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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.

Quarter

1

2

3

4

Cash

605

625

175

1,000

Accounts Receivable

585

745

1,260

760

Inventory

410

540

725

375

Accounts Payable

835

910

1,055

1,145

Question 7: In which quarter are Hasbeen's seasonal working capital needs the greatest? (8 marks)

(a) 2 (b) 3 (c) 4 (d) 1

Your Answer: ___________

Question 8: The permanent working capital needs for Hasbeen Toys is closest to: (2 marks)

(a) $2,435 million (b) $1,100 million (c) $770 million (d) $1,275 million

Your Answer: ___________

Question 9: The temporary working capital needs for Hasbeen Toys in quarter 1 is closest to: (2 marks)

(a) $770 million (b) $845 million (c) $340 million (d) $0 million

Your Answer: ___________

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