Chapt

er3

Di
scussi
onQuest
ions
3-
1. Ifwedivi
deusersofrat
iosi
ntoshor
t-
ter
mlenders,
long-
ter
ml ender
s,
andstockhol
ders,whi
chrat
ioswoul
deachgroupbemostinterest
edin,
andforwhatreasons?

Shor
t-t
ermlender
s–li
quidi
tybecausethei
rconcer
niswi
tht
hef
ir
m's
abi
li
tytopayshor
t-t
erm obl
igat
ionsastheycomedue.

Long-termlenders–lev
eragebecausetheyareconcernedwit
hthe
rel
ationshi
pofdebtt ototal
assets.Theyal
sowillexaminepr
ofi
tabi
l
ity
toinsurethati
nterestpaymentscanbemade.

Stockhol
ders–pr
ofi
tabil
i
ty,wit
hsecondaryconsider
ati
ongiv
entodebt
uti
li
zati
on,l
i
quidi
ty,andotherrat
ios.Si
ncestockhol
der
saretheul
ti
mate
ownersofthefir
m, t
heyareprimaril
yconcer
nedwi t
hprof
it
sorthe
ret
urnontheiri
nvestment.

3-
2. Explai
nhowtheDuPontsyst
em ofanal
ysisbreaksdownr et
urnon
assets.Al
soexpl
ainhowi
tbr
eaksdownr etur
nonst ockhol
ders'
equi
ty.

TheDuPontsy
stem ofanal
ysi
sbreaksouttheret
urnonasset
s
bet
weenthepr
ofi
tmar gi
nandassettur
nover.

Pr
ofi
tMar
gin AssetTur
nov
er

Inthisfashi
on, wecanassessthejoi
nti
mpactofprofi
tabil
it
yandasset
turnoveront heover
all
retur
nonassets.Thi
sisaparti
cularl
yusef ul
analysisbecausewecandet ermi
nethesourceofst
rengthand
weaknessf oragivenfir
m.Forexample,acompanyinthecapi t
algoods
i
ndust rymayhav eahighprofi
tmargi
nandal owassetturnover,whil
ea
foodprocessingfi
rm maysufferf
rom l
owprofitmar
gins,butenjoya
rapidturnoverofasset
s.

Themodi
fi
edf
orm oft
heDuPontf
ormul
ashows:

S-
32
 Thisindicat
est hatret
urnonstockholders'equi
tymaybei nf
luencedby
retur
nonasset s, t
hedebt-t
o-asset
sratiooracombi nati
onofbot h.
Analystsorinvestorsshoul
dbepar ti
cularl
ysensit
ivetoahighretur
non
stockholder
s'equitythati
sinfl
uencedbyl argeamountsofdebt .

3-
3. I
ftheaccount
sreceiv
abletur
noverrat
ioisdecr
easi
ng,
whatwi
l
lbe
happeni
ngtotheaveragecol
lect
ionperi
od?

I
ftheaccount
sreceiv
abletur
nov
errati
oisdecreasi
ng,
accounts
r
eceiv
ablewil
lbeonthebooksforalongerperi
odofti
me.Thismeans
t
heav er
agecoll
ect
ionperi
odwil
lbeincr
easing.

3-
4. Whatadvant
agedoesthefi
xedchar
gecov
erager
ati
oof
ferov
ersi
mpl
y
usi
ngti
mesinter
estear
ned?

Thefix
edchar gecover
ager at
iomeasur esthefi
rm'sabi
li
tytomeetal
l
fi
xedobli
gati
onsr at
herthanint
erestpay mentsal
one,onthe
assumptionthatf
ail
uretomeetanyf inanci
alobli
gati
onwill
endanger
theposit
ionofthefi
rm.

Isther
eanyval
i
dit
yinrul
e-of
-t
humbrati
osforall
corpor
ati
ons,f
or
3-
5. example,
acurr
entrat
ioof2to1ordebttoassetsof50per
cent?

Nor ul
e-of-
thumbratioisvali
df orallcor
porati
ons.Thereissi
mplytoo
muchdi ff
erencebetweeni ndustri
esortimeper i
odsinwhichrat
iosare
computed.Nev er
theless,r
ules-of-
thumbr at
iosdooffersomeini
tial
i
nsightintotheoperati
onsoft hefirm,andwhenusedwi t
hcauti
onby
theanalystcanprovideinf
ormat i
on.

3-
6. Whyi
str
endanal
ysi
shel
pful
inanal
yzi
ngr
ati
os?

Trendanal y
sisall
owsust ocomparet
hepresentwit
hthepastand
evaluateourprogressthroughti
me.Aprofi
tmarginof5percentmaybe
parti
cularl
yimpressiv
eifithasbeenrunni
ngonly3percenti
nthelast
teny ear
s.Trendanalysismustalsobecomparedtoindust
rypatt
ernsof
change.

3-
7. Inf
lat
ioncanhav esi
gnif
icanteff
ectsoni ncomestatementsandbalance
sheets,
andtherefor
eont hecalcul
ationofrati
os.Discussthepossi
ble
i
mpactofi nf
lat
iononthef ol
lowingrati
os,andexplainthedir
ect
ionof
theimpactbasedony ourassumpt i
ons.

a.Ret
urnoninvest
ment.
b.I
nvent
orytur
nover.
c.Fi
xedassett
urnover
.

S-
33
 d.Debt
-t
o-asset
srat
io.

a.

I
nfl
ati
onmaycausenetincometobeover
statedandt
otal
asset
sto
beunder
stat
ed.Toohi
ghar at
iocoul
dbereport
ed.

b.

Inf
lat
ionmaycausesalestobeoverst
ated.I
fthefi
rm usesFIFO
accounti
ng,
invent
orywil
lal
soref
lect"
infl
ati
on-i
nfl
uenced"doll
ars
andtheneteff
ectwil
lbenil
.

I
fthefi
rm usesLI
FOaccount
ing,i
nventor
ywil
lbest
atedi
nol
d
dol
lar
sandt oohi
gharat
iocouldbereport
ed.

c.

Fi
xedasset
swillbeunder
stat
edr
elat
ivet
osal
esandt
oohi
ghar
ati
o
coul
dberepor
ted.

d.

Si
ncebot
harebasedonhist
ori
calcost
s,nomaj
ori
nfl
ati
onar
y
i
mpactwi
llt
akeplacei
ntherat
io.

3-
8. Whateff
ectwil
ldi
sinf
lat
ionf
oll
owi
ngahi
ghl
yinf
lat
ionar
yper
iodhav
eon
t
hereport
edincomeofthefi
rm?

Disi
nfl
ati
ont endst ol
owerr
eportedearningsasinf l
ati
on-
induced
i
ncomei ssqueezedoutoft hefi
rm'sincomest atement.Thisis
part
icul
arl
ytruef orfi
rmsi
nhighl
ycy cli
calindust
rieswherepricest
end
tori
seandf allquickl
y.

3-
9. Whymi
ghtdi
si
nfl
ati
onpr
ovet
obef
avor
abl
etof
inanci
alasset
s?

