Question

You have just been hired as a financial analyst for Lydex Company, a manufacturer of safety helmets. Your boss has asked you to perform a comprehensive analysis of the company’s financial statements, including comparing Lydex’s performance to its major competitors. The company’s financial statements for the last two years are as follows:

Lydex Company Comparative Balance Sheet
	This Year		Last Year
Assets
Current assets:
Cash	$	1,040,000	$	1,280,000
Marketable securities		0		300,000
Accounts receivable, net		3,020,000		2,120,000
Inventory		3,680,000		2,300,000
Prepaid expenses		270,000		210,000
Total current assets		8,010,000		6,210,000
Plant and equipment, net		9,680,000		9,130,000
Total assets	$	17,690,000	$	15,340,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities	$	4,090,000	$	3,140,000
Note payable, 10%		3,720,000		3,120,000
Total liabilities		7,810,000		6,260,000
Stockholders' equity:
Common stock, $75 par value		7,500,000		7,500,000
Retained earnings		2,380,000		1,580,000
Total stockholders' equity		9,880,000		9,080,000
Total liabilities and stockholders' equity	$	17,690,000	$	15,340,000

Lydex Company Comparative Income Statement and Reconciliation
	This Year		Last Year
Sales (all on account)	$	15,940,000	$	14,380,000
Cost of goods sold		12,752,000		10,785,000
Gross margin		3,188,000		3,595,000
Selling and administrative expenses		1,216,000		1,636,000
Net operating income		1,972,000		1,959,000
Interest expense		372,000		312,000
Net income before taxes		1,600,000		1,647,000
Income taxes (30%)		480,000		494,100
Net income		1,120,000		1,152,900
Common dividends		320,000		576,450
Net income retained		800,000		576,450
Beginning retained earnings		1,580,000		1,003,550
Ending retained earnings	$	2,380,000	$	1,580,000

To begin your assignment you gather the following financial data and ratios that are typical of companies in Lydex Company’s industry:

Current ratio	2.3
Acid-test ratio	1.2
Average collection period	32	days
Average sale period	60	days
Return on assets	8.6	%
Debt-to-equity ratio	0.7
Times interest earned ratio	5.8
Price-earnings ratio	10

rev: 04_27_2020_QC_CS-209476

2. You decide next to assess the company’s stock market performance. Assume that Lydex’s stock price at the end of this year is $110 per share and that at the end of last year it was $78. For both this year and last year, compute: (Round your "Percentage" answers to 1 decimal place and other intermediate and final answers to 2 decimal places.)

a. The earnings per share.

b. The dividend yield ratio.

c. The dividend payout ratio.

d. The price-earnings ratio.

e. The book value per share of common stock

Answer 1

a.

Earning per share = Net income / Weighted common shares outstanding

This year = $1,120,000 / 100,000 (7,500,000/$75) = $11.2

Last year = $1,152,900 / 100,000 = $11.53

b.

Dividend yield ratio = Dividend per share / Stock price per share

This year = $3.2 ($320,000/100,000) / $110 *100 = 2.9%

Last year = $5.76 (576,450/100,000) / $78 *100 = 7.4%

c.

Dividend payout ratio = Dividend per share / Earning per share

This year = $3.2 / $11.2 * 100 = 28.6%

Last year = $5.76 / $11.53 * 100 = 50%

d.

Price earning ratio = Stock price per share / Earning per share

This year = $110 / $11.2 = 9.82

Last year = $78 / $11.53 = 6.76

e

Book value per share of common stock = Total stockholders' equity / Weighted common shares outstanding

This year = $9,880,000 / 100,000 = $98.8

Last year = $9,080,000 / 100,000 = $90.8