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

2. Previous Lecture Summary
Expanded Analysis
Practical Exercises

3. Today’s Lecture Topics
Expanded Analysis
Practical Exercises

4. 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 %
Net profit rate on net sales %
Rate of selling expenses to net sales 20%
Accounts receivable turnover per year
Inventory turnover per year
Acid test ratio to 1
Current ratio to 1
Quick assets composition, 8% cash 32%
Marketable securities,60% accounts
Receivable
Assets turnover per year
Ratio of total assets to intangible assets to 1
Ratio of accumulated depreciation to cost
Of fixed assets to 3
Ratio of accumulated depreciation to
Cost of fixed assets
Ratio of account receivable to accounts
Payable to 1
Ratio of working capital to stockholders equity 1 to 1.6
Ratio of total debt to stockholders equity 1 to 2

5. 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)

6. 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

19. 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
Earnings before interest and taxes $70,000 $60,000 $50,000
Market price per share $ $ $16.50
Number of shares outstanding
Book value of total debt $30,000 $50,000 $80,000
Sales $430,000 $400,000 $200,000

20. 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?

22. 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.

23. Lecture Summary
Expanded Analysis
Practical Exercises