Becauseiti
spossibl
et hatpri
orinfl
ati
onarypressureswi l
lnolonger
seri
ousl
yimpairthepurchasingpoweroft hedollar
,lesseni
nginfl
ati
on
al
someanst hattherequiredret
urnthatinvest
or sdemandonf i
nanci
al
assetswi
llbegoingdown, andwi t
hthislowerdemandedr etur
n,fut
ure
earni
ngsorint
erestshouldrecei
v eahighercurrentevaluat
ion.

S-
34
S-
35
3-
10. Compari
sonsofincomecanbev er
ydif
fi
cul
tfortwocompani
esev
en
thought
heysel
lthesameproductsi
nequalvol
ume.Why?

Therear emanydi ff
erentmet hodsoff i
nancial r
epor t
ingacceptedbythe
accountingprofessionaspr omul gatedbytheFi nancialAccounting
StandardsBoard.Thought hei ndustryhascont inuall
ytri
edt oprovi
de
unif
orm guideli
nesandpr ocedur es,manyopt ionsr emainopent othe
reporti
ngfir
m.Ev eryitem ont hei ncomestatementandbal ancesheet
mustbegi vencar ef
ul at
tention.Twoappar ent lysimilarfi
rmsmayshow
dif
ferentval
uesf orsales,researchanddev elopment ,extr
aordinary
l
osses, andmanyot herit
ems.

S-
36
Pr
obl
ems
3-
1. DatabaseSystemsisconsider
ingexpansioni
ntoanewpr oductl
ine.
Assetstosupportexpansi
onwi l
lcost$500,
000.I
tisesti
matedthat
Databasecangenerate$1,
200,000inannualsal
es,wit
ha6per centprof
it
margin.

Whatwoul
dneti
ncomeandr
etur
nonasset
s(i
nvest
ment
)bef
ort
hey
ear
?

Sol
uti
on:
Dat
abaseSy
stems
Neti
ncome

Retur
non
assets
(i
nvestment
)

S-
37
3-
2. Poll
yEst
herDressShops, I
nc.,
canopenanewst or
ethatwil
ldoanannual
sal
esvolumeof$960,000.Itwil
ltur
nov eri
tsasset
s2.4ti
mesperyear.
Theprof
itmarginonsaleswill
be7per cent
.Whatwouldnetincomeand
ret
urnonassets(i
nvest
ment )befortheyear?

Sol
uti
on:
Pol
l
yEst
herDr
essShops,
Inc.

S-
38
3-
3. Bil
ly
'sChryst
alStor
es,Inc.,hasasset
sof$5,
000,
000andtur
nsoveri
ts
assets1.
2t i
mespery ear.Retur
nonassetsi
s8percent
.Whati
sitspr
ofi
t
margin(r
eturnonsales)?

Sol
uti
on:
Bi
l
lyCr
yst
alSt
ores,
Inc.

3-
4. NeonLightCompanyhas$1,
000,
000i
nasset
sand$600,
000ofdebt
.It
r
eport
snetincomeof$100,
000.

a.Whati
st heret
urnonassets?
b.Whati
st heret
urnonstockhol
der
s'equi
ty?
c.I
fthefi
rm hasanassetturnov
err
ati
onof3t i
mes,
whati
sthepr
ofi
t
margi
n(retur
nonsales)?

Sol
uti
on:
NeonLi
ghtCompany
a.

S-
39
b.

c.

S-
40
3-
5. NetworkCommuni cati
onshast ot
alasset
sof$1,400,
000andcurrent
assetsof$600,000.Itturnsoveri
tsfi
xedasset
s4t i
mesay ear.I
thas
$300,000ofdebt.Itsreturnonsal
eis5percent
.Whatisit
sr et
urnon
stockhol
ders'
equity?

Sol
uti
on:
Net
wor
kCommuni
cat
ions

tot
alassets $1,
400,
000
–curr
entassets 600,
000
Fi
xedassets $800,000

Sal
es=Fixedassets*Fixedassett
urnov
er=
$800,
000*4=$3, 200,
000

totalassets $1,
400,
000
–debt 300,
000
Stockholder
s'equi
ty$1,
100,
000

Neti
ncome=Sal
es*prof
itmar
gin=
$3,
200,
000*5%=$160,
000

S-
41
3-
6. a.AlphaIndust ri
eshadanassett urnoverof1.4ti
mespery ear
.Ifthe
retur
nont ot alassets(
investment)was8.4percent,whatwasAl pha'
s
profi
tmargi n?
b.Thef ol
l
owi ngy ear,onthesamel evelofasset
s,Alpha'sassetturnover
decli
nedto1. 2timesandi t
sprofi
tmar gi
nwas7per cent.

Howdidther
etur
nont
otal
asset
schangef
rom t
hatoft
hepr
evi
ous
year
?

Sol
uti
on:
Al
phaI
ndust
ri
es
a.

b.

I
tdi
dnotchangeatal
lbecausethei
ncreasei
nprofi
t
mar
ginmadeupforthedecreasei
ntheassett
urnover
.

S-
42
3-
7. TheKingCar
dCompanyhasar
etur
n-on-
asset
s(i
nvest
ment
)rat
ioof12
per
cent.

a.Ifthedebt
-to-
tot
al-
assetsr
ati
ois40per
cent
,whatist
heret
urnon
equi
ty?
b.Ifthefi
rm hadnodebt,whatwoul
dther
etur
n-on-
equi
tyr
ati
obe?

Sol
uti
on:
Ki
ngCar
dCompany

a.

b.Thesameasr
etur
nonasset
s(12%)
.

S-
43
3-
8. UsingtheDuPontmet
hod,evaluatetheef
fect
soft
hef
oll
owi
ng
rel
ati
onshi
psfort
heLol
larCorporati
on.

a.Loll
arCorpor at
ionhasapr ofi
tmar ginof5per centanditsretur
non
assets(i
nv estment)is13.5per cent.Whati sit
sassetturnoverrati
o?
b.Ift
heLol l
arCor porati
onhasadebt -to-t
otal-
asset
srati
oof60per cent,
whatwi l
lthef i
rm'sretur
nonequi t
ybe?
c.Whatwoul dhappent oreturnonequi t
yifthedebt-
to-t
otal-
assetsrati
o
decreasedt o40per cent
?

Sol
uti
on:
Lol
l
arCor
por
ati
on

b.

S-
44
3-
9. Jerr
yRi ceandGrai
nStoreshas$4,
000,000iny
earl
ysales.Thefi
rm ear
ns
3.5percentoneachdoll
arofsal
esandt ur
nsoveri
tsassets2.
5t i
mesper
year
.Ithas$100,000i
ncur r
entl
i
abil
i
tiesand$300,
000inlong-t
erm
l
iabi
li
ti
es.

a.Whati sitsr
eturnonstockholders'equit
y?
b.Iftheassetbaser emai
nsthesameascomput edinparta,
buttot
al
assetturnovergoesupt o3,whatwi ll
bet henewr et
urnon
stockholder
s'equity
?Assumet hattheprofi
tmar gi
nstaysthesameas
docur r
entandl ong-
ter
ml i
abili
ti
es.

