Please see attached worksheet for required activities. No additional materials needed. 1. Calculate the profitability ratios for all three years using the formulas provided in section “A. Profitability Ratios”within Chapter 3:1. Profit margin2. Return on assets (a and b)3. Return on equity ( a and b)2. Write a one-paragraph description of any trends that appear to have taken place over the three-year timeperiod.3. Examine the income statement in Figure 1 above. Note that there was an extraordinary loss of $170,000 in2015. This might have represented uninsured losses from a fire, a lawsuit settlement, etc. It probably does notrepresent a recurring event or affect the earnings capability of the firm. For that reason, the astute financialanalyst might add back in the extraordinary loss to gauge the true operating earnings of the firm. Since it was atax-deductible item, we must first multiply by (1-tax rate) before adding it back in.* The tax rate was 35 percentfor the year.$170,000 Extraordinary loss_____.65_ (1-tax rate)$110,500 After-tax addition to profits from eliminating the extraordinary lossfrom net incomeThe more representative net income number for 2015 would now be:Initially reported (Figure 1 above) $200,318Adjustment for extraordinary loss being eliminated +110,500_Adjusted net income $310,818Note: This adjustment was made because the $170,000 deduction saved 35 percent of this amount in taxes. If weeliminate the $170,000, the tax benefit would also be eliminated. Thus, the firm would only benefit by 65 percent of$170,000, based on a 35 percent tax rate. The after-tax benefit of the tax adjustment for the extraordinary loss is$110,500.A. Recompute the same ratios for 2015 using the adjusted net income figure of $310,818.4. Write a one-paragraph description of trends that appear to have taken place over the three-year time period(Refer to question 1 above for 2013 and 2014 data and question 3 above for the adjusted net income numbersfor 2015).5. Write a one-paragraph analysis of the company’s profitability ratios compared to the industry ratios (Figure 3above) using the revised ratios for 2015 from question 3 above. Include asset turnover and debt to total assetsas supplemental material in your analysis.6. Calculate the Asset Utilization ratios for 2015 using the formulas provided in section “B. Asset Utilization Ratios”within Chapter 3:1. Receivable turnover (Note: For the Receivables turnover ratio, only half the sales are on creditterms.)2. Inventory turnover3. Fixed Asset turnover7. Write a brief one-paragraph description of any trends that appear to have taken place. Compare Harrod’s salesto total assets ratio to the industry in your description.8. Write a one-paragraph conclusion that provides analysis of your answers to questions 4 and 5 above.a. Include your opinion on whether or not Becky Harrod has a legitimate complaint about being charged2ó percent, instead of 1 percent over prime.
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Week 5 Case Study
Copyright © 2017 by University of Phoenix. All rights reserved.
FIN/486 Version 6
1
Harrod’s Sporting Goods
In January of 2016, Becky, who served as the company’s chief financial officer, walked into Jim’s office and said, “I’ve
had it with the First National Bank of Omaha. It is willing to renew our loan and line of credit, but the bank wants to
charge us 2½ percentage points over prime.” The prime rate is the rate at which banks make loans to their most
creditworthy customers. It was 4.75 percent at the time Becky had visited the bank, so that the total rate on the loan
would be 7.25 percent. It was not so much the total rate that Becky objected to, as the fact that Harrod’s was being
asked to pay 2½ percent over prime. She felt that Harrod’s was a strong enough company that one percent over prime
should be all that the bank required. Her banker told her he would review the firm’s financial statements with her next
week and reconsider the premium Harrod’s was being asked to pay over prime.
While Becky knew the bank “crunched all the numbers,” she decided to do some additional financial analysis on her
own. She had a bachelor’s degree in finance with a 3.3 GPA. She began by examining Figures 1, 2, and 3 below.
Figure 1
Harrod’s Sporting Goods
Income Statement
(2013-2015)
2013
2014
2015
Sales
…………………………………………………….
$4,269,871
$4,483,360
$5,021,643
Cost of goods
sold
…………………………………………………….
2,991,821
2,981,434
3,242,120
Gross
Profit
…………………………………………………….
$1,278,050
$1,501,926
$1,779,523
Selling and administrative
expense
…………………………………………………….
865,450
1,004,846
1,175,100
Operating
profit
…………………………………………………….
$412,600
$497,080
$604,423
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Week 5 Case Study
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FIN/486 Version 6
Interest
expense
…………………………………………………….
Extraordinary
loss
…………………………………………………….
115,300
__
122,680
126,241
__
170,000
Net income before
taxes
…………………………………………………….
297,300
374,400
308,182
Taxes
…………………………………………………….
104,100
131,300
107,864
Net
income
…………………………………………………….
