Data for Barry Computer Co. and its industry averages follow. a. Calculate the indicated ratios for Barry. b. Construct the DuPont equation for both Barry and the industry. c. Outline Barry’s strengths and weaknesses as revealed by your analysis. d. Suppose Barry had doubled its sales as well as its inventories, accounts receivable, and common equity during 2016. How would that information affect the validity of your ratio analysis?

$$\begin{matrix} \text{Barry Computer Company:} & \text{Balance Sheet as of December 31, 2016 (in Thousands)}\\ \text{Cash} & \text{\$ 77.500} & \text{Accounts payable} & \text{\$ 129.000}\\ \text{Receivables} & \text{336.000} & \text{Other current liabilities} & \text{117.000}\\ \text{Inventories} & \text{241.500} & \text{Notes payable to bank} & \text{84.000}\\ \text{Total current assets} & \text{\$ 655.000} & \text{Total current liabilities} & \text{\$ 330.000}\\ \text{ } & \text{ } & \text{Long-term debt} & \text{256.500}\\ \text{Net fixed assets} & \text{292.500} & \text{Common equity} & \text{361.000}\\ \text{Total assets} & \text{\$ 947.500} & \text{Total liabilities and equity} & \text{\$ 947.500}\\ \end{matrix}$$

$$\begin{matrix} \text{Barry Computer Company:} & \text{Balance Sheet as of December 31, 2016 (in Thousands)}\\ \text{Sales} & \text{ } & \text{\$ 1.607.500}\\ \text{Costs of goods sold} & \text{ }\\ \text{Materials} & \text{\$ 717.000}\\ \text{Labor} & \text{453.000}\\ \text{Heat, light, and power} & \text{68.000}\\ \text{Indirect labor} & \text{113.000}\\ \text{Deprecation} & \text{41.500} & \text{1.392.500}\\ \text{Gross profit} & \text{ } & \text{\$ 215.000}\\ \text{Selling expenses} & \text{ } & \text{115.000}\\ \text{General and administrative expenses} & \text{ } & \text{30.000}\\ \text{Earnings before interest and taxes (EBIT)} & \text{ } & \text{\$ 70.000}\\ \text{Interest expense} & \text{ } & \text{24.500}\\ \text{Earnings before taxes (EBT)} & \text{ } & \text{\$45.500}\\ \text{Federal and state income taxes (40\\\%)} & \text{ } & \text{18.200}\\ \text{Net income} & \text{ } & \text{\$ 27.300}\\ \end{matrix}$$

$$\begin{matrix} \text{Ratio} & \text{Barry} & \text{Industry Average}\\ \text{Current} & \text{ } & \text{2.0 }{\times}\\ \text{Quick} & \text{ } & \text{1.3 }{\times}\\ \text{Days sales outstanding} & \text{ } & \text{35 days}\\ \text{Inventory turnover} & \text{ } & \text{6.7 }{\times}\\ \text{Total assets turnover} & \text{ } & \text{3.0 }{\times}\\ \text{Profit margin} & \text{ } & \text{1.2\\\%}\\ \text{ROA} & \text{ } & \text{3.6\\\%}\\ \text{ROE} & \text{ } & \text{9.0\\\%}\\ \text{ROIC} & \text{ } & \text{7.5\\\%}\\ \text{TIE} & \text{ } & \text{3.0 }{\times}\\ \text{Debt/Total capital} & \text{ } & \text{47.0\\\%}\\ \end{matrix}$$

Data for Barry Computer Co. and its industry averages follow.

$$\hspace{20mm}\text{Barry Computer Company:}$$

Balance Sheet as of December 31, 2015 (in Thousands)

$$\small{ \begin{array}{lrlr} \text{Cash}& \$77,500 &\text{Accounts payable}& \$129,000\\ \text{Receivables} &336,000 &\text{Other current liabiities} &117,000\\ \text{Inventories} &241,500 &\text{Notes payable to bank} &84,000\\ \text{Total current assets}& \$655,000 &\text{Total curent labilities}& \$330,000\\ &&\text{Long-term debt} &256,500\\ \text{Net fixed assets}& 292,500 &\text{Common equity}& 361,000\\ \text{Total assets}& \$947.500& \text{Total liabilities and equity} &\$947.500 \\ \end{array}}$$

