Reference no: EM131085369

1. Melissa Hampton was reviewing the recent performance of the EASY Chair Company, a company with a reputation for producing high-quality home furniture. Over the years, the name EASY had become synonymous with a kind of chair called a recliner. By 2000, the company was producing a variety of home furnishings, including reclining sofas, sleep sofas, living room cabinets, upholstered furniture, and solid-wood dining room furniture. In the past decade, the company had also entered the office furniture business by producing office systems and patient seating for clinics and hospitals. To determine the impact that diversification and expansion had on EASY, Ms. Hampton collected the following data for the company:

EASY CHAIR COMPANY FINANCIAL DATA (dollars in millions)
	2000	1999	1998	1997	1996
Sales	$592.3	$553.2	$486.8	$420.0	$341.7
Net Income	$28.3	$27.5	$26.5	$24.7	$23.0
Dividends per share	$0.5	$0.5	$0.4	$0.4	$0.4
Number of shares	17.9	17.9	18.3	18.4	18.3
Total Assets	$361.9	$349.0	$336.6	$269.9	$233.0
Total equity	$214.6	&194.3	$178.8	$165.3	$147.0

a. How had EASY's sustainable growth rate changed over time? What caused any changes you found?

b. The home furniture industry had the following ratios over the same time. How did EASY compare with the industry?

HOME FURNITURE INDUSTRY RATIOS
	2000	1999	1998	1997
Return on equity	15.12%	15.54%	15.31%	15.74%
Retention rate	71.00%	71.00%	71.00%	72.00%
Sustainable growth rate	10.73%	11.03%	10.87%	11.33%

2. Perplexed by the declining profit margin and the rate of growth of EASY's net income, Melissa Hampton pressed the company management for more detailed information. The management asks you, one of EASY's financial analysts, to compute component and percentage changes for the following statements and determine if there were any positive or negative trends.

EASY CHAIR COMPANY INCOME STATEMENT (dollars in millions)
	2000	1999	1998	1997
Net sales	$592.3	$553.2	$486.8	$420.0
Cost of sales	(430.4)	(397.8)	(352.1)	(289.8)
Gross profit	161.9	135.4	134.7	130.2
Selling, general, and administrative expenses	(111.6)	(106.9)	(91.4)	(85.5)
Income from operations	50.3	48.5	43.3	44.7
Interest expense	(7.2)	(7.6)	(4.0)	(1.9)
Other income	2.5	3.1	2.7	2.1
Income before taxes	45.6	44.0	42.0	44.9
Taxes	(17.3)	(16.5)	(15.5)	(20.3)
Net income	$28.3	$27.5	$26.5	$24.6

3. Ms. Hampton was not satisfied with EASY's performance. She believed that the company could achieve the following ratios:

EASY CHAIR COMPANY MS. HAMPTON'S TARGET RATIOS
Dividend payout	45.0%	Profit margin	5.1%
Market price	$15.00	Gross margin	27.6%
Dividend yield	5.2%	Return on assets	9.4%
Number of shares outstanding	18,000	Inventory turnover	733.3%
Return on equity	13.7%	Operating profit	8.7%
Long-term debt/equity	27.3%	Accounts receivable collection period	92.5 days
Current ratio	551.0%	Accounts payable payment period	28.7 days
Acid-test ratio	407.3%	Tax rate	34.0%

Using Ms. Hampton's target ratios for EASY, complete the following financial statements:

EASY CHAIR COMPANY MS. HAMPTON'S REVISED FINANCIAL STATEMENTS

Income Statement

Sales

Cost of sales Gross profit

Selling, general, and administrative expenses Operating profit

Interest

Earnings before taxes Taxes

Net income

Balance Sheet

Cash

Accounts receivable Inventory

Total current assets

Net property, plant, and equipment Total assets

Accounts payable Other current liabilities

Total current liabilities Long-term debt

Total liabilities Owners' equity

Total liabilities and owners' equity Dividends per share

4. As the new financial analyst for Peterson's Chemicals, you have been asked to analyze the profitability problems encountered during the last two years. Current financial statements and selected industry averages are as follows:

