1. Williams Furniture Compan
1. Williams Furniture Company has thefollowing data:
WilliamsFurniture
BalanceSheet
December 31, 201x
Assets:
Cash $50,000
Marketable Securities 80,000
Accounts Receivable 3,000,000
Inventory 1,000,000
Gross plant &
Equipment 6,000,000
Less Accum
Depreciation 2,000,000
TotalAssets 8,130,000
Liabilities And Equity
AccountsPayable $2,200,000
Accrued Expense 150,000
Notes Payable (current) 400,000
BondsPayable 2,500,000
Common Stock (1.7
Million shares, par $1) 1,700,000
RetainedEarnings 1,180,000
Total Liabilities &
Equity 8,130,000
WilliamsFurniture
Income Statement
Year ended Dec 31, 201x
Sales(credit) $7,000,000
Fixedcosts* 2,100,000
Variable costs(.60) 4,200,000
Earnings before interest and
Taxes 700,000
Lessinterest 250,000
Earnings beforetaxes 450,000
Less Taxes(35%) 157,500
Earnings aftertaxes 292,500
Dividends (40%payout) 117,000
Increased retainedearnings 175,500
*Fixed costs include a) lease expense of $200,000 and 9b)depreciation of $500,000.
Williams Furniture has a $65,000 per year sinking fundobligation associated with its bond issues. The sinking fundrepresents an annual repayment of the principal amount of the bond.It is not tax deductible.
a. Calculate the following and compare to industry average. Bethorough and specific with weak points, strong points and yourrecommendation on how to improve the company’s performance.
Williams Industry
ProfitMargin 5.75%
Return onAssets 6.90%
Return onEquity 9.20%
ReceivablesTurnover 4.35x
InventoryTurnover 6.50x
Fixed AssetTurnover 1.85x
CurrentRatio 1.45x
QuickRatio 1.10x
InterestCoverage 5.35x
Debt to totalassets 25.05%
b. Calculate break even in sales dollars. Calculate DOL .
2. Litten Oil and Gas Company is a largecompany with common stock listed on the New York Stock Exchange andbonds traded over the counter.
The vice president of finance is planning to sell $75 million ofbonds this year. Present market yields are 12.1%. Litten has $90million of 7.5% non callable preferred stock outstanding and has nointentions of selling any preferred stock at any time in thefuture. The preferred stock is currently priced at $80 per shareand its dividend per share is $7.80.
The company has had volatile earnings but its dividend per sharehad had 8% growth and this will continue. The expected dividend is$1.90 per share and common stock is selling for $40 per share. Thecompany’s flotation costs are $2.50 per share preferred stock and$2.20 per share for common stock.
Litten keeps its debt at 50% of assets and its equity at 50%.Litten sees no need to sell common or preferred stock in the nearfuture as is has generated enough internal funds for investmentneeds. The tax rate for the company is 40%
Calculated the following cost of capital:
a. bond
b. preferred stock
c. common stock in retained earnings
d. new common stock
e. weighted average cost of capital.
3. Smith Corporation is considering two newinvestments. Project A and Project B are listed below
Project A will cost $20,000 and has the following cash flow
Yr 1 5,000
Yr 2 6,000
Yr 3 7,000
Yr 4 10,000
Project B will also cost $20,000 has the following cash flow
Yr 1 16000
Yr 2 5000
Yr 3 4000
Calculate specific payback for each
Calculate NPV of each. Use the weighted cost of capital of8%.
Answer:
1.
(a)
In the books of Williams FurnitureCompany
Profit Margin = Net Income / Sales = $292,500 / $7,000,000 =4.18%Return on Assets = Net Income / Sales = $292,500 / $ 8,130,000 =3.60%Return on Equity = Net Income / Share holders’ equity = $292,500 /($1,700,000 + 1,180,000) = 10.15%Receivables Turnover = Credit Sales / Receivables = $7,000,000 /$3,000,000 = 2.33xInventory Turnover = Sales / Inventory = $7,000,000 / $1,000,000 =7xFixed Asset Turnover = Sales / (Gross Fixed Asset – AccumulatedDepreciation) = $7,000,000 / (6,000,000 – 2,000,000) = 1.75xCurrent Ratio = Current Asset / Current Liability = ($50,000+$80,000 + 3,000,000 + 1,000,000) / ($2,200,000 + $ 150,000 + $400,000) = 1.50xQuick Ratio = (Cash + Marketable Securities + Accounts Receivable)/ Current Liabilities = ($50,000 + $ 80,000 + $3,000,000) /($2,200,000 + $ 150,000 + $ 400,000) = 1.14xInterest Coverage = EBIT / Interest = $700,000 / $250,000 =2.8xDebt to total assets = Total Liabilities / Total Asset = (2,200,000+ 150,000 + 400,000 + 2,500,000) / 8,130,000 = 64.58%
| Ratio | Williams | Industry | Remarks |
| Profit Margin | 4.18% | 5.75% | Weak Point |
| Return on Assets | 3.60% | 6.90% | Weak Point |
| Return on Equity | 10.15% | 9.20% | Strong Point |
| ReceivablesTurnover | 2.33 | 4.35 | Weak Point |
| Inventory Turnover | 7 | 6.50x | Almost Same |
| Fixed Asset Turnover | 1.75 | 1.85x | Almost Same |
| Current Ratio | 1.5 | 1.45x | Almost Same |
| Quick Ratio | 1.14 | 1.10x | Almost Same |
| Interest Coverage | 2.8 | 5.35x | Weak Point |
| Debt to total assets | 64.58% | 25.05% | Weak Point |
Recommendation –
From above analysis we can see that due to poor recovery ofaccounts receivables, Company’s debt fund has increased whichresults high interest expense and reduced Profit margin.So, It is Advisible to revise company’s credit policy and Improveits in collection function.
(b)
| Particulars | Amount | |
| Sales | $ 7,000,000.00 | |
| Less ; Variable Cost | $ 4,200,000.00 | |
| Contribution | $ 2,800,000.00 | |
| PV ratio (Contribution / Sales) | $ 0.40 | |
| Fixed Cost | $ 2,100,000.00 | |
| Break even in sales | $ 5,250,000.00 | Fixed Cost / PV Ratio |
DOL = Contribution / EBIT = $2,800,000 / $700,000 = 4
"Our Prices Start at $11.99. As Our First Client, Use Coupon Code GET15 to claim 15% Discount This Month!!"