Barry Computer Company: Income Statement for Year Ended

$$\hspace{40mm}\text{December 31, 2015 (in Thousands)}$$

$$\small{ \begin{array}{lrr} \text{Sales}& &\$1,607,500\\ \text{Cost of goods sold Materials} &\$717,000\\ \text{Labor}& 453,000\\ \text{Heat, light, and power} &68,000\\ \text{Indirect labor} &113,000\\ \text{Depreciation}& 41,500& 1,392,500\\ \text{Gross profit}&& \$ 215,000\\ \text{Selling expenses} &&115,000\\ \text{General and administrative expenses}&& 30,000\\ \text{Earnings before interest and taxes (EBIT)}&& \$ 70.000\\ \text{Interest expense}&& 24,500\\ \text{Earnings before taxes (EBT)} &&\$ 45,500\\ \text{Federal and state income taxes (40\\\%)} &&18,200\\ \text{Net income}&& \$ 27,300 \\ \end{array}}$$

$$\small{ \begin{array}{lcc} \text { Ratio } & \text { Barry } & \text { Industry Average } \\ \hline \text { Current } &- & 2.0 \times \\ \text { Quick } & - & 1.3 \times \\ \text { Days sales outstanding }{ }^a & - & 35 \text { days } \\ \text { Inventory turnover } & - & 6.7 \times \\ \text { Total assets turnover } & - & 3.0 \times \\ \text { Profit margin } & - & 1.2 \% \end{array}}$$

$^a\text{Calculation is based on a 365-day year.}$

$$\small{ \begin{array}{lcc} \text { Ratio } & \text { Barry } & \text { Industry Average } \\ \hline \text { ROA } & - & 3.6 \% \\ \text { ROE } & - & 9.0 \% \\ \text { ROIC } &-& 7.5 \% \\ \text { TIE } & - & 3.0 \times \\ \text { Debt/Total capital } & - & 47.0 \% \end{array}}$$

a. Calculate the indicated ratios for Barry.

b. Construct the DuPont equation for both Barry and the industry.

c. Outline Barry's strengths and weaknesses as revealed by your analysis.

d. Suppose Barry had doubled its sales as well as its inventories, accounts receivable, and common equity during $2015$ . 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.)

The Stewart Company has $2,392,500 in current assets and$1,076,625 in current liabilities. Its initial inventory level is $526,350, and it will raise funds as additional notes payable and use them to increase inventory. How much can its short-term debt (notes payable) increase without pushing its current ratio below 2.0?

Data for Barry Computer Co. and its industry averages follow.

$$\small{ \begin{array}{lclc} &\textbf{Barry Computer Company:}\\ &\textbf{Balance Sheet as of December 31, 2016 (in Thousands)}\\\\ \text{Cash} & \$77,500&\text{ Accounts payable} &\$129,000\\ \text{Receivables}& 336,000& \text{Other current liabilities} &117,000\\ \text{Inventories}& 241,500& \text{Notes payable to bank}& 84,000\\ \text{Total current assets}& \$655,000 &\text{Total current liabilities}& \$330,000\\ &&\text{Long-term debt} &256,500\\ \text{Net fixed assets}& 292,500 &\text{Common equity} &361,000\\ \text{Total assets} &\$947,500 &\text{Total liabilities and equity} &\$947,500\\ \end{array}}$$

$$\small{ \begin{array}{lcr} &\textbf{Barry Computer Company: Income Statement for Year Ended}\\ &\textbf{December 31, 2016 (in Thousands)}\\ \text{Sales} &&\$1,607,500\\ \text{Cost of goods sold}\\ \text{Materials} &\$717,000\\ \text{Labor}& 453,000\\ \text{Heat, light, and power} &68,000\\ \text{Indirect labor} &113,000\\ \text{Depreciation} &41,500 &1,392,500\\ \text{Gross profit}&& \$ 215,000\\ \text{Selling expenses} &&115,000\\ \text{General and administrative expenses}&& 30,000\\ \text{Earnings before interest and taxes (EBIT)}&& \$ 70,000\\ \text{Interest expense} &&24,500\\ \text{Earnings before taxes (EBT)}& &\$ 45,500\\ \text{Federal and state income taxes (40\\\%)}&& 18,200\\ \text{Net income} &&\$ 27,300\\ \end{array}}$$