$ 193,200
$ 243,100
$ 200,318
Figure 2
Harrod’s Sporting Goods
Balance Sheet
(2013-2015)
2013
2014
2015
Cash
………………………………………………………
$ 121,328
$ 125,789
Marketable
securities
………………………………………………………
56,142
66,231
144,090
Accounts
receivable
………………………………………………………
341,525
216,240
398,200
Inventory
………………………………………………………
972,456
1,250,110
1,057,008
Total current
assets
………………………………………………………
$1,491,451
$1,658,370
$1,698,968
$
99,670
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Week 5 Case Study
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FIN/486 Version 6
Net plant and
equipment
………………………………………………………
1,678,749
1,702,280
1,811,142
Total
assets
………………………………………………………
$3,170,200
$3,360,650
$3,510,110
Accounts
payable
………………………………………………………
$ 539,788
$ 576,910
$ 601,000
Notes
payable
………………………………………………………
160,540
180,090
203,070
Total current
liabilities
………………………………………………………
$700,328
$757,000
$804,070
Long-term
liabilities
………………………………………………………
1,265,272
1,292,995
1,372,240
Total
liabilities
………………………………………………………
$1,965,600
$2,049,995
$2,176,310
Common
stock
………………………………………………………
367,400
368,000
368,000
Retained
earnings1
………………………………………………………
837,200
942,665
965,800
Total Stockholders’
equity
………………………………………………………
1,204,600
1,310,655
1,333,800
Total liabilities and stockholders’
equity
………………………………………………………
$3,170,200
$3,360,650
$3,510,110
Liabilities and Stockholders’ Equity
1
Withdrawal of funds in the form of dividends or other means makes the increase in retained earnings less than net income.
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Week 5 Case Study
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FIN/486 Version 6
Figure 3
1.
2a.
2b.
3a.
3b.
4.
5.
6.
+
Harrod’s Sporting Goods
Selected Industry Ratios for 2015
Net income/Sales
Net income/Total Assets
Sales/Total Assets
Net income/Stockholder’s Equity
Debt/Total Assets
Sales/Receivables
Sales/Inventory
Sales/Fixed Assets
4.51%
5.10%
1.33 x
9.80%
0.48
5.75 x
3.01 x
3.20 x
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without the prior written consent of McGraw-Hill Education.
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Week 5 Case Study
Copyright © 2017 by University of Phoenix. All rights reserved.
FIN/486 Version 6
5
Required Activities:
1. Calculate the profitability ratios for all three years using the formulas provided in section “A. Profitability Ratios”
within Chapter 3:
1. Profit margin
2. Return on assets (a and b)
3. Return on equity ( a and b)
2. Write a one-paragraph description of any trends that appear to have taken place over the three-year time
period.
3. Examine the income statement in Figure 1 above. Note that there was an extraordinary loss of $170,000 in
2015. This might have represented uninsured losses from a fire, a lawsuit settlement, etc. It probably does not
represent a recurring event or affect the earnings capability of the firm. For that reason, the astute financial
analyst might add back in the extraordinary loss to gauge the true operating earnings of the firm. Since it was a
tax-deductible item, we must first multiply by (1-tax rate) before adding it back in.* The tax rate was 35 percent
for the year.
$170,000
_____.65_
$110,500
Extraordinary loss
(1-tax rate)
After-tax addition to profits from eliminating the extraordinary loss
from net income
The more representative net income number for 2015 would now be:
Initially reported (Figure 1 above)
Adjustment for extraordinary loss being eliminated
Adjusted net income
$200,318
+110,500_
$310,818
Note: This adjustment was made because the $170,000 deduction saved 35 percent of this amount in taxes. If we
eliminate the $170,000, the tax benefit would also be eliminated. Thus, the firm would only benefit by 65 percent of
$170,000, based on a 35 percent tax rate. The after-tax benefit of the tax adjustment for the extraordinary loss is
$110,500.
A. Recompute the same ratios for 2015 using the adjusted net income figure of $310,818.
4. Write a one-paragraph description of trends that appear to have taken place over the three-year time period
(Refer to question 1 above for 2013 and 2014 data and question 3 above for the adjusted net income numbers
for 2015).
5. Write a one-paragraph analysis of the company’s profitability ratios compared to the industry ratios (Figure 3
above) using the revised ratios for 2015 from question 3 above. Include asset turnover and debt to total assets
as supplemental material in your analysis.
6. Calculate the Asset Utilization ratios for 2015 using the formulas provided in section “B. Asset Utilization Ratios”
within Chapter 3:
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education.
Copyright © 2017 by University of Phoenix. All rights reserved.
Week 5 Case Study
FIN/486 Version 6
6
1. Receivable turnover (Note: For the Receivables turnover ratio, only half the sales are on credit
terms.)
2. Inventory turnover
3. Fixed Asset turnover
7. Write a brief one-paragraph description of any trends that appear to have taken place. Compare Harrod’s sales
to total assets ratio to the industry in your description.
8. Write a one-paragraph conclusion that provides analysis of your answers to questions 4 and 5 above.
a. Include your opinion on whether or not Becky Harrod has a legitimate complaint about being charged
2½ percent, instead of 1 percent over prime.
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education.

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