Sol
uti
on:
Jer
ryRi
ceandGr
ainSt
ores

S-
45
b.TheVal
uef
orsal
eswi
l
lbe:

S-
46
3-
10. Assumet
hef
oll
owi
ngdat
aforCabl
eCor
por
ati
onandMul
ti
-Medi
a,I
nc.
:

Cable Mult
i-
Corporati
on Media,
Inc.
Netincome $30,000 $ 100,
000
Sales 300,
000 2,
000,
000
Totalassets 400,
000 900,
000
Totaldebt 150,
000 450,
000
Stockholder
s'equi
ty 250,
000 450,
000

a.Comput ereturnonst ockholders'equit

yforbot
hfi
rmsusingrato3a.
i
Whi chfi
rm hast hehi gherreturn?
b.Comput ethef ol
lowi ngadditionalrati
osforbot
hfi
rms.
Netincome/ Sales
Netincome/ Total assets
Sales/Totalassets
Debt/Totalassets
c.Discussthefactor sfrom par tbthataddedordetr
actedf
rom onefi
rm
havingahigherr eturnonst ockhol der
s'equi
tyt
hantheot
herfir
m as
comput edinpar ta.

Sol
uti
on:

Cabl
eCor
por
ati
onandMul
ti
-Medi
a,I
nc.

a. Cable Mul
ti
-
Cor
porati
on Medi
a,I
nc.

Mult
i-
MediaInc.hasamuchhi
gherret
urnon
st
ockhol
ders'equi
tyt
hanCabl
eCorpor
ati
on.

S-
47
b. Cable Mul
ti
-
Cor
porati
on Medi
a,I
nc.

Asprev i
ouslyindicated,Mult
i-Media,
Inc.hasa
substanti
all
yhigherr etur
nonst ockholder'
sequit
ythan
CableCor porat
ion( 22.2%versus12%).Ther easonis
cert
ainl
ynott obef oundonreturnont hesalesdoll
ar
whereCabl eCor porati
onhasahi gherreturnthanMulti
-
Media,Inc.(10%v s.5%) .

Howev er,Multi
-Media,I
nc.hasahi gherr eturnthan
CableCorporationontotalassets(11. 1%v s.7.5%).The
reasonisclearl
ytobef oundintotal assett ur
nover,
whichstronglyfavorsMulti
-Media,Inc.ov erCable
Corporati
on(2.2xv er
sus.75x).Thisf act
oral oneleads
tothehigherreturnontotalassets.

Multi
-Media,Inc.'
ssuperi
orretur
nonst ockholders'
equit
yisfurtherenhancedbyahi gherdebtr at
iothan
CableCorpor at
ion(50%vs.37.5%) .Thi
smeanst hata
smallerpercentageofMulti
-Media, I
nc.
'stotal
assets
arebeingfinancedbystockholders'equit
yandt husthe
potenti
all
yhigherretur
nonst ockholders'equi
ty.

S-
48
 Alt
houghnotrequest
edi
nthequest
ion,
onecoul
dshow
thefol
l
owing:

3-
11. Afi
rm hassal
esof$1.2mill
i
on,and10percentofthesal
esar
eforcash.
Theyear-
endaccount
srecei
vabl
ebalancei
s$180,000.

Whati
stheav
eragecol
l
ect
ionper
iod?(
Usea360-
dayy
ear
.)

Sol
uti
on:

S-
49
3-
12. TheChamberlai
nCor porat
ionhasaccount
srecei
vabl
eturnoverequalto
12ti
mes.Ifaccountsrecei
v abl
ear
eequalto$90,
000,whatisthevaluefor
aver
agedail
ycreditsal
es?

Sol
uti
on:
Chamber
lai
nCor
por
ati
on

Av
eragedai
l
ycr
edi
tsal
es

Todetermi
necredi
tsal
es,
multi
plyaccount
srecei
vabl
e
byaccount
srecei
vabl
etur
nov
er.

$90,
000*12=$1,
080,
000

Av
eragedai
l
ycr
edi
tsal
es

3-
13. KaminCor
por
ati
onhast
hef
oll
owi
ngf
inanci
aldat
afort
hey
ear
s2000and
2001:

2000 2001
Sal
es $4,
000,000 $5,
000,000
Costofgoodsol
d 3,
000,000 4,
500,000
I
nventor
y 400,000 500,000

a.Comput ei
nventoryturnoverbasedonr at
ionumber6, sal
es/i
nvent
ory,
foreachyear.
b.Comput ei
nventoryturnoverbasedonanal ter
nat
ivecalcul
ati
onthati
s
usedbymanyf inancialanal
ysts,costofgoodssol
d/ i
nventor
y,f
oreach
year.
c.Whatconclusi
onscany oudrawf r taandpar
om par tb?

S-
50
Sol
uti
on:
Kami
nCor
por
ati
on

a. 2000 2001

b.

c.Basedont hesalestoinventor
yrati
o,t
heturnover
hasremainedconst antat10x.However,
basedon
thecostofgoodssol dtoinvent
oryrat
io,i
thas
i
mpr ovedfrom 7.5xto9x.

Thelatterrat
iomaybepr ov
idi
ngaf alsepi
ctureof
i
mpr ovementi nthi
sexamplesimplybecausecostof
goodssol dhasgoneupasper centageofsales(f
rom
75percentt o90percent
).I
nventor
yisnotreall
yturni
ng
overanyf aster
.

Neverthel
ess,costofgoodssol dusedbymany
analy
sisinthenumer atoroftheinventor
yturnoverr
ati
o
becauseitisstat
edona" cost"basi
sasi si
nv ent
ory
.
Thisisanimpor t
anttheoreti
calconsider
ati
on.

Nev ert
heless,theauthorspref
ertousesal esinthe
numer atoroftheinventorytur
noverratiobecausethat
i
st hepr ocedureusedbyDun&Br adstr
eet,t
hemost
widelyquot edsourcesforrati
oanal ysi
s.Fur
thermore,
forprivatel
ytradedcompani estheremaybeonl y
i
nfor mationav ai
l
ableonsalesandnetcostofgoods

S-
51
 sol
d.
3-
14. Thebalancesheetfort
heBryanCorporat
ionisshownbelow.Sal
esf
ort
he
yearwere$3,
040,000,wi
th75percentofthesalesoncr
edit
.

Br
yanCorpor
ati
on
Bal
anceSheet200X

Asset
s Liabil
iti
esandSt ockhol
ders'Equit
y
Cash $50,
000 Account spay able $220,000
Account
sreceiv
abl
e 280,
000 Accruedt axes 80,000
I
nventor
y 240,
000 Bondspay able( l
ongt er
m) 118, 000
Pl
antandequipment 380,
000 Commonst ock 100,000
Pai
d-in-capital 150,000
Retai
nedear nings 282,000
Totalli
abili
ti
esand
Tot
alasset
s $950,
000 Stockhol der s'equit
y $950,000

Comput
ethef
oll
owi
ngr
ati
os:

a.Currentrati
o.
b.Quickr at
io.
c.Debt-to-t
otal
-asset
srat
io.
d.Assett ur
nover.
e.Averagecol l
ecti
onperi
od.

