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FINANCIAL HEALTH ASSESSMENT: BARRY COMPUTER COMPANY – PART 1

FINANCIAL HEALTH ASSESSMENT: BARRY COMPUTER COMPANY – PART 1

MODULE 2 ASSIGNMENT OVERVIEW

In this module, you will complete a two-part Assignment that is submitted over the course of 2 weeks. This week, you will complete and submit Part 1. You will complete and submit Part 2 in Week 5.

For this Assignment, you will act as a consultant hired by the operations director of the Barry Computer Company to do a financial analysis and comparison to the industry. You will conduct a financial ratio analysis to gain a good understanding of the company’s financial performance and will then write up an evaluation of the organization’s financial health, as well as your recommendations for how specific ratios can be improved within the next 3-5 years.

In your report, be sure to include relevant citations from the Learning Resources, the Walden Library, and/or other appropriate academic sources to support your work.

RESOURCES

To prepare for this Assignment:

  • Download the Module 2 Assignment Part 1 Template.
  • Using problem 4-23 on pages 143-144 of Fundamentals of Financial Management (Brigham & Houston, 2022), populate the Module 2 Assignment Part 1 file with the necessary information. This will assist you as you develop your report. All formulas are included in the Module 2 Assignment Part 1 file.
  • Download the Module 2 Assignment Part 2 Template. Note: Be sure to keep a copy of your completed Assignment this week, as you will be adding to the same file for your Week 5 Assignment.

PART 1: FINANCIAL INFORMATION (2-3 PAGES, PLUS EXCEL SPREADSHEET)

  1. Calculate the following ratios for the Barry Computer Company using the Excel spreadsheet provided.
RatioCalculation
CurrentCurrent Assets / Current Liabilities
Quick(Current Assets – Inventories) / Current Liabilities
Days Sales OutstandingReceivables / (Annual Sales / 365)
Inventory TurnoverSales / Inventories
Total Assets TurnoverSales / Total Assets
Profit MarginNet Income / Sales
ROANet Income / Total Assets
ROENet Income / Common Equity
ROICEBIT(1-T) / Total Invested Capital
TIEEBIT / Interest Charges
Debt/Total CapitalTotal Debt / (Total Debt + Equity)
M/BMarket Price / Book Value
P/EPrice per Share / Earnings per Share
EV/EBITDA(Market Value of Equity + Market Value of Total Debt + Market Value of Other Financial Claims – Cash and Equivalents) / EBITDA
  1. Analyze computations to determine which ratios are above and below their industry averages, and for each, provide a brief explanation as to why that might be the case.
  2. Evaluate the financial health of the organization, including in what areas the organization could improve.
  3. Refer to the Week 4 Assignment Rubric for specific grading elements and criteria. Your Instructor will use this grading rubric to assess your work.

Data for Barry Computer Co. and its industry averages follow. The firm’s debt is priced at par, so the market value of its debt equals its book value. Since dollars are in thousands, number of shares are shown in thousands too.

a. Calculate the indicated ratios for Barry.
b. Construct the DuPont equation for both Barry and the industry.
c. Outline Barry’s strengths and weaknesses as revealed by your analysis.
d. Suppose Barry had doubled its sales as well as its inventories, accounts receivable, and common equity during 2018. How would that information affect the validity of your ratio analysis? (Hint: Think about averages and the effects of rapid growth on ratios if averages are not used. No calculations are needed.)

Barry Computer Company Financial Statements (in Thousands of Dollars)

Balance Sheet as of December 31, 2018

AssetsAmountLiabilities and EquityAmount
Current AssetsCurrent Liabilities
Cash$77.5Accounts Payable$129
Accounts Receivable$336Other Current Liabilities$117
Inventories$241.5Notes Payable to Bank$84
Total Current Assets$655Total Current Liabilities$330
Net Fixed Assets$292.5Long-Term Debt$256.5
Total Assets$947.5Common Equity$361
Common stock (36,100 shares)
Total Liabilities & Equity$947.5Total Liabilities and Equity$947.5

Income Statement for Year Ended December 31, 2018

ItemAmount
Sales$1,607.5
Cost of Goods Sold$1,351
Materials$717
Labor$453
Heat, Light, and Power$68
Indirect Labor$113
Gross Profit$256.5
Depreciation$41.5
Selling Expenses$115
General and Administrative Expenses$30
Earnings Before Interest and Taxes (EBIT)$70

Solution

RatioCalculationBarry’s Value CalculationBarry’s ValueIndustry AverageAnalysis
Liquidity Ratios
Current RatioCurrent Assets / Current Liabilities$655,000 / $330,0001.98Correct2.03Barry’s current ratio is slightly below the industry average, indicating a slightly weaker liquidity position.
Quick Ratio or Acid-Test Ratio(Current Assets – Inventory) / Current Liabilities($655,000 – $241,500) / $330,0001.25Correct1.33Barry’s quick ratio is also slightly below the industry average, suggesting a slightly lower ability to cover short-term obligations without relying on inventory.

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