Modern Building Supply sells various building materials to r

Published by Beth Roe

Apr 25, 2017

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Modern Building Supply sells various building materials to retail outlets. The company has just approached Linden State Bank requesting a $300,000 loan to strengthen the Cash account and to pay certain pressing short-term obligations. The companys financial statements for the most recent two years follow: Modern Building Supply Comparative Balance Sheet This Year Last Year Assets Current assets: Cash $ 90,000 $ 200,000 Marketable securities 0 50,000 Accounts receivable, net 650,000 400,000 Inventory 1,300,000 800,000 Prepaid expenses 20,000 20,000 Total current assets 2,060,000 1,470,000 Plant and equipment, net 1,940,000 1,830,000 Total assets $ 4,000,000 $ 3,300,000 Liabilities and Stockholders’ Equity Liabilities: Current liabilities $ 1,100,000 $ 600,000 Bonds payable, 12% 750,000 750,000 Total liabilities 1,850,000 1,350,000 Stockholders’ equity: Preferred stock, $50 par, 8% 200,000 200,000 Common stock, $10 par 500,000 500,000 Retained earnings 1,450,000 1,250,000 Total stockholders’ equity 2,150,000 1,950,000 Total liabilities and stockholder’s equity $ 4,000,000 $ 3,300,000 Modern Building Supply Comparative Income Statement and Reconciliation This Year Last Year Sales $ 7,000,000 $ 6,000,000 Cost of goods sold 5,400,000 4,800,000 Gross margin 1,600,000 1,200,000 Selling and administrative expenses 970,000 710,000 Net operating income 630,000 490,000 Interest expense 90,000 90,000 Net income before taxes 540,000 400,000 Income taxes (40%) 216,000 160,000 Net income 324,000 240,000 Dividends paid: Preferred dividends 16,000 16,000 Common dividends 108,000 60,000 Total dividends paid 124,000 76,000 Net income retained 200,000 164,000 Retained earnings, beginning of year 1,250,000 1,086,000 Retained earnings, end of year $ 1,450,000 $ 1,250,000 During the past year, the company has expanded the number of lines that it carries in order to stimulate sales and increase profits. It has also moved aggressively to acquire new customers. Sales terms are 2/10, n/30. All sales are on account. Assume that the following ratios are typical of companies in the building supply industry: Current ratio 2.5 Acid-test ratio 1.2 Average collection period 18 days Average sale period 50 days Debt-to-equity ratio 0.75 Times interest earned ratio 6.0 Return on total assets 10 % Price-earnings ratio 9 Assume that you have just inherited several hundred shares of Modern Building Supply stock. Not being acquainted with the company, you decide to do some analytical work before making a decision about whether to retain or sell the stock you have inherited. Required: 1. You decide first to assess the well-being of the common stockholders. For both this year and last year, compute the following: a. The earnings per share. (Round your answers to 2 decimal places. Omit the “%” sign in your response.) b. The dividend yield ratio for common stock. The companys common stock is currently selling for $45 per share; last year it sold for $36 per share. (Do not round intermediate calculations. Round your answers to 2 decimal places. Omit the “%” sign in your response.) c. The dividend payout ratio for common stock. (Do not round intermediate calculations. Round your answers to 1 decimal place. Omit the “%” sign in your response.) d. The price-earnings ratio. How do investors regard Modern Building Supply as compared to other companies in the industry? (Do not round intermediate calculations. Round your answers to 1 decimal place.) e. The book value per share of common stock. Does the difference between market value and book value suggest that the stock at its current price is too high? (Omit the “$” sign in your response.) 2. You decide next to assess the companys rate of return. Compute the following for both this year and last year: a. The return on total assets. (Total assets at the beginning of last year were $2,700,000.) (Round your answers to 1 decimal place. Omit the “%” sign in your response.) b. The return on common stockholders equity. (Stockholders equity at the beginning of last year was $1,786,000.) (Round your answers to 1 decimal place. Omit the “%” sign in your response.) c. Is the companys financial leverage positive or negative?

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