Diversified Industries is a large conglomerate that is continually in the market
ID: 2492464 • Letter: D
Question
Diversified Industries is a large conglomerate that is continually in the market for new acquisitions. The company has grown rapidly over the last ten years through buyouts of medium-size companies. Diversified does not limit itself to companies in any one industry, but looks for firms with a sound financial base and the ability to stand on their own financially.
The president of Diversified recently told a meeting of the company’s officers: ‘‘I want to impress two points on all of you. First, we are not in the business of looking for bargains. Diversified has achieved success in the past by acquiring companies with the ability to be a permanent member of the corporate family. We don’t want companies that may appear to be a bargain on paper but can’t survive in the long run. Second, a new member of our family must be able to come in and make it on its own—the parent is not organized to be a funding agency for struggling subsidiaries.’’
Required:
1. How liquid is Heavy Duty Tractors? Round current ratio to one decimal place and round average collection period and average number of day's in inventory to the nearest whole day. Assume 360 days.
Several measures give an indication as to the company’s liquidity. The working capital has
over the two-year period. The current ratio for 2014 is____ to 1 and for 2013 to___ 1. One area of concern is the large____ in both receivables and inventories from the prior year. The 2014 average collection period is_____ days and the 2014 average number of ______days’ sales in inventory is days.
2. In light of the president's comments, should you be concerned about the solvency of Heavy Duty Tractors? Round the times interest ratio to two decimal places.
The company’s solvency can be examined by looking at the following factors. The debt-to-equity ratio has ____
from the prior year: The times interest earned ratio is times. The company is carrying a _____
debt burden even though the bonds are not due until 2021.
3. Has Heavy Duty demonstrated the ability to be a profitable member of the Diversified family? Use a tax rate of 40% in your computations. Round all computations (except asset turnover) to one decimal place. Round asset turnover to two decimal places.
Profitability can be assessed by looking at a number of ratios for 2014. The return on assets is_______ % and the return on sales is %. The asset turnover is is times and the return on common Stockholders' Equity is_____ %.
4. What will you tell your boss? Should he recommend to the board of directors that Diversified put in a bid for Heavy Duty Tractors? Round the profit margin to one decimal place.
Heavy Duty _______ demonstrated the ability to be a profitable member of the Diversified family over the long run. Disregarding the extraordinary gain, the profit margin before interest and taxes was_____ %. Heavy Duty relies on a considerable amount_________ of for funding. This is further evidenced by the overall return on assets which_____ is than the return to the stockholders.
Heavy Duty Tractors Inc Comparative Statements of Financial Position (thousands omitted) December 31, 2014 December 31, 2013 Assets Current assets: Cas 48,500 24,980 Marketable securities 3,750 128,420 Accounts receivable, net of allowances 84,120 Inventories 135,850 96,780 Prepaid items 7.600 9.300 Total current assets $324,120 $215,180 Long-tem investments 55,890 55,890 Property, plant, and equipment: Land 45,000 45,000 Buildings and equipment, less accumulated depreciation of $385,000 in 2014 and $325,000 in 2013 545,000 605.000 Total property, plant, andequipment $590,000 $650,000 Total assets $970,010 $921,070 Liabilities and Stockholders' Equity Current liabilities: Short-term notes 80,000 60,000 Accounts payable 65,350 48,760 Salaries and wages payable 14,360 13,840 Income taxes payable 2,590 3,650 Total current liabilities $162,300 $126,250 Long-term bonds payable, due 2021 $275,000 $275,000 Stockholders' equity Common stock, no par Retained earnings 182,710 169,820 Total stockholders' equity $532,710 $519,820 Total liabilities and stockholders' equity $970,010 $921,070 Heavy Duty Tractors Inc Statement of Income and Retained Earnings For the Year Ended December 31, 2014 (thousands omitted) Sales revenue $875,250 Cost of goods sold 542,750 Gross profit $332,500 Selling, general, and administrative expenses 264,360 Operating income 68,140 Interest expense 45,000 Net income before taxes and extraordinary items 23,140 Income tax expense 9.250 Income before extraordinary items 13,890 Extraordinary gain, less taxes of $6,000 9.000 Net income 22,890 Retained earnings, January 1,2014 169,820 $192,710 Dividends paid on common stock 0.000 Retained earnings, December 31, 2014 $182,710Explanation / Answer
Answer for question no.1:
Several measures give an indication as to the company’s liquidity. The working capital has
over the two-year period. The current ratio for 2014 is to 2.56 to 1 and for 2013 1.325 to 1. One area of concern is the large increase in both receivables and inventories from the prior year. The 2014 average collection period is 44 days and the 2014 average number of days’ sales in inventory is 78 days.
Formula for current ratio =Current Assets/Cuurrent liabilities.
Days sales in receivables in 2014 = Sales/Debtors turnover ratio.
Formula for debtors turnover ratio = Sales/average debtors
Average debtors = Accounts receivable of 2013+Accounts receivable of 2014/2
Days sales in accounts receivables = 365/Debtors turnover ratio.
Formula for Inventory turnover ratio = Cost of goods sold/Average inventory
Average inventory =(Opening stock+Closing stock)/2
Days sales in inventory = 365/Iventory turnover ratio.
Answer for question no.2:
Formula for interest coverage ratio = Profit before interest and tax/Interest
=68140/45000
=1.51 times.
The company’s solvency can be examined by looking at the following factors. The debt-to-equity ratio has increased from the prior year: The times interest earned ratio is 1.5 times. The company is carrying a $275,000 debt burden even though the bonds are not due until 2021.
Workings are under:
Answer for question no.3:
Profitability can be assessed by looking at a number of ratios for 2014. The return on assets is 2 % and the return on sales is 2.6%. The asset turnover is 0.9 times and the return on common Stockholders' Equity is 4.3 %.
Formula for return on assets =Profit after tax/Average assets.
Given net income =$22,890/$945,540
=2%
Return on sales =Net income/Sales
=$22,890/$875,250
=2.6%
Return on common stock holders equity:
Formula for Return on common stock holders equity = Netincome/Common stock holders equity
=22890/532710
=4.3%.
Answer for question no.4:
Heavy Duty did not demonstrated the ability to be a profitable member of the Diversified family over the long run. Disregarding the extraordinary gain, the profit margin before interest and taxes was 7.79 %. Heavy Duty relies on a considerable amount of debt for funding. This is further evidenced by the overall return on assets which is less than the return to the stockholders.
Profit margin before intrest and taxes =68,140/875,250
=7.79%.
Particulars 2013 2014 Average Current assets $215,180.00 $324,120.00 Current liabilities $126,250.00 $162,300.00 Current ratio 1.325816389 2.567287129 Accounts receiables $84,120.00 $128,420.00 Average accounts receiables $106,270.00 Sales revenues $875,250.00 Debtors turnover ratio 8.236096735 Days sales in accounts receivables 44.3171094 Inventory $96,780.00 $135,850.00 Average Inventory $116,315.00 Cost of goods sold $542,750.00 Inventory turnover ratio 4.666208142 Days sales in inventory 78.22197144