S-
52
Sol
uti
on:
Br
yanCor
por
ati
on

S-
53
 e. Averagecol
l
ect
ion
peri
od

3-
15. TheLancast
erCor
por
ati
on'
sincomest
atementi
sgi
venbel
ow.

a.Whati
stheti
mes-
int
erest-
earnedrati
o?
b.Whatwoul
dbethefi
xed-char
ge-coverager
ati
o?

Lancast
erCor
por
ati
on

Sales $200,
000
Costofgoodssol d 116,
000
Grossprof
it 84,
000
Fi
xedcharges(otherthani
nter
est
) 24,
000
I
ncomebef oreint
erestandt
axes 60,
000
I
nterest 12,
000
I
ncomebef oretaxes 48,
000
Taxes(35%) 16,
800
I
ncomeaf tert
axes $31,200

S-
54
Sol
uti
on:
Lancast
erCor
por
ati
on

S-
55
3-
16. Usi
ngt
hei
ncomest
atementf
orJasonKi
d'
sFur
nit
ure,
comput
ethe
fol
l
owi
ngr
ati
os:

a.Timesinterestearned.
b.Fixedchargecov erage.
Thet ot
alassetsfort hi
scompanyequal $160,
000.Setupt
heequat
ion
fortheDuPontsy stem ofrat
ioanal
ysi
s,andcomputetheanswert
o
partcbelowusi ngr ato2b.
i
c.Returnonasset s(investment)
.

JasonKid'
sFurni
tur
e
IncomeStat
ement

Sales $200,
000
Less:Costofgoodssol d 90,
000
Grosspr ofi
t $110,
000
Less:Selli
ngandadmi ni
str
ati
veexpense 40,
000
Less:Leaseexpense 10,
000
Operati
ngpr ofi
t* $60,000
Less:Inter
estexpense 5,
000
Earni
ngsbef oretaxes $55,000
Less:Taxes( 40%) 22,
000
Earni
ngsaf tertaxes $33,000

*
Equal
sincomebef
orei
nter
estandt
axes

Sol
uti
on:
JasonKi
d'
sFur
nit
ure

S-
56
c.Retur
non
assets
(I
nvestment
)

S-
57
3-
17. Afir
m hasnetincomebef
orei
nter
estandt
axesof$96,
000andi
nter
est
expenseof$24,000.

a.Whatisthet
imes-
int
erest
-ear
nedrat
io?
b.Ift
hefir
m'sl
easepaymentsare$40,
000,whati
sthef
ixedchar
ge
cov
erage?

Sol
uti
on:

3-
18. InJanuary1992, t
heSt atusQuoCompanywasf ormed.Totalassetswere
$500,000,ofwhi ch$300, 000consi stedofdepr eciabl
efi
xedassets.Status
Quousesst raight-l
inedepr eciat
ion,andin1992i test
imatedit
sf i
xed
assetstohav eusef ull
ivesof10y ears.After
taxincomehasbeen$26, 000
peryeareachoft helast10y ear
s.Ot herassetshav enotchangedsince
1992.

a.Comput eretur
nonasset saty ear-
endfor1992, 1994,1997,1999and
2001.(Use$26,000int henumer at
orforeachy ear.
)
b.Towhatdoy ouatt
ri
but ethephenomenonshowni nparta?
c.Nowassumei ncomei ncreasedby10per centeachy ear.Whateff
ect
wouldthishaveony ourabov eanswers?(Acommenti sallthati
s
necessary.
)

S-
58
Sol
uti
on:
St
atusQuoCompany

a.

Ther etur
nonasset sforStatusQuowilli
ncr
easeov er
ti
meast heasset sdepreci
at eandthedenominator
getssmal l
er .Fixedassetsatt hebegi
nningof1991
equal $300,000wi t
hat en-
y earl
if
ewhichmeanst he
depreciati
onexpensewi l
lbe$30,000peryear.Book
val
uesaty ear-endar easfol l
ows:

1992=$270,000;
1994=$210,000;
1997=$120,000;
1999=$60,000;
2001=-0-
Ret
urnonasset
s(inv
estment)

1992=$26,
000/
$470,
000=5.
53%
1994=$26,
000/
$410,
000=6.
34%
1997=$26,
000/
$320,
000=8.
13%
1999=$26,
000/
$260,
000=10.
00%
2001=$26,
000/
200,
000=13.
00%

b.Theincreasi
ngret
urnonassetsov erti
mei sdue
solel
ytothefactt
hatannualdepreciat
ioncharges
reducetheamountofinvest
ment.Thei ncr
easing
retur
nisinnowayduet ooperati
ons.

S-
59
 Fi
nanci
alanal
ystsshouldbeawar eoft heeffectof
over
all
assetageont heretur
n-on-
investmentr at
io
andbeabletosearchelsewhereforindicat
ionsof
oper
ati
ngeffi
ciencywhenROIi sveryhighorv ery
l
ow.

c.Asincomer ises,
ret
urnonassetswillbehi
gherthan
i
npar t(b)andwouldindi
cateanincr
easeinret
urn
par
tiall
yfrom moreprofi
tabl
eoperat
ions.

3-
19. Jodi
eFost
erCar
eHomes,
Inc.showst
hef
oll
owi
ngdat
a:

Year Net Tot

alAsset
s Stockholder
s' Tot
alDebt
income Equity
1998 $118,
000 $1,
900,
000 $ 700,000 $1,
200,
000
1999 131,
000 1,
950,
000 950,000 1,
000,
000
2000 148,
000 2,
010,
000 1,
100,000 910,
000
2001 175,
700 2,
050,
000 1,
420,000 630,
000

a.Computetherati
oofnetincomet
ototalassetsforeachyearand
commentont hetrend.
b.Computetherati
oofnetincomet
ostockholders'equi
tyandcomment
onthet
rend.Explainwhyther
emaybeadi f
ferenceinthetr
ends
bet
weenpartsaandb.

Sol
uti
on:
Jodi
eFost
erCar
eHomes,
Inc.

a.

1998 6.
21%
1999 6.
72
2000 7.
36
2001 8.
57

S-
60
 Comment:Therei
sastrongupwardmov ementi
n
ret
urnonasset
sovert
hefouryearper
iod.

b.

1998 16.
86%
1999 13.
79
2000 13.
45
2001 12.
37

Comment :Ther eturnonstockholder

s'equit
yrat
ioi
s
goingdowneachy ear.Thedif
fer
enceintrends
betweenaandbi sduet othelar
gerporti
onofasset
s
thatar
efinancedbyst ockhol
ders'equi
tyasopposed
todebt.

Opti
onal
:Thiscanbeconfi
rmedbycomput
ingt
otal
debtt
ototal
asset
sforeachyear
.

1998 63.
2%
1999 51.
3
2000 45.
3
2001 30.
7

S-
61
3-
20. Quant
um Movi
ngCompanyhast
hef
oll
owi
ngdat
a.I
ndust
ryi
nfor
mat
ion
al
soisshown.

