Question 1: Baker brothers have a DSO of 40 days. The company\'s average daily sales are $20,000. What is the level of its accounts receivable? Assume there are 365 days in a year.
Data for Barry Computer Company and its industry averages follow.
a) Calculate the indicated ratios for Barry.
b) Construct the extended Du Pont 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 2004. How would that information affect the validity of your ratio analysis? (A hint: Think about averages and the effects of rapid growth on ratios if averages are not used. No calculations are needed.)
Barry Computer Company: Balance Sheet as of December 31, 2004 (in thousands)
Cash $77,500 Accounts Payable $129,000
Receivables 336,000 Notes payable 84,000
Inventories 241,500 Other current liabilities 117,000
Total current assets $655,000 Total current liabilities $330,000
Net fixed assets 292,500 Long term Debt 256,000
Common equity 361,000
Total Assets $947,500 Total liabilities & equity $947, 500
Barry Computer Company: income statement for year ended December 31, 2004 (in thousands).
Sales $1,607,500
Cost of goods sold 1,392,500
Selling general and admin
Expenses 145,000
Earnings before interest &
Taxes $ 70,000
Interest expense 24,500
Earnings before taxes $ 45,500
Federal and state income taxes (40%) 18,200
Net income $ 27,300
Ratio Barry Industry average
Current assets/current liabilities 2.0x
Days sales outstanding 35 days
Sales/inventory 6.7x
Sales/fixed assets 12.1x
Sales/total assets 3.0x
Net income/sales 1.2%
Net income/total assets 3.6%
Net income/common equity 9.0%
Total debt/total assets 60.0%
Carter Corporation's sales are expected to increase from $5 million in 2004 to $6 million in 2005, or by 20%. Its assets totaled $3 million at the end of 2004. Carter is at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2004, current liabilities were $1 million, consisting of $250,000 of accounts payable, $500,000 of notes payable, and $250,000 of accruals. The after-tax profit margin is forecasted payout ratio is 70 percent.
a) Use the AFN formula to forecast Carter's additional funds needed for the coming year.
b) What would be the additional funds needed if the company's year-end 2004 assets had been $4 million? Assume that all other numbers are the same. Why is this AFN different from the one found in question A. Is the company's capitol intensity the same or different?
Pierce furnishings generated $2.0 million in sales during 2004, and its year-end total assets were $1.5 million. Also, at year-end 2004, current liabilities were $500,000, consisting of $200,000 of notes payable, $200,000 of accounts payable, and $100,000 of accruals. Looking ahead to 2005, the company estimates that its assets must increase by 75 cents for every $1 increase in sales. Pierces profit margin is 5 percent, and its payout ratio is 60 percent. How large a sales increase can the company achieve without having to raise funds externally.