$$\small{ \begin{array}{lcc} \textbf{Ratio}& \textbf{Barry} &\textbf{Industry Average}\\ \hline \text{Current}& \underline{\phantom{\text{justekst}}} &2.0\times\\ \text{Quick}& \underline{\phantom{\text{justekst}}}&1.3\times\\ \text{Days sales outstanding}& \underline{\phantom{\text{justekst}}} &35 \text{ days}\\ \text{Inventory turnover} &\underline{\phantom{\text{justekst}}}&6.7\times\\ \text{Total assets turnover}& \underline{\phantom{\text{justekst}}} &3.0\times\\ \text{Profit margin}& \underline{\phantom{\text{justekst}}} &1.2\%\\ \text{ROA}& \underline{\phantom{\text{justekst}}} &3.6\%\\ \text{ROE}& \underline{\phantom{\text{justekst}}} &9.0\%\\ \text{ROIC}& \underline{\phantom{\text{justekst}}} &7.5\%\\ \text{TIE}& \underline{\phantom{\text{justekst}}} &3.0\times\\ \text{Debt/Total capital}& \underline{\phantom{\text{justekst}}} &47.0\%\\ \end{array}}$$

$$\footnotesize{\text{Calculation is based on a 365-day year.}}$$

Construct the DuPont equation for both Barry and the industry.

Ferrell Inc. recently reported net income of $8 million. It has 540,000 shares of common stock, which currently trades at$21 a share. Ferrell continues to expand and anticipates that 1 year from now, its net income will be $13.2 million. Over the next year, it also anticipates issuing an additional 81,000 shares of stock so that 1 year from now it will have 621,000 shares of common stock. Assuming Ferrell’s price/earnings ratio remains at its current level, what will be its stock price 1 year from now?

Ingraham Inc. currently has $205,000 in accounts receivable, and its days sales outstanding (DSO) is 71 days. It wants to reduce its DSO to 20 days by pressuring more of its customers to pay their bills on time. If this policy is adopted, the company’s average sales will fall by 15%. What will be the level of accounts receivable following the change? Assume a 365-day year.

A firm has a profit margin of 3% and an equity multiplier of 1.9. Its sales are $150 million, and it has total assets of$60 million. What is its ROE?

MPI Incorporated has $6 billion in assets, and its tax rate is 35%. Its basic earning power (BEP) ratio is 11%, and its return on assets (ROA) is 6%. What is MPI’s times-interest-earned (TIE) ratio?

Lloyd Inc. has sales of $200,000, a net income of$15,000, and the following balance sheet:

$$\begin{matrix} \text{Cast} & \text{\$ 10.000} & \text{Accounts payable} & \text{\$ 30.000}\\ \text{Receivables} & \text{50.000} & \text{Notes payable to bank} & \text{20.000}\\ \text{Inventories} & \text{150.000} & \text{Total current liabilities} & \text{\$ 50.000}\\ \text{Total current assets} & \text{\$ 210.000} & \text{Long-term debt} & \text{50.000}\\ \text{Net fixed assets} & \text{90.000} & \text{Common equity} & \text{200.000}\\ \text{Total assets} & \text{\$ 300.000} & \text{Total liabilities and equity} & \text{\$ 300.000}\\ \end{matrix}$$

The new owner thinks that inventories are excessive and can be lowered to the point where the current ratio is equal to the industry average, 2.5 $\times$, without affecting sales or net income. If inventories are sold and not replaced (thus reducing the current ratio to 2.5$\times$); if the funds generated are used to reduce common equity (stock can be repurchased at book value); and if no	other changes occur,by how much will the ROE change? What will be the firm’s new quick ratio?

A company has an EPS of $2.40, a book value per share of$21.84, and a market/book ratio of 2.7$\times$. What is its P/E ration?