CompanyDat
a I
ndust
ryDataonNet
Year NetIncome TotalAsset
s I
ncome/Tot
alAsset
s
1999 $350,000 $2,800,
00 11.5%
0
2000 375,000 3,
200,000 8.
4%
2001 375,000 3,
750,000 5.
5%

I
ndustr
yDat aon
Year Debt TotalAsset
s Debt
/TotalAsset
s
1999 $1,
624,
000 $2,800,
00 54.
1%
0
2000 1,
730,
000 3,
200,000 42.
0%
2001 1,
900,
000 3,
750,000 33.
4%

Asanindust
ryanal
ystcompar
ingt
hefi
rmtothei
ndust
ry,
arey
oumor
e
l
ikel
ytoprai
seorcr
iti
ci
zethef
irmi
nint
ersof
:

a.Neti
ncome/totalasset
s?
b.Debt
/tot
alassets?

Sol
uti
on:
Quant
um Mov
ingCompany

a.Neti
ncome/
tot
alasset
s

Year Quant
um Rat
io I
ndust
ryRat
io
1999 12.
5% 11.
5%
2000 11.
7% 8.
4%
2001 10.
0% 5.
5%

Alt
hought hecompanyhasshownadecli
ningr
eturnon
assetssince1999,i
thasper
for
medmuchbet t
erthan
theindustr
y.Prai
semaybemor eappr
opr
iatet
han
cri
ti
cism.

S-
62
 b.Debt
/tot
alasset
s

Year Quant
um Rat
io I
ndust
ryRat
io
1999 58.
0% 54.
1%
2000 54.
1% 42.
0%
2001 50.
7% 33.
4%

Whil
ethecompany'sdebtrati
oisimprov
ing,itisnot
i
mprovingnear
lyasrapi
dlyastheindust
ryratio.
Cr
it
ici
sm maybemor eappr opr
iat
ethanpraise.

3-
21. TheGl
obal
Product
sCor
por
ati
onhast
hreesubsi
diar
ies.

Medical Heavy El
ect
roni
cs
Suppli
es Machi
ner
y
Sal
es $20,000,
000 $5,
000,
000 $4,
000,
000
Netincome(
aft
er 1,200,
000 190,
000 320,
000
tax
es)
Assets 8,
000,
000 8,
000,
000 3,
000,
000

a.Whi chdi
visi
onhast helowestreturnonsales?
b.Whi chdi
visi
onhast hehighestreturnonasset s?
c.Comput ethereturnonassetsfort heenti
recor porati
on.
d.Ifthe$8,
000,000investmentintheheav ymachi nerydi
vi
sionissoldoff
andredepl
oyedinthemedi calsuppli
essubsidiaryatt hesamer ateof
ret
urnonassetscurrentl
yachievedint hemedical suppli
esdivi
sion,what
wil
lbethenewr et
urnonasset sfortheentir
ecor por at
ion?

Sol
uti
on:
Gl
obal
Product
sCor
por
ati
on

a. Medical Heav y
Suppli
es Machi
ner
y El
ect
roni
cs
Net 6.
0% 3.
8% 8.
0%
i
ncome/
sal
es

S-
63
Theheav
ymachi
ner
ydi
vi
sionhast
hel
owestr
etur
non
sal
es.

S-
64
b. Medical Heav y
Suppli
es Machi
ner
y El
ect
roni
cs
Neti
ncome/ 15.
0% 2.
375% 10.
67%
t
otal
asset
s

Themedical
suppl
i
esdi
vi
si
onhast
hehi
ghestr
etur
non
asset
s.

d.Ret
urnonr
edepl
oyedasset
sinheav
ymachi
ner
y.
15%*$8,
000,
000=$1,200,
000

Ret
urnonasset
sfort
heent
ir
ecor
por
ati
on:

S-
65
3-
22. TheCantonCorpor
ati
onshowsthef
oll
owi
ngi
ncomest
atement
.Thef
ir
m
usesFI
FOinventor
yaccount
ing.

Cant
onCorporati
on
I
ncomeSt at
ementfor2000

Sal
es $100,
000 (10,
000uni
tsat
$10)
Costofgoodssol
d 50,
000 (10,
000uni
tsat$5)

Grosspr ofit 50,

000
Selli
ngandadmi ni
str
ati
veexpense 5,
000
Depreciation 10,
000
Oper ati
ngpr of
it 35,
000
Taxes( 30%) 10,
500
Aftertaxincome $24,
500

a.Assumei n2001t hesame10, 000-

unitvol
umei smaintai
ned, butt
hat
thesal espr i
ceincreasesby10per cent
.BecauseofFIFOi nventor
y
policy,oldinventorywill
st i
l
lbechar gedoffat$5perunit.Alsoassume
thatsel l
ingandadmi ni
strati
veexpensewi l
lbe5percentofsal esand
depr eciati
onwi l
lbeunchanged.Thet axratei
s30per cent.Comput e
aftertaxincomef or2001.

b.I
nparta,bywhatper
centdi
dafter
taxincomeincr
easeasaresultofa
10percenti
ncr
easei
nthesalespr
ice?Explai
nwhythi
simpacttook
pl
ace.

c.Nowassumet hatin2002t hevolumer emainsconstantat10,000

units,
butthesalespricedecreasesby15per centf
rom its2001l evel
.
Also,becauseofFIFOi nv
entorypoli
cy,costofgoodssol drefl
ectsthat
i
nflati
onaryconditi
onsofthepr i
oryearandis$5.50perunit.Further,
assumet hatsel
lingandadmi nist
rat
iveexpensewillbe5per centof
salesanddepreciati
onwi l
lbeunchanged.Thet axrateis30per cent.
Comput etheaftert
axincome.

S-
66
Sol
uti
on:
Cant
onCor
por
ati
on

a. 2000
Sal
es $110,
00 (10,
000uni
tsat
0 $11)
Costofgoodssol d (10,
000uni
tsat$5)
50,
000
Grossprof i
t $60,00
0
Sell
ingandadm.
expense 5,
500 (5%ofsal
es)
Depreci
ation
10,
000
Operati
ngpr ofi
t $44,50
0
Taxes(30%) $13,35
0
Aftert
axi ncome $31,150

b. Gai
ninaf
ter
taxi
ncome

2001 $31,
150
2000 24,
500
I
ncrease $6,650

Aft
ertaxi
ncomei ncreasedmuchmor ethansales
becauseofFIFOinventorypol
icy(
inthi
scase,thecost
ofoldinv
entorydidnotgoupatall),
andbecauseof
hi
stori
calcostdepreci
ation(
whichdidnotchange).

S-
67
 c. 2002
Sal
es $93,
500 (10,000uni
tsat
$9.35*)
Costofgoodssol d (10,000uni
tsat$5.
50)
55,
000
Grossprof it $38,50
0
Sell
ingandadm.
expense 4,
675 (5%ofsales)
Depreci
ation
10,
000
Operati
ngpr of
it $23,82
5
Taxes(30%) $ 7,14
8
Aftert
axi ncome $16,67
7
*
$11*
0.85=$9. 35

Thel
owpr ofi
tsi
ndi
cat
etheef
fectofi
nfl
ati
onf
oll
owed
bydi
sinf
lat
ion.

3-
23. Const
ructt
hecurr
entasset
ssect
ionoft
hebal
ancesheetf
rom t
he
fol
l
owingdata.

