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eBook Data for Barry Computer Co. and its industry averages follow. The firm's debt is priced...

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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, number of shares are shown in thousands too.

Barry Computer Company:
Balance Sheet as of December 31, 2019 (In Thousands)
Cash $ 249,900 Accounts payable $ 249,900
Receivables 678,300 Other current liabilities 232,050
Inventories 428,400 Notes payable to bank 89,250
   Total current assets $ 1,356,600    Total current liabilities $ 571,200
Long-term debt 357,000
Net fixed assets 428,400 Common equity (85,680 shares) 856,800
Total assets $ 1,785,000 Total liabilities and equity $ 1,785,000
Barry Computer Company:
Income Statement for Year Ended December 31, 2019 (In Thousands)
Sales $ 2,550,000
Cost of goods sold
   Materials $1,020,000
   Labor 714,000
   Heat, light, and power 178,500
   Indirect labor 102,000
   Depreciation 51,000 2,065,500
Gross profit $ 484,500
Selling expenses 280,500
General and administrative expenses 76,500
   Earnings before interest and taxes (EBIT) $ 127,500
Interest expense 35,700
   Earnings before taxes (EBT) $ 91,800
Federal and state income taxes (25%) 22,950
Net income $ 68,850
Earnings per share $ 0.8036
Price per share on December 31, 2019 $ 13.00
  1. Calculate the indicated ratios for Barry. Do not round intermediate calculations. Round your answers to two decimal places.
    Ratio Barry              Industry Average
    Current × 2.35 ×
    Quick × 1.68 ×
    Days sales outstandinga days 45 days
    Inventory turnover × 6.24 ×
    Total assets turnover × 1.70 ×
    Profit margin   % 2.52 %
    ROA   % 4.29 %
    ROE   % 8.55 %
    ROIC   % 7.50 %
    TIE × 3.48 ×
    Debt/Total capital   % 35.35 %
    M/B    5.30
    P/E    18.38
    EV/EBITDA    9.96

    aCalculation is based on a 365-day year.
  2. Construct the DuPont equation for both Barry and the industry. Do not round intermediate calculations. Round your answers to two decimal places.
    FIRM INDUSTRY
    Profit margin   % 2.52%
    Total assets turnover × 1.70×
    Equity multiplier × ×
  3. 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 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.
    2. 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.
    3. 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.
    4. 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.
    5. 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.
    -Select-IIIIIIIVVItem 19
  4. Suppose Barry had doubled its sales as well as its inventories, accounts receivable, and common equity during 2019. 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 2019 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 2019 ratios will be misled, and a return to supernormal conditions in 2020 could hurt the firm's stock price.
    2. If 2019 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 2019 ratios will be well informed, and a return to normal conditions in 2020 could hurt the firm's stock price.
    3. If 2019 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 2019 ratios will be misled, and a return to normal conditions in 2020 could hurt the firm's stock price.
    4. If 2019 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 2019 ratios to be well informed, and a return to normal conditions in 2020 could help the firm's stock price.
    5. If 2019 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 2019 ratios will be misled, and a continuation of normal conditions in 2020 could hurt the firm's stock price.
    -Select-IIIIIIIVVItem 20

Homework Answers

Answer #1

Answer:

(a)

(1) Current Ratio= Current Assets/Current Liabilities

As per Question given, Current Assets= $1,356,600

Current Liabilities= $571,200

Current Ratio= $1,356,600 / $571,200= 2.38:1

(2) Quick Ratio= Quick Assets/ Current Liabilities

Quick Assets= Total Current Assets- Inventory

As per Question given, Current Assets= $1,356,600

Current Liabilities= $571,200

Hence, Quick Assets= $1,356,600- $428,400= $928,200

Quick Ratio= $928,200 / $571,200= 1.63:1

(3) Inventory Turnover Ratio= Cost of goods sold/ average inventory

Cost of goods sold= material + labour

Cost of goods sold= $1020000+714000= 1734000

Inventory= $428,400

Inventory Turnover Ratio= $1734000 / 428400= 4.05 times

(4) Profit Margin Ratio= Net Profit/ Sales * 100

As per question given,

Profit Margin Ratio= $68,850 / 2,550,000 * 100= 2.70%

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