Fontaine Inc. recently reported net income of $\$2$ million. It has $500,000$ shares of common stock, which currently trades at $\$ 40$ a share. Fontaine continues to expand and anticipates that $1$ year from now, its net income will be $\$ 3.25$ million. Over the next year, it also anticipates issuing an additional $150,000$ shares of stock so that $1$ year from now it will have $650,000$ shares of common stock. Assuming Fontaine's price/earnings ratio remains at its current level, what will be its stock price $1$ year from now?

Palencia Paints Corporation has a target capital structure of 35% debt and 65% common equity, with no preferred stock. Its before-tax cost of debt is 8%, and its marginal tax rate is 40%. The current stock price is $\mathrm{P}_{0}=\$ 22.00$. The last dividend was $\mathrm{D}_{0}=\$ 2.25$, and it is expected to grow at a 5% constant rate. What is its cost of common equity and its WACC?

The Corrigan Corporation’s 2015 and 2016 financial statements follow, along with some industry average ratios. a. Assess Corrigan’s liquidity position, and determine how it compares with peers and how the liquidity position has changed over time. b. Assess Corrigan’s asset management position, and determine how it compares with peers and how its asset management efficiency has changed over time. c. Assess Corrigan’s debt management position, and determine how it compares with peers and how its debt management has changed over time. d. Assess Corrigan’s profitability ratios, and determine how they compare with peers and how its profitability position has changed over time. e. Assess Corrigan’s market value ratios, and determine how its valuation compares with peers and how it has changed over time. f. Calculate Corrigan’s ROE as well as the industry average ROE, using the DuPont equation. From this analysis, how does Corrigan’s financial position compare with the industry average numbers? g. What do you think would happen to its ratios if the company initiated cost-cutting measures that allowed it to hold lower levels of inventory and substantially decreased the cost of goods sold? No calculations are necessary. Think about which ratios would be affected by changes in these two accounts. $$ \begin{matrix} \text{Corrigan Corporation: Balance Sheets as of December 31}\\ \text{ } & \text{2016} & \text{2015}\\ \text{Cash } & \text{\$72.000} & \text{\$ 65.000}\\ \text{Accounts receivable} & \text{439.000} & \text{328.000}\\ \text{Inventories} & \text{894.000} & \text{813.000}\\ \text{Total current assets} & \text{\$ 1.405.000} & \text{\$ 1.206.000}\\ \text{Land and Building } & \text{238.000} & \text{271.000}\\ \text{Machinery} & \text{132.000} & \text{133.000}\\ \text{Other fixed assets} & \text{61.000} & \text{57.000}\\ \text{Total assets} & \text{\$ 1.836.000} & \text{\$ 1.667.000}\\ \text{Accounts payable} & \text{\$80.000} & \text{\$ 72.708}\\ \text{Accrued liabilities} & \text{45.010} & \text{40.880}\\ \text{Notes payable} & \text{476.990} & \text{547.912}\\ \text{Total current liabilities} & \text{\$ 602.000} & \text{\$ 571.500}\\ \text{Long-term debt} & \text{404.290} & \text{258.898}\\ \text{Common stock} & \text{575.00} & \text{575.000}\\ \text{Retained earnings} & \text{254.710} & \text{261.602}\\ \text{Total liabilities and equity} & \text{\$ 1.836.000} & \text{\$ 1.667.000}\\ \end{matrix} $$ $$ \begin{matrix} \text{Corrigan Corporation: Income Statements for Years Ending December 31}\\ \text{ } & \text{2016} & \text{2015}\\ \text{Sales} & \text{\$ 4.240.000} & \text{\$ 3.635.000}\\ \text{Cost of goods sold} & \text{3.680.000} & \text{2.980.000}\\ \text{Gross operating profit} & \text{\$ 560.000} & \text{\$ 655.000}\\ \text{General administrative and selling expenses} & \text{303.320} & \text{297.550}\\ \text{Depreciation} & \text{159.000} & \text{154.500}\\ \text{EBIT} & \text{\$ 97.680} & \text{\$ 202.950}\\ \text{Interest} & \text{67.000} & \text{43.000}\\ \text{Earnings before taxes (EBT)} & \text{\$30.680} & \text{\$ 159.950}\\ \text{Taxes (40\\%)} & \text{12.272} & \text{63.980}\\ \text{Net income} & \text{\$ 18.408} & \text{\$ 95.970}\\ \end{matrix} $$ $$ \begin{matrix} \text{Per-Share Data}\\ \text{ } & \text{2016} & \text{2015}\\ \text{EPS} & \text{\$ 0.80} & \text{\$ 4.17}\\ \text{Cash dividends} & \text{\$ 1.10} & \text{\$ 0.95}\\ \text{Market price (average)} & \text{\$ 12.34} & \text{\$ 23.57}\\ \text{P/E ratio} & \text{15.42 }{\times} & \text{5.65 }{\times}\\ \text{Number of shares outstanding} & \text{23.000} & \text{23.000}\\ \end{matrix} $$ $$ \begin{matrix} \text{Industry Financial Ratios} & \text{ }\\ \text{Current ratio} & \text{2.7 }{\times}\\ \text{Inventory turnover} & \text{7.0 }{\times}\\ \text{Days sales outstanding} & \text{32.0 days}\\ \text{Fixed assets turnover} & \text{13.0 }{\times}\\ \text{Total assets turnover} & \text{2.6 }{\times}\\ \text{Return on assets} & \text{9.1\\%}\\ \text{Return on equity} & \text{18.2\\%}\\ \text{Return on invested capital} & \text{14.5\\%}\\ \text{Profit margin} & \text{3.5\\%}\\ \text{Debt-to-capital ratio} & \text{50.0\\%}\\ \text{P/E ratio} & \text{6.0 }{\times}\\ \end{matrix} $$

