What is the degree of financial leverage? Explain what your number mean. As a manager, how would you use the numbers in financial planning?

This problem Set is based on materials covered in modules 1 and 2. It is designed for you to demonstrate your understanding of basic financial statements, financial statement analysis, break-even concepts, financial and operating leverages. Before you start this assignment, please review Modules 1 and 2 materials thoroughly.

Finance date of Adams Stores, Inc. for the year ending 2016 and 2017.

Items                                    2016                     2017

Sales                                $3,432,000            $5,834,400

Cash                                  9,000                     7,282

Other Expenses                340,000                 720,000

Retained Earnings            203,768                 97,632

Long-term debt                 323,432                 1,000,000

Cost of goods sold           2,864,000               4,980,000

Depreciation                     18,900                    116,960

Short-term investments    48,600                     20,000

Fixed Assets                     491,000                  1,202,950

Interest Expenses             62,500                     176,000

Shares outstanding

(par value = $46.00)         100,000                   100,000

Market Price of stock         8.50                          6

Accounts Receivable        351,200                    632,160

Accounts payable             145,600                    324,000

Inventory                           715,200                    1,287,360

Notes Payable                  200,000                     720,000

Accumulated Depreciation 146,200                    263,160

Accruals                           136,000                      284,960

Tax Rate                              40%                          40%

complete the following activities using the financial information above:

Part 1: Financial Statements

A. Prepare the income statement for 2016 and 2017. Include statement of retained earnings for 2017. The company paid $11,000 dividend in 2017.

B. Prepare the balance sheet for 2016 and 2017

C. Prepare Common-Size financial statements of income statement and balance sheet.

D. Prepare Statement of Cash Flows

Part 2: Financial Statement Analysis

A. Based on your financial statements (from Part 1), calculate the following ratios for the two years. Show all your calculations in good form. Show your formulas. If you use excel, each calculation need to show the excel formula

Current ratio

Quick ratio

Inventory turnover (times)

Average collection period (days)

Total asset turnover (times)

Debt ratio

Times interest earned

Gross profit margin

Net profit margin

Return on total assets

Return on equity

P/E ratio

Return on equity using DuPont Analysis

B. Comments on the ratios by comparing 2016 to 2017 ratios.

C. Assume Adams Stores, Inc. is a retail company similar to WalMart, Myers, or Target. Compare 2017 ratios to the industry average. Please note that Adams Stores, Inc. is not a real company. To find comparable industry ratios, you need to search for industry ratios for retail. See information on Moodle for instructions on how to find industry ratios. Based on the industry average, how is Adams Stores, Inc. doing financially?

Part 3: Break-even, Financial and Operating Leverages

Johnson Products, Inc.

Income Statement

For the Year Ended December 31, 2018

Sales (40,000 bags at $50 each) …………………………….             $2,000,000

Less: Variable costs (40,000 bags at $25) …………….                1,000,000

Fixed costs ……………………………………………………..                600,000      

Earnings before interest and taxes …………………………                400,000

Interest expense …………………………………………………..               120,000       

Earnings before taxes ………………………………………….                 280,000

Income tax expense (20%) ……………………………………                 56,000        

Net income ………………………………………………………..                $ 224,000

Based on the information above, calculate (show all calculations and responses in good form):

a. Break-even in units (in dollars and units). Explain what your numbers mean. As a manager, how would you use the numbers in financial planning?

b. What is the degree of financial leverage? Explain what your number mean. As a manager, how would you use the numbers in financial planning?

c. What is the degree of operating leverage? Explain what your number mean. As a manager, how would you use the numbers in financial planning?