PETERSON'S CHEMICALS FINANCIAL STATEMENTS (dollars in millions)
Income Statement	2000	1999
Sales	$1,478	$1,435
Cost of goods sold	(1,182)	(1,076)
Gross profit	296	359
Selling and administrative expenses	(443)	(445)
Operating profit	(147)	(86)
Interest expense	(27)	(29)
Net income	$(174)	$(115)
Balance Sheet	2000	1999
Cash and equivalent	$120	$76
Accounts receivable (net)	432	437
Inventory	324	284
Other current assets	37	38
Total current assets	913	835
Plant, property, and equipment	300	376
Total assets	$1,213	$1,210
Accounts payable	$500	$412
Other current liabilities	309	98
Total current liabilities	809	510
Long-term debt	178	300
Total liabilities	987	810
Owners' equity	226	400
Total liabilities and owners' equity	$1,213	$1,210

Using your analysis of the financial statements, how does Peterson's compare to the following industry averages?

CHEMICAL INDUSTRY AVERAGES
	Industry Ratios
Current ratio	150%
Acid-test ratio	90%
Receivables collection period	65 days
Payables payment period	60 days
Debt/equity	110%
Return on assets	7%
Return on equity	19%

5. Peterson's management has decided to reexamine the company's short-term credit policies. The chief financial officer estimates that reducing the receivables collection period to 78 days would result in a sales decrease of 3 percent. The purchasing department reports that by reducing the payables period to 68.5 days, discounts would be available that would reduce the cost of goods by 9 percent. Initially the cash required to finance these changes would come from additional long-term debt, resulting in a debt to equity ratio of 100 percent. As an analyst:

a. Determine whether Peterson's Chemicals would have been profitable if management had made these changes at the beginning of 2000.

b. Determine how the ROE and ROA would have been affected.

c. Prepare new financial statements to reflect these changes.

6. Lacey Harmoniski had just moved to the Endura Republic as a part of a business school summer internship. His mentor and supervisor, Mr. Rickki, had handed him THE FASTNER CO. income statements and asked him to analyze them. His mentor was proud of the progress the company had made. Lacey knew that the analysis would show how well the joint fastener company had done over the past five years, and that his analysis was his introduction to a company of which his mentor was proud. Mr. Rickki had described the economic environment as one that was difficult: inflation had been high and variable. The company, he said, had coped with the inflation, and prospered.

THE FASTNER CO. INCOME STATEMENTS (currency in millions)
	1999	1998	1997	1996	1995
Volume (in units)	54,518	55,631	54,540	54,000	50,000
Revenues	10,119	8,294	6,480	4,800	4,000
Cost of goods sold:
Labor	2,255	1,762	1,456	1,120	1,000
Material	4,588	3,584	2,636	1,856	1,600
Gross profit	3,276	2,948	2,388	1,824	1,400
Marketing expenses	873	715	559	414	345
Administrative expenses	539	435	334	385	282
Operating profit	1,864	1,798	1,495	1,166	855
Taxes	615	593	493	385	282
Net Income	1,249	1,205	1,002	781	573

a. Calculate common-size statements for the income statements of THE FASTNER CO. On the basis of this analysis, determine how well the company did.

b. What was the price per unit of the goods being sold by mE FASTNER co.?

c. Mr. Rickki has asked that Lacey calculate and comment on the growth rates of the various items on the income statement. Lacey asks that you draft the report. Please do so.

 d. In spite of the fact that Mr. Rickki had not asked, Lacey decided to put one of his new business school tools to use: an analysis of real growth rates. In addition to the nominal growth rates of the various items, please help him by calculating and commenting on the real growth rates the company has achieved over the past four years. Inflation was as follows:

                          1999       1998       1997       1996

Inflation               28%        26%        40%        12%

e. Draft a report to Mr. Rickki stating your conclusions regarding how well THE FASTNER co. has done.