Year
lysal
es(
credi
t) $420,
00
0
I
nventor
ytur
nover 7times
Cur
rentl
iabi
l
iti
es $80,00
0
Curr
entr
ati
o 2
Aver
agecol
lect
ionper
iod 36days

Cur
rentassets:
Cash $_
___
__
Account srecei
vabl
e _
___
__
Inventory _
___
__
Totalcurr
entasset
s _
___
__

S-
68
S-
69
 Sol
uti
on:

I
nvent
ory =$420,000/7
=$60, 000
Cur
rentasset
s =2*$80,000
=$160,000
Accountr
ec. =($420,000/
360)
*36
=$42,000
Cash =$160,000–$60,000–$42,
000
=$58,000

Cash $58,
000
Accountsrecei
vable 42,000
I
nventory 60,
000
Totalcur
rentasset
s$160,
000

3-
24. TheShannonCorporat
ionhascredi
tsal
esof$750,
000.Gi
vent
he
fol
l
owingrat
ios,
fil
li
nthebalancesheet
.

Totalassetsturnover 2.
5ti
mes
Casht ototalasset
s 2.
0percent
Accountsreceivabl
eturnov
er 10.
0ti
mes
I
nvent or
yturnover 15.
0ti
mes
Currentrat
io 2.
0ti
mes
Debttot ot
alassets 45.
0percent

ShannonCorporat
ion
BalanceSheet200X

Assets Li
abili
ti
esandSt ockhol
der
s'Equi
ty
Cash Currentdebt
Accountsrecei
vable Long-ter
m debt
I
nventory Totaldebt
Totalcurr
entasset
s Networ th
Fi
xedasset s Totaldebtand
Totalassets Stockholder
s'equit
y

S-
70
Sol
uti
on:
ShannonCor
por
ati
on

Sal
es/t
otal
asset
s =2.
5t i
mes
Tot
alasset
s =$750,
000/
2.5
Tot
alasset
s =$300,
000

Cash =2%oftot
al asset
s
Cash =2%*$300,000
Cash =$6,
000

Sal
es/accountsrecei
vabl
e =10t imes
Accountsrecei
vable =$750,
000/10
Accountsrecei
vable =$75,
000

Sal
es/
inv
ent
ory =15ti
mes
I
nvent
ory =$750,
000/
15
I
nvent
ory =$50,
000

Fi
xedasset s =Tot
alasset
s–cur
rent
assets
Currentasset =$6,
000+$75,
000+$50,
000
=$131,
000
Fi
xedasset
s =$300,
000–$131,
000
=$169,
000

Cur
rentasset
s/cur
rentdebt =2
Cur
rentdebt =Curr
entasset
s/2
Cur
rentdebt =$131,
000/2
Cur
rentdebt =$65,
500

Tot
aldebt
/tot
alasset
s =45%
Tot
aldebt =.
45*$300,000
Tot
aldebt =$135,
000

S-
71
 Long-
ter
m debt =Totaldebt–curr
entdebt
Long-
ter
m debt =$135,000–65,500
Long-
ter
m debt =$69,500

Networ
th =Total
asset
s–tot
aldebt
Networ
th =$300,
000–$135,
000
Networ
th =$165,
000

ShannonCorporat
ion
BalanceSheet200X

Cash $ 6,
000 Cur
rentdebt $65,50
0
A/
R $75,00 Long-ter
m debt $69,50
0 0
I
nvent
ory $50,00 Tot aldebt $135,
00
0 0
Tot
alcur
rent $131,
00
asset
s 0
Fi
xedassets $169,
00 Networ t
h $165,
00
0 0
Tot
alasset
s $300,
00 Totaldebtand $300,
00
0 stockhol
ders' 0
equity

3-
25. Wear
egi
vent
hef
oll
owi
ngi
nfor
mat
ionf
ort
hePet
ti
tCor
por
ati
on.

Sal
es( credit
) $3,000,
000
Cash 150,
000
I
nventory 850,
000
Curr
entliabil
iti
es 700,
000
Assetturnover 1.25times
Curr
entr ati
o 2.50times
Debt-
to-assetsr at
io 40%
Recei
vabl esturnover 6times

S-
72
Currentassetsarecomposedofcash,mar
ket
ablesecur
it
ies,
account
s
receiv
able,andinvent
ory
.Cal
cul
atethefol
l
owingbal
ancesheetit
ems.

a.Accountsreceiv
able.
b.Marketabl
esecur i
ti
es.
c.Fi
xedasset s.
d.Long-
term debt.

Sol
uti
on:
Pet
ti
tCor
por
ati
on

a.Account
srecei
vabl
e=Sales/Recei
vabl
etur
nov
er
=$3,
000,000/
6x
=$500,
000

b.Mar
ket
abl
esecur
it
ies =Currentassets–(cash+
accountsrec.+i
nventor
y)

Cur
rentAsset
s =Curr
entrati
o*Cur
rent
l
i
abil
it
ies
=2.
5*$700, 000
=$1,
750,000

Mar
ket
abl
esecur
it
ies=$1,750,000–($150,000+
$500,000+$850,000)
=$1,
750,000–$1,500,000
=$250,000

c.Fi
xedasset
s =Tot
alasset
s–Cur
rentasset
s

Tot
alasset
s =Sal
es/Assettur
nov
er
=$3,
000,000/
1.2x
=$2,
500,000

Fi
xedasset
s =$2,
5000,
000–$1,
750,
000
=$750,
000

S-
73
 d.Long-
ter
m debt =Tot
aldebt–cur
rentl
i
abi
l
iti
es

Tot
aldebt =Debtt
oassets*tot
alasset
s
=40%*$2,500,
000
=$1,
000,
000

Long-
ter
m debt =$1,
000,
000–$700,
000
=$300,
000

3-
26. Thefol
lowingi
nfor
mationi
sfrom Har
rel
sonInc.
'
sfi
nanci
alst
atement
s.
Sal
es(allcr
edi
t)were$20mil
l
ionfor2000.

Sal
est ototalassets 2ti
mes
Totaldebtt oassets 30%
Currentratio 3.
0times
I
nvent oryturnover 5.
0times
Averagecol lecti
onperi
od 18days
Fi
xedassett urnover 5.
0times

Fi
l
lint
hebal
ancesheet
:

Cash Currentdebt
Accountsrecei
vable Long-ter
m debt
I
nventory Totaldebt
Totalcurr
entasset
s Equity
Fi
xedasset s Totaldebtandequi
ty
Totalassets

Sol
uti
on:
Har
rel
sonI
nc.

