2/1/2012

Chapter 8. Solution to 8-15

Joshua & White Technologies: December 31 Balance Sheets

(Thousands of Dollars)

Assets 2012 2011

Cash and cash equivalents $21,000 $20,000
Short-term investments 3,759 3,240
Accounts Receivable 52,500 48,000
Inventories 84,000 56,000
Total current assets $161,259 $127,240
Net fixed assets 218,400 200,000
Total assets $379,659 $327,240

Liabilities and equity

Accounts payable $33,600 $32,000
Accruals 12,600 12,000
Notes payable 19,929 6,480
Total current liabilities $66,129 $50,480
Long-term debt 67,662 58,320
Total liabilities $133,791 $108,800
Common stock 183,793 178,440
Retained Earnings 62,075 40,000
Total common equity $245,868 $218,440
Total liabilities and equity $379,659 $327,240

Joshua & White Technologies December 31 Income Statements

(Thousands of Dollars)
2012 2011
Sales $420,000 $400,000
Expenses excluding depr. and amort. 327,600 320,000
EBITDA $92,400 $80,000
Depreciation and Amortization 19,660 18,000
EBIT $72,740 $62,000
Interest Expense 5,740 4,460
EBT $67,000 $57,540
Taxes (40%) 26,800 23,016
Net Income $40,200 $34,524

Common dividends $18,125 $17,262

Addition to retained earnings $22,075 $17,262

Other Data 2012 2011

Year-end Stock Price $90.00 $96.00
# of shares (Thousands) 4,052 4,000
Lease payment (Thousands of Dollars) $20,000 $20,000
Sinking fund payment (Thousands of Dollars $0 $0
Ratio Analysis 2012 2011 Industry Avg
Liquidity Ratios
Current Ratio 2.44 2.52 2.58
Quick Ratio 1.17 1.41 1.53
Asset Management Ratios
Inventory Turnover 5.00 7.14 7.69
Days Sales Outstanding 45.63 43.80 47.45
Fixed Assets Turnover 1.92 2.00 2.04
Total Assets Turnover 1.11 1.22 1.23
Debt Management Ratios
Debt Ratio 35.2% 33.2% 32.1%
Times-interest-earned ratio 12.67 13.90 15.33
EBITDA coverage ratio 4.37 4.09 4.18
Profitability Ratios
Profit Margin 9.57% 8.63% 8.86%
Basic Earning Power 19.16% 18.95% 19.48%
Return on Assets 10.59% 10.55% 10.93%
Return on Equity 16.35% 15.80% 16.10%
Market Value Ratios
Earnings per share $9.92 $8.63 NA
Price-to-earnings ratio 9.07 11.12 10.65
Cash flow per share $14.77 $13.13 NA
Price-to-cash flow ratio 6.09 7.31 7.11
Book Value per share $60.68 $54.61 NA
Market-to-book ratio 1.48 1.76 1.72

a. Has Joshua & White's liquidity position improved or worsened? Explain.

The current ratio and quick ratio were a little below the industry average initially. However, the quick
ratio fell by a lot while the current ratio fell by just a little. This indicates a build-up in inventory relative
to other current assets.

b. Has Joshua & White's ability to manage its assets improved or worsened? Explain.
All asset management ration were close to the industry averages initially (although the DSO was a
little better than the industry average. However, all ratios worsened, with the inventory turnover
showing the biggest change, which again indicates a buildup in inventory.

c. How has Joshua & White's profitability changed during the last year?
All profit margins improved and are comparable to the industry averages.

d. Perform an extended Du Pont analysis for Joshua & White for 2008 and 2009.
ROE = PM x TA Turnover x Equity Multiplier
2012 16.35% 9.57% 1.11 1.54
2011 15.80% 8.63% 1.22 1.50

ROE improved because the profit margin improved and the equity multiplier increases, despite the
reduction in the total asset turnover ratio. Thus, J&W became more profitable, more leveraged, but
less efficient.

e. Perform a common size analysis. What has happened to the composition