A firm has been experiencing low profitability in recent years. Perform an analysis of the firm’s financial position using the DuPont equation. The firm has no lease payments but has a 2 million dollars sinking fund payment on its debt. The most recent industry average ratios and the firm’s financial statements are as follows:

Current ratio	$3 \times$	Fixed assets turnover	$6 \times$
Debt-to-capital ratio	20 percent	Total assets turnover	$3 \times$
Times interest earned	$7 \times$	Profit margin	3 percent
EBITDA coverage	$9 \times$	Return on total assets	9 percent
Inventory turnover	$10 \times$	Return on common equity	12.86 percent
Days sales outstanding $^a$	24 days	Return on invested capital	11.50 percent
$^a$ Calculation is based on a 365-day year.

Balance Sheet as of December 31, 2018 (Millions of Dollars)

Cash and equivalents	78 dollars	Accounts payable	45 dollars
Accounts receivable	66	Other current liabilities	11
Inventories	159	Notes payable	29
Total current assets	303 dollars	Total current liabilities	85 dollars
		Long-term debt	50
		Total liabilities	135 dollars
Gross fixed assets	225	Common stock	114
Less depreciation	78	Retained earnings	201
Net fixed assets	147 dollars	Total stockholders’ equity	315 dollars
Total assets	450 dollars	Total liabilities and equity	450 dollars

Income Statement for Year Ended December 31, 2018 (Millions of Dollars)

Net sales	795.0 dollars
Cost of goods sold	660.0
Gross profit	135.0 dollars
Selling expenses	73.5
EBITDA	61.5 dollars
Depreciation expense	12.0
Earnings before interest and taxes (EBIT)	49.5 dollars
Interest expense	4.5 dollars
Earnings before taxes (EBT)	45.0 dollars
Taxes (40 percent)	18.0
Net income	27.0 dollars

a. Calculate the ratios you think would be useful in this analysis.

b. Construct a DuPont equation, and compare the company’s ratios to the industry average ratios.

c. Do the balance sheet accounts or the income statement figures seem to be primarily responsible for the low profits?

d. Which specific accounts seem to be most out of line relative to other firms in the industry?

e. If the firm had a pronounced seasonal sales pattern or if it grew rapidly during the year, how might that affect the validity of your ratio analysis? How might you correct for such potential problems?