Peabody Swimwear
Chris Vericker has recently been approached by his brother-in-law, Edward Peabody, with a proposal to buy a 15% interest in Peabody Swimwear. The company manufactures stylish bathing suits and sunscreen products.
Mr. Peabody is quick to point out the increase in sales over the last three years as indicated in the income statement (Exhibit 1). The annual growth rate is 25%. A balance sheet for a similar timeframe is shown (Exhibit 2) and selected industry ratios are also presented (Exhibit 3). Note the industry growth rate in sales ranges from 10 to 12 percent per year.
(There was a steady real growth rate of 1 to 2 percent in gross domestic product during the period under study. The rate of inflation was also in the 1 to 2 percent range. Neither GDP nor inflation had a material impact on the financial position of the company.)
The stock in the corporation has become available due to the ill health of a current stockholder, who needs cash. The issue here is not to determine the exact price for the stock, but rather whether Peabody Swimwear represents an attractive investment situation. Although Mr. Vericker has a primary interest in the profitability ratios, he will take a closer look at all the ratios. He has no fast and firm rules about required return on investment, but rather wishes to analyze the overall condition of the firm. The firm does not currently pay a cash dividend, and the return to the investor must come from the selling of the stock in the future. After completing a thorough analysis (including ratios for each year and comparisons to the industry), what comments and recommendations do you offer to Mr. Vericker?
Please prepare your written comments in a clear and concise memorandum to Mr. Vericker. (Use a standard memorandum format.) Attach a separate sheet presenting the ratio calculations and analysis. Follow the industry numbers given in the form when rounding numbers.
Attachment:- Peabody Swimwear.rar