Course Title: Financial Statement Analysis Course Code: MGT-537 Course Instructor: Dr. Hafiz Muhammad Ishaq Lectures: 29

Previous Lecture Summary Expanded Analysis Practical Exercises

Today’s Lecture Topics Expanded Analysis Practical Exercises

Practical Exercise Argo Sales Corporation has in recent years maintained the following relationships among the data on its financial statements: Gross profit rate on net sales 40% Net profit rate on net sales 10% Rate of selling expenses to net sales 20% Accounts receivable turnover 8 per year Inventory turnover 6 per year Acid test ratio 2 to 1 Current ratio 3 to 1 Quick assets composition, 8% cash 32% Marketable securities,60% accounts Receivable Assets turnover 2 per year Ratio of total assets to intangible assets 20 to 1 Ratio of accumulated depreciation to cost Of fixed assets 1 to 3 Ratio of accumulated depreciation to Cost of fixed assets Ratio of account receivable to accounts Payable 1.5 to 1 Ratio of working capital to stockholders equity 1 to 1.6 Ratio of total debt to stockholders equity 1 to 2

Practical Exercise (Cont’d) The corporation had a net income of $120,000 for 1998 which resulted in earnings of $5.20 per share of common stock. Additional information includes the following: Capital stock authorized issued (all in 1970) and outstanding: Common $ 10 per share par value issued at 10% premium. Market value per share of common at December 31, 1998:$78 Preferred dividend paid in 1998: $3,000 Time amounts of the following were the same at December 31, 1998 as at January 1, 1998; inventory accounts receivable 5% bonds payable due 2010, and total stockholder’s equity. All purchases and sales were on account. Prepare in good form the condensed balance sheet an income statement for the year ending December 31, 1998, presenting the amounts you would expect to appear on Argos financial statement (ignoring income taxes) Major captions appearing on Argo’s balance sheet are current assets, fixed assets intangible assets current liabilities long term liabilities and share holder’s equity. In addition to the accounts divulged in the problem you should include accounts for prepaid expenses, Accrued expenses and administrative exposes. Supporting computations should be in good form. Compute the following for 1998 ( show your computations)

Practical Exercise (Cont’d) Rate of return on stockholder’s equity. Price/earnings ratio for common stock Dividends paid per share of common stock Dividends paid per share of preferred stock Yield on common stock

Practical Exercise The following data are for the A, B and C Companies Company Variables A B C Current assets $150,000 $170, 000 $180,000 Current liabilities $ 60,000 $ 50,000 $ 30,000 Total assets $300,000 $280,000 $250,000 Retained earnings $80,000 $90,000 50,000 Earnings before interest and taxes $70,000 $60,000 $50,000 Market price per share $ 20.00 $18.75 $16.50 Number of shares outstanding 9000 9000 9000 Book value of total debt $30,000 $50,000 $80,000 Sales $430,000 $400,000 $200,000

Practical Exercise (Cont’d) Required: Compute the Z score for each company According to the Altman model which of share of these firms is most likely to experience financial failure?

B. All of these companies appear to have good financial condition. The company with the lowest score is Company C; therefore, Company C is most likely to experience financial failure.

Lecture Summary Expanded Analysis Practical Exercises