Financial Management 2

Problems/ Exercises/
Case study on financial risk analysis
Problem 5.8 (Understanding Financial Statements (6th Ed.) - Fraser and
Ormiston)
Dandy Corporation manufactures and markets electronics for the home and office. Distribution
is through 5,928 company-owned stores and 3,090 dealer/franchise locations in approximately
100 countries. Dandy has the largest number of retail electronics outlets in the world.
Products offered include telephone equipment; radios; scanners; citizens band radios; security
devices; electronic kits and games; clocks and parts; and audio, video, and computer parts.
Dandy plays a major role in the computer marketplace, and the firm has recently begun to
emphasize its telephone products. Their newest type of store is the Ding-a-ling Telephone
Center, which specializes in business telephone system sales, leasing, and installation. A
number of Ding-a-ling Telephone Centers are combined with or adjacent to the Computer
Centers. About 36% of the products in the Dandy catalog are manufactured, assembled, or
packaged in their plants.
In the 2007 fiscal year, Dandy made three substantial expenditures of cash. The acquisition of
Cosman Industries required cash of $91,500,000. (Cosman is a manufacturer/ wholesaler of
consumer electronic stands, racks, desks, and accessories.) Open market purchases of
2,785,000 shares for the treasury totaled $92,535,000. Also the company used $150 million of
cash to finance part of its $355 million purchase and retirement of 10 million shares of common
stock. The remainder was financed through long-term debt.
Required:
a) Calculate the 2007 ratios from operating activities for Dandy Corporation based on the
available data from the financial statements.
b) Compute the appropriate ratios to analyze the following:
Short-term liquidity
Capital structure and long-term solvency
Operating efficiency and profitability
(See last page for formulas to be used in computing the ratios)
c) Discuss possible reasons for the trend in return on equity.

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 Dandy Corporation
Distribution of Sales
Class of Product 2007 2006 2005 2004 2003
Radios, phonographs, TVs 8.6 % 8.6% 9.4% 11.6% 12.1%
CB radios, walkie-talkies,
scanners, PA systems 5.5 4.9 6.0 6.8 9.3
Audio equipment, tape
recorders 17.8 18.2 21.5 25.4 29.5
Electronic parts, batteries, test
equipment 13.7 13.2 13.9 14.5 15.8
Toys, antenna, security devices,
timers, calculators 11.9 12.5 12.0 14.1 12.6
Telephones and intercoms 8.9 8.0 6.5 5.8 5.6
Microcomputers, software, and
peripherals 33.6 34.6 30.7 21.8 15.1

Total 100.0 100.0 100.0 100.0 100.0

Ratio Analysis
Industry
Ratio 2007 2006 2005 2004 2003 Average*
Current 4.42 4.07 3.48 3.15 2.50
Quick 1.47 1.19 0.96 0.57 0.80
Cash flow- liquidity 1.45 1.09 1.35 0.70 N/A
Average collection period
(days) 16.00 15.00 9.00 7.00 11.00
Inventory turnover 1.19 1.23 1.37 1.37 2.30
Fixed asset turnover 9.76 9.03 8.88 8.38 17.50
Total asset turnover 1.59 1.66 1.81 1.95 2.80
Debt 0.29 0.334 0.39 0.60 0.62
Long-term debt to total
capitalization 0.14 0.18 0.22 0.48 0.25
Debt to equity 0.41 0.51 0.64 1.51 2.90
Times interest earned 22.30 19.20 14.85 8.69 9.93
Fixed charge coverage 4.91 4.60 4.25 3.37 8.69
Gross profit margin 0.59 0.59 0.58 0.57 0.31
Operating profit margin 0.22 0.21 0.20 0.17 0.08
Net profit margin 0.11 0.11 0.10 0.08 0.04
Cash flow margin 0.05 0.04 0.08 0.08 N/A
Return on investment 17.60 18.04 18.10 15.60 9.20
Return on equity 24.85 27.24 29.68 39.00 11.30
Cash flow from operations $136,061 85,877 134,127 108,330 N/A
* Retail specialty stores for 2007
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 Consolidated Income Statement
(In thousands except per share amounts)
Three Years ended June 30
2007 2006 2005
Net sales $ 2,784,479 $ 2,513,297 $ 2,061,212
Costs and expenses
Cost of products sold 1,184,531 1,008,187 826,842
Selling, general and administrative 899,885 823,274 690,646
Rent 114,942 106,970 89,732
Depreciation and amortization 46,079 38,679 29,437
Total
Earnings before interest and tax 539,042 536,187 424,555
Interest expense (27,905) (24,044) (22,114)
Interest income 23,542 15,139 20,946
Income from continuing operations
Before interest and tax 534,679 527,282 423,387
Provision for income taxes 242,808 248,761 199,302
Net income $ 281,871 $ 278,521 $ 224,085
Income per share $2.75 $ 2.67 $ 2.17

