,586
$7,309
Chapter 03: Financial Analysis
$18,181
$14,152
7. The book values per share for the same four years discussed in the preceding question were:
1998 $1.18
CP 3-2. Solution
Sun Microsystems
1. Percentage change in net income per common share—diluted
1999
$ .31
2000
$ .55
2001
$ .27
1998
$ .24
1999
$ .31
2000
$ .55
$ .07
$ .24
$–.28
+29.2%
+77.4%
–50.9%
2. Profit margin
1998 1999 2000 2001
Net income $755 $1,030 $1,854 $927
3. Percent of net revenue
2000 2001
Net revenues $15,721 $18,250
Cost of sales 7,549 48.02% 10,041 55.02%
Chapter 03: Financial Analysis
CP 3-2. (Continued)
4. Return on stockholders’ equity
2000 2001
Net income $1,854 $ 927
5.
2000 2001
1.
Net income
Net revenues (sales)
11.79% 5.08%
2.a.
Net income
Total assets
13.1% 5.10%
2.b.
Net income Sales 11.79% 1.11 5.08% 1.00
Sales Total assets
3.b.
( ) ( ) ( )
Return on assets 13.09% 5.08%
1 Debt/Assets 1 .484 1 .418− − −
Chapter 03: Financial Analysis
The main contributing factor to the decline in the return on
stockholders’ equity (25.37 percent to 8.73 percent) was the
CP 3-2. (Continued)
6.a. P/E = Stock price/Net income per common share—diluted (EPS)
Share prices $11.25 $16.75 $28.50 $9.50
7.a. Price to book value = Stock price/book value
1998 1999 2000 2001
Share prices $11.25 $16.75 $28.50 $9.50
b. Once again, the sharp falloff in price to book value between 2000