1 answer

Data for Barry Computer Co. and its industry averages follow. The firm's debt is priced at...

Question:

Data for Barry Computer Co. and its industry averages follow. The firm's debt is priced at par, so the market value of its debt equals its book value. Since dollars are in thousands, number of shares are shown in thousands too.

Barry Computer Company:
Balance Sheet as of December 31, 2019 (In Thousands)
Cash $ 107,360 Accounts payable $ 214,720
Receivables 496,540 Other current liabilities 214,720
Inventories 389,180 Notes payable to bank 80,520
   Total current assets $ 993,080    Total current liabilities $ 509,960
Long-term debt 402,600
Net fixed assets 348,920 Common equity (42,944 shares) 429,440
Total assets $ 1,342,000 Total liabilities and equity $ 1,342,000
Barry Computer Company:
Income Statement for Year Ended December 31, 2019 (In Thousands)
Sales $ 2,200,000
Cost of goods sold
   Materials $1,078,000
   Labor 550,000
   Heat, light, and power 88,000
   Indirect labor 110,000
   Depreciation 66,000 1,892,000
Gross profit $ 308,000
Selling expenses 198,000
General and administrative expenses 22,000
   Earnings before interest and taxes (EBIT) $ 88,000
Interest expense 32,208
   Earnings before taxes (EBT) $ 55,792
Federal and state income taxes (25%) 13,948
Net income $ 41,844
Earnings per share $ 0.9744
Price per share on December 31, 2019 $ 12.00
  1. Calculate the indicated ratios for Barry. Do not round intermediate calculations. Round your answers to two decimal places.
    Ratio Barry              Industry Average
    Current       ? x 1.96x
    Quick       ? × 1.13x
    Days sales outstandinga       ? days 39days
    Inventory turnover        ? × 5.93x
    Total assets turnover        ? × 1.85x
    Profit margin        ? % 1.78%
    ROA        ? % 3.28%
    ROE        ? % 10.83%
    ROIC        ? % 7.80%
    TIE        ?× 2.64x
    Debt/Total capital        ?% 54.44%
    M/B        ? 4.20
    P/E        ? 14.73
    EV/EBITDA        ? 8.42

    aCalculation is based on a 365-day year.
  2. Construct the DuPont equation for both Barry and the industry. Do not round intermediate calculations. Round your answers to two decimal places.
    FIRM INDUSTRY
    Profit margin ? % 1.78%
    Total assets turnover ? × 1.85×
    Equity multiplier ? ×    ? ×
  3. Select the correct option based on Barry's strengths and weaknesses as revealed by your analysis.
    1. The firm's days sales outstanding ratio is comparable to the industry average, indicating that the firm should neither tighten credit nor enforce a more stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets increased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity, assets, and invested capital. However, the company seems to be in a below average liquidity position and financial leverage is similar to others in the industry.
    2. The firm's days sales outstanding ratio is more than twice as long as the industry average, indicating that the firm should tighten credit or enforce a more stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets decreased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity, assets, and invested capital. Finally, it's market value ratios are also below industry averages. However, the company seems to be in an average liquidity position and financial leverage is similar to others in the industry.
    3. The firm's days sales outstanding ratio is more than twice as long as the industry average, indicating that the firm should loosen credit or apply a less stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets increased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity, assets, and invested capital. However, the company seems to be in an average liquidity position and financial leverage is similar to others in the industry.
    4. The firm's days sales outstanding ratio is less than the industry average, indicating that the firm should tighten credit or enforce a more stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets decreased, or both. While the company's profit margin is lower than the industry average, its other profitability ratios are high compared to the industry - net income should be higher given the amount of equity, assets, and invested capital. However, the company seems to be in an average liquidity position and financial leverage is similar to others in the industry.
    5. The firm's days sales outstanding ratio is more than the industry average, indicating that the firm should tighten credit or enforce a more stringent collection policy. The total assets turnover ratio is well above the industry average so sales should be increased, assets increased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity, assets, and invested capital. However, the company seems to be in an above average liquidity position and financial leverage is similar to others in the industry.
    6. D) Suppose Barry had doubled its sales as well as its inventories, accounts receivable, and common equity during 2019. 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.)
    7. If 2019 represents a period of supernormal growth for the firm, ratios based on this year will be accurate and a comparison between them and industry averages will have substantial meaning. Potential investors need only look at 2019 ratios to be well informed, and a return to normal conditions in 2020 could help the firm's stock price.
    8. If 2019 represents a period of normal growth for the firm, ratios based on this year will be distorted and a comparison between them and industry averages will have little meaning. Potential investors who look only at 2019 ratios will be misled, and a continuation of normal conditions in 2020 could hurt the firm's stock price.
    9. If 2019 represents a period of normal growth for the firm, ratios based on this year will be accurate and a comparison between them and industry averages will have substantial meaning. Potential investors who look only at 2019 ratios will be misled, and a return to supernormal conditions in 2020 could hurt the firm's stock price.
    10. If 2019 represents a period of supernormal growth for the firm, ratios based on this year will be distorted and a comparison between them and industry averages will have substantial meaning. Potential investors who look only at 2019 ratios will be well informed, and a return to normal conditions in 2020 could hurt the firm's stock price.
    11. If 2019 represents a period of supernormal growth for the firm, ratios based on this year will be distorted and a comparison between them and industry averages will have little meaning. Potential investors who look only at 2019 ratios will be misled, and a return to normal conditions in 2020 could hurt the firm's stock price.

Answers

9 Firm Industry 10 Current Ratio = 1.95 1.96X Current Assets Current liabilities 993080 509960 11 12 13 Quick ratio = 60390031 Return on Equity = 41844 9.74% 10.83% Net Income Total Equity 32 429440 33 34 ROIC 66000 15.37% 7.80% EBIT ( 1-T) Total In52 b. Construct the DuPont equation for both Barry and the industry. 53 54 For Barry 55 ROE = Profit Margin * Total assets tu

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