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 Dandy Corporation
Consolidated Balance Sheets
(In Thousands)

6/30/2007 6/30/2006
Assets
Cash and short-term investments $ 154.655 $ 279,743
Accounts receivable 122,910 107,530
Inventories 910,530 844,097
Other current assets 40,456 31,928
Total current assets 1,228,551 1,263,298
Property and equipment, net of
Accumulated depreciation 288,854 257,620
Other assets 135,039 60,990
Total Assets $ 1,652,444 $ 1,581,908

Liabilities and Stockholders’ Equity

Notes payable $ 51,036 $ 55,737
Accounts payable 88,961 64,640
Accrued expense 130,386 115,054
Income taxes payable 5,003 50,668
Total current liabilities 275,386 286,099
Long-term debt 347,548 138,420
Deferred income taxes 22,502 17,682
Other noncurrent liabilities 18,312 18,835
Total other liabilities 388,362 174,937
Total Liabilities 663,748 461,036
Stockholders’ Equity
Common stock, $1 par 95,645 105,645
Additional paid-in capital 75,413 68,111
Retained earnings 914,297 969,626
Foreign currency translation effects ( 21,672) (16,197)
Treasury stock at cost ( 74,987) ( 6,313)
Total stockholders’ equity 988,696 1,120,872
Total liabilities and equity $ 1,652,444 $ 1,581,908

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 FORMULAS FOR COMPUTATION OF RATIOS

1. Current ratio
Current assets / Current liabilities

2. Quick ratio/ Acid-test ratio

Quick assets
÷Current liabilities (CL)

3. Cash flow liquidity ratio

Cash Flow from Operations
Divided by Current Liabilities

4. Average collection period

Receivable turnover = Net Sales ÷Average Accounts Receivable
Average collection period = 365 days ÷ Receivable turnover

5. Inventory turnover
Cost of products sold ÷Average inventory

6. Fixed asset turnover

Net Sales ÷Net Property Plant & Equipment

7. Asset turnover
Net Sales ÷Average Total Assets

8. Debt ratio
Total Debt ÷Total Assets

9. Long-term debt to total capitalization ratio

Long-term debt ÷(Long-term debt + Stockholders’ Equity)

10. Debt to equity ratio

Total Liabilities ÷Stockholders’ Equity

11. Times interest earned

Earnings before interest and taxes ÷ interest expense

12. Fixed charge coverage

Earnings before interest and taxes ÷( Interest expense + other fixed charges)
Note: In this case, rent expense is a fixed charge.

13. Gross profit margin

Gross profit ÷Net sales

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 FORMULAS FOR COMPUTATION OF RATIOS
14. Operating profit margin
Operating profit (Earnings before interest and taxes) ÷Net Sales

15. Net profit margin

Net income/profit ÷Net Sales

16. Cash flow margin

Cash flow from operating activities ÷Net Sales

17. Return on Investment (Total Assets)

Net income ÷Net Sales

18. Return on equity

Net income ÷Stockholders’ equity

19. Cash flow from operations (should be obtained from Cash Flow Statement)
Earnings before interest and taxes
Add: Non-cash charges
Total
Add:
Decrease in Current Assets (Current Year less Prior Year)
Increase in Current Liabilities (CY less PY)
Less:
Increase in current assets (Current Year less Prior Year)
Decrease in current liabilities (CY less PY)
Less: Payment for income taxes
= Cash flow from operations

20. Payment for income taxes

Income Tax Payable, beginning of the year
Add: Provision for income tax for the year
Total
Less: Income Tax Payable, end of the year
= Payment for income taxes