Financial Analysis: Luther Corporation

Financial Analysis of Luther Corporation

Answered

Balance Sheet

The aim of the assignment is to function as both a review of tools used to date and provide additional practice of the tools introduced to date. How are you doing? Feeling like you have got a decent strength in the finance area? Then we are ready to proceed and apply the skills further.

This assignment consists of four parts and includes 9 questions you are required to respond to. Read the instructions carefully and respond to all of the questions provided.

Part 1: Balance Sheet (2 marks)

Consider the following balance sheet and write your answer to question 1 in the space provided below.

Luther Corporation

Consolidated Balance Sheet

December 31, 2018 and 2017 (in $ millions)

Assets	2018	2017	Liabilities and Stockholders' Equity	2018	2017
Current Assets			Current Liabilities
Cash	63.6	58.5	Accounts payable	87.6	73.5
Accounts receivable	55.5	39.6	Notes payable / short-term debt	10.5	9.6
Inventories	45.9	42.9	Current maturities of long-term debt	39.9	36.9
Other current assets	6.0	3.0	Other current liabilities	6.0	12.0
Total current assets	171.0	144.0	Total current liabilities	144.0	132.0

Long-Term Assets			Long-Term Liabilities
Land	66.6	62.1	Long-term debt	239.7	168.9
Buildings	109.5	91.5	Capital lease obligations	---	---
Equipment	119.1	99.6	Total Debt	239.7	168.9
Less accumulated depreciation	(56.1)	(52.5)	Deferred taxes	22.8	22.2
Net property, plant, and equipment	239.1	200.7	Other long-term liabilities	---	---
Goodwill	60.0	--	Total long-term liabilities	262.5	191.1
Other long-term assets	63.0	42.0	Total liabilities	406.5	323.1
Total long-term assets	362.1	242.7	Stockholders' Equity	126.6	63.6

Total Assets	533.1	386.7	Total liabilities and Stockholders' Equity	533.1	386.7

Question 1: If on December 31, 2017 Luther has 8 million shares outstanding trading at $15 per share, then what is Luther's market-to-book ratio? (2 marks)

Part 2: Income Statement (9 marks)

Consider the following income statement and write your answer to questions 2 and 3 in the space provided below.

Luther Corporation Consolidated Income Statement Year ended December 31 (in $ millions)
	2018	2017
Total sales	610.1	578.3
Cost of sales	(500.2)	(481.9)
Gross profit	109.9	96.4
Selling, general, and administrative expenses	(40.5)	(39.0)
Research and development	(24.6)	(22.8)
Depreciation and amortization	(3.6)	(3.3)
Operating income	41.2	31.3
Other income	---	---
Earnings before interest and taxes (EBIT)	41.2	31.3
Interest income (expense)	(25.1)	(15.8)
Pretax income	16.1	15.5
Taxes	(5.5)	(5.3)
Net income	10.6	10.2

Price per share	$16	$15
Shares outstanding (millions)	10.2	8.0
Stock options outstanding (millions)	0.3	0.2

Stockholders' Equity	126.6	63.6
Total Liabilities and Stockholders' Equity	533.1	386.7

Question 2: Calculate Luther's return of equity (ROE), return of assets (ROA), and price-to-earnings ratio (P/E) for the year ending December 31, 2017. (6 marks)

Question 3: If Luther's accounts receivable were $55.5 million in 2018, then calculate Luther's accounts receivable days for 2018. (3 marks)

Part 3: Scenario (10 marks)

Read the scenario below and respond to the question 4.

SCENARIO: Joe just inherited the family business, and having no desire to run the family business, he has decided to sell it to an entrepreneur. In exchange for the family business, Joe has been offered an immediate payment of $100,000. Joe will also receive payments of $50,000 in one year, $50,000 in two years, and $75,000 in three years. The current market rate of interest for Joe is 6%.

Question 4: Suppose a second entrepreneur approaches Joe and offers him $250,000 today for the business. Should Joe accept the new entrepreneur's offer or stick with the original offer of $100,000 and the series of payments over three years? Why? (10 marks)

Part 4: Multiple Choice Questions (24 marks)

Read the scenarios and choose the one alternative that best completes the statement or answers the question. Show all work as part marks will be granted.

SCENARIO: Assume that you are 30 years old today, and that you are planning on retirement at age 65. Your current salary is $45,000 and you expect your salary to increase at a rate of 5% per year as long as you work. To save for your retirement, you plan on making annual contributions to a retirement account. Your first contribution will be made on your 31st birthday and will be 8% of this year's salary. Likewise, you expect to deposit 8% of your salary each year until you reach age 65. Assume that the rate of interest is 7%. Show all calculations. Part marks are granted. Use the scenario for the questions 5 and 6.

Question 5: The present value (at age 30) of your retirement savings is closest to: (10 marks)

(a) $87,000 (b) $75,230 (c) $46,600 (d) $108,000

Your Answer: _______

Question 6: The future value at retirement (age 65) of your savings is closest to: (2 marks)

(a) $497,530 (b) $108,000 (c) $928,895 (d) $1,263,236

Your Answer: ___________

SCENARIO: The quarterly working capital levels for Hasbeen Toys are presented in the table (in $ millions) below. Use the table for the Question 7 through 9.