Sal
es/t
otal
asset
s =2
Tot
alasset
s =$20mi
l
li
on/
2
Tot
alasset
s =$10mi
l
li
on

Tot
aldebt
/tot
alasset
s=30%
Tot
aldebt =$10mi
ll
i
on*.
3

S-
74
Tot
aldebt =$3mi
l
li
on

Sal
es/
inv
ent
ory =5.
0x
I
nvent
ory =$20mil
li
on/
5x
I
nvent
ory =$4mil
l
ion

Av
eragedai
l
ysal
es =$20mill
i
on/360days
=$55,
555.55perday

Account
srecei
vabl
e=18days*$55,
555.
56
=$1mi
l
li
on(or)

Account
srecei
vabl
e=

Fi
xedasset
s =$20mil
li
on/
5x
=$4mil
l
ion

Cur
rentasset
s =Tot
alasset
s–Fi
xedasset
s
=$10mil
li
on–$4mil
li
on
=$6mil
li
on

Cash =Currentasset
s–Accounts
receivable–i
nventor
y
=$6mi l
l
ion–$1mi l
l
ion–$4
mil
lion
=$1mi l
l
ion

Cur
rentl
i
abi
l
iti
es =Cur
rentasset
s/3x
=$6mill
i
o/3
=$2mill
i
on

Long-
ter
m debt =Tot
aldebt–cur
rentdebt

S-
75
 =$3mi
l
li
on–$2mi
l
li
on
=$1mi
l
li
on

Equi
ty =Tot
alasset
s–t
otal
debt
=$10mil
li
on–$3mil
li
on
=$7mil
li
on

Cash $1.
0mi
l
li
on Currentdebt $2mil
l
ion
Account s Long-ter
m $1.
0
receivable $1.
0 debt
Inventory $4.
0 Totaldebt $3.
0
Total Equity $7.
0
current $6.
0
asset s
Fixed $4.
0
assets
Total $10.
0mi
l
li
on Total
debt $10.
0
assets andequi
ty mil
li
on
3-
27. Usingt
hefinanci
alst
atementsfort
heSni
derCor
por
ati
on,
cal
cul
atet
he13
basicr
ati
osfoundinthechapter
.

SniderCorpor
ation
BalanceSheet
December31, 2001

Asset
s
Currentassets:
Cash $ 50,
000
Mar ketabl
esecur i
ti
es 20,
000
Account srecei
vable(net
) 160,
000
Inventory 200,
000
Total cur
rentassets $430,
000
I
nv estments 60,
000
Plantandequi pment 600,
000
Less: Accumulateddepreci
ati
on (
190,
000)
Netpl antandequipment 410,
000
Total asset
s $900,
000

S-
76
 Li
abi
l
iti
esandSt
ockhol
der
s'Equi
ty
Currentli
abili
ties:
Account spay able $ 90,
000
Notespay able 70,
000
Accruedt axes 10,
000
Totalcurrentl i
abil
it
ies $170,
000
Long-terml i
abilit
ies:
Bondspay able 150,
000
Totalli
abili
ties $320,
000
Stockholders'equi t
y:
Preferr
edst ock, $50parv al
ue 100,
000
Commonst ock, $1parvalue 80,
000
Capitalpaidinexcessofpar 190,
000
Retainedear nings 210,
000
Totalstockhol ders'
equity $580,
000
Totalli
abili
ti
esandst ockholder
s'equi
ty $900,
000

SniderCorporat
ion
IncomeSt at
ement
FortheYearEndi ngDecember31,
2001
Sales(oncr edi
t) $1,
980,
00
0
Less:Costofgoodssol d 1,
280,
000
Grosspr ofi
t 700,
000
Less:Selli
ngandadmi ni
str
ativeexpenses 475,
000*
Operat
ingpr ofit(
EBIT) 225,
000
Less:Inter
estexpense 25,
000
Earni
ngsbef or
etaxes(EBT) 200,
000
Less:Taxes 80,
000
Earni
ngsaf tertaxes(EAT) $120,
000

*
Incl
udes$35,
000i
nleasepay
ment
s.

S-
77
Sol
uti
on:
Sni
derCor
por
ati
on

Profi
tabi
l
ityrat
ios
Profi
tmargin=$120,000/$1,
980,
000=6.06%
Retur
nonasset s(i
nvestment)=$120,
000/
$900,
000=
13.3%
Retur
nonequi ty=$120,000/
$580,
000=20.69%

Assetsutil
i
zat ionr ati
os
Receivabl
etur nov er=$1,980,000/ $160,
000=12. 38x
Averagecollect i
onper i
od=$160, 000/$5,500=29.09
days
I
nventoryturnov er=$1, 980,000/$200,000=9.9x
Fi
xedassett ur nov er=$1,980,000/$410,000=4.83x
Totalassetturnov er=$1, 980,000/$900,000=2.2x

Li
qui
dit
yrat
io

Cur
rentr
ati
o=$430,
000/$170,
000=2.53x
Qui
ckrat
io=$230,
000/
$170,000=1.
35x

Debtuti
li
zat i
onratios
Debttototalassets=$320,000/$900,000=35.56%
Ti
mesi nterestearned=$225,000/$25,000=9x
Fi
xedchar gecov erage=$260,000/$60,000=4.
33x

S-
78
3-
28. Gi
vent
hefinanci
alst
atement
sforJonesCor
por
ati
onandSmi
th
Cor
por
ati
onshownher e:

a.Towhichcompanywouldy ou,
ascredi
tmanagerforasuppl
i
er,
approv
etheextensi
onof(shor
t-t
erm)t
radecr
edit
?Why ?Computeal
l
rat
iosbef
oreansweri
ng.

b.I
nwhi
chonewoul
dyoubuyst
ock?Why
?

JonesCor
por
ati
on
Curr
entAsset
s Li
abi
li
ti
es
Cash $ 20,
000 Account
spayabl
e $100,
000
Account
srecei
vabl
e 80,
000 Bondspayabl
e(l
ong- 80,
000
ter
m)
I
nvent
ory 50,
000

Long-
Ter
m Assets St
ockhol
der
s'Equi
ty
Fi
xedasset
s $500,
000 Commonst ock $150,
00
0
Less: Accum.Dep. (
150,
000) Paid-
incapi
tal 70,
000
*
Netf ixedassets 350,
000 Ret ai
nedearni
ngs 100,
000
Total asset
s $500,
000 Totall
i
ab.andequi
ty $500,
00
0

Sal
es(
oncr
edi
t) $1,
250,
00
0
Costofgoodssol
d
750,
000
Grossprofi
t 500,
000
Sell
i
ngandadmi ni
str
ati
veexpense 257,
000
Less:Depreci
ati
onexpense 50,
000
Operati
ngpr of
it 193,
000
I
nterestexpense 8,
000
Earni
ngsbef or
etaxes 185,
000
Taxexpense 92,
500
Netincome 92,
500

*
Usenetf i
xedasset
sincomput
ingf
ixedasset
t
urnover
.
Incl
udes$7,000inl
easepay
ments.

S-
79
 Smi
thCor
por
ati
on
CurrentAsset
s Li
abi
li
ti
es
Cash $ 35,
000 Account
spayabl
e $75,
000
Market
abl
esecuri
ti
es 7,
500 Bondspayabl
e(l
ong- 210,
000
ter
m)
Account
srecei
vabl
e 70,
000
I
nventor
y 75,
000

Long-
Ter
m Assets St
ockhol
der
s'Equi
ty
Fi
xedasset
s $500,
000 Commonst ock $75,00
0
Less: Accum.Dep. (
250,
000) Paid-
incapi
tal 30,
000
*
Netf ixedassets 250,
000 Ret ai
nedearni
ngs 47,
500
Total asset
s $437,
500 Totall
i
ab.andequi
ty $437,
50
0

Sal
es(
oncr
edi
t) $1,
000,
00
0
Costofgoodssol
d
600,
000
Grossprofi
t 400,
000
Sell
i
ngandadmi ni
str
ati
veexpense 224,
000
Less:Depreci
ati
onexpense 50,
000
Operati
ngpr of
it 126,
000
I
nterestexpense 21,
000
Earni
ngsbef or
etaxes 105,
000
Taxexpense 52,
500
Netincome 52,
500

*
Usenetf i
xedasset
sincomput
ingf
ixedasset
t
urnover
.
Incl
udes$7,000inl
easepay
ments.

S-
80
Sol
uti
on:
JonesandSmi
thCompar
ison

Onewayofanalyzingthesit
uati
onforeachcompanyi s
tocompar et
herespecti
verat
iosforeachon,exami
ning
thoserat
ioswhi
chwoul dbemosti mpor t
anttoa
suppli
erorshor
t-
termlenderandast ockhol
der.

JonesCorp. Smi
thCorp.
Pr of i
tmar gin 7.
4% 5.
25%
Ret ur nonasset s 18.
5% 12.
00%
(inv estment s)
Ret ur nonequi ty 28.9% 34.4%
Recei vablet urnov er 15.63x 14.29x
Av er agecol lect i
onper i
od 23.
04day s 25.2day s
Inv ent orytur nover 25x 13.3x
Fixedassett urnov er 3.57x 4x
Tot al assett urnover 2.5x 2.
29x
Cur r entrat i
o 1.5x 2.5x
Qui ckr at
io 1.0x 1.5x
Debtt ot otal asset s 36% 65.1%
Timesi nterestear ned 24.13x 6x
Fixedchar gecov erage 13.33x 4.
75x
Fixedchar gecov erage (
200/15) (
133/ 28)
cal culat i
on

a.Sincesuppl iersandshor t-
terml endersar emost
concer nedwi thli
quidit
yratios,Smi t
hCor porati
on
woul dgett henodashav ingthebestr at
iosinthis
categor y.Onecoul dargue,howev er,
thatSmi t
hhad
benef i
tedf r
om hav i
ngi t
sdebtpr i
mar i
lylongterm
ratherthanshor tterm.Nev ertheless,i
tappearst o
hav ebetterliqui
dit
yr at
ios.

S-
81
b.Stockhol der saremostconcer nedwi thpr ofit
abili
ty.
Inthiscat egor y,Joneshasmuchbet terratiost han
Smi th.Smi t
hdoeshav eahigherr et urnonequi ty
thanJones, butthisisduetoi tsmuchl argeruseof
debt .I
tsr eturnonequi tyi
shi ghert hanJones'
becausei thast akenmor efinanci alrisk.Int ermsof
otherr atios, Joneshasi tsi
nt erestandf ixedchar ges
well cov eredandi ngeneralitslong- termr at i
osand
outlookar ebetterthanSmith's.Joneshasasset
uti
li
zat ionr ati
osequal toorbet terthanSmi thandi t
s
l
owerl i
qui dit
yrat i
oscouldreflectbet tershor t
-t
erm
assetmanagement ,
andthatpoi ntwascov eredin
parta.

Note:Remembert hatt
omakeact ualf
inanci
al
deci
sionsmor ethanoney ear
'scomparati
vedatais
usual
lyrequi
red.Industr
ycomparisonsshouldal
sobe
made.

S-
82
 Compr
ehensi
vePr
obl
ems
CP3-
1. BobAdki
nshasrecent
lybeenapproachedbyhi sfi
rstcousin,
EdLamar,
wit
haproposal
tobuya15per centi
nteresti
nLamarSwi mwear.Thef
ir
m
manuf
actur
esstyl
i
shbathingsuit
sandsunscr eenproducts.

Mr.Lamari squi
cktopointouttheincreaseinsalesthathast
akenpl ace
overthelastt
hreeyearsasindi
catedinthei ncomestatement
,Exhibit1.
Theannual gr
owthrateis25percent.Abal ancesheetforasi
milarti
me
peri
odisshowni nExhibi
t2,andselect
edi ndustr
yrati
osarepresentedin
Exhi
bit3.Notetheindust
rygrowthrateinsal esi
sonly10to12per cent
peryear.

Therewasast eadyr
ealgr
owthof3to4per
centi
ngr
ossdomest
ic
productdur
ingtheper
iodunderst
udy
.

Thest ockinthecor porati

onhasbecomeav ai l
abl eduet otheillheal
thofa
currentst ockholder,whoi si nneedofcash.Thei ssueher eisnott o
deter minetheexactpr i
cef orthest ock, butrat herwhet herLamar
Swi mwearr epresentsanat tractiveinvestmentsi tuati
on.AlthoughMr .
Adki nshasapr imaryinteresti nthepr ofit
abil
ityr ati
os,hewi l
l t
akeacl ose
l
ookatal ltheratios.Hehasnof astandf ir
mr ulesaboutr equiredret
urn
oni nvestment ,butratherwi shest oanal yzetheov eral
l condit
ionofthe
fi
rm.Thef i
rm doesnotcur rentlypayacashdi v i
dend,andr eturntothe
i
nv estormustcomef rom sel li
ngt hest ockint hef utur
e.Af t
erdoi nga
thoroughanal ysi
s( i
ncludi
ngr ati
osf oreachy earancompar i
sonst othe
i
ndust ry
),whatcomment sandr ecommendat ionsdoy ouoffert oMr.
Adki ns?

Exhi
bit1 LamarSwimwear
I
ncomeStatement

199X 199Y 199Z

Sales(alloncr
edit) $1,
200,
000 $1,
500,
000 $1,
875,
000
Costofgoodssol d 800,
000 1,040,
000 1,310,
000
Grosspr ofi
t $ 400,
000 $ 460,
000 $ 565,
000
Sell
ingandadmi nist
rati
ve 239,
900 274,
000 304,
700
expense*
Oper at
ingprof
it(
EBIT) $ 160,
100 $ 186,
000 $ 260,
300
Int
erestexpense 35,
000 45,
000 85,
000
Netincomebef oretaxes $ 125,
100 $ 141,
000 $ 175,
300
Taxes 36,
900 49,
200 55,
600
Netincome $ 88,200 $ 91,800 $ 119,
700
Shares 30,
000 30,
000 38,
000
Earningspershare $2.
94 $3.
06 $3.
15

S-
83
*
Incl
udes$15,
000i
nleasepay
ment
sforeach
y
ear.

S-
84
Exhi
bit2 LamarSwi
mwear
Bal
anceSheet

Asset s 199X 199Y 199Z

Cash $ 30,000 $ 40,000 $ 30,000
Marketablesecurit
ies 20,
000 25,
000 30,
000
Accountsreceivable 170,
000 259,
000 360,
000
I
nventory 230,
000 261,
000 290,
000
Totalcurr
entasset s $ 450,
000 $ 585,
000 $ 710,
000
Netplantandequi pment 650,
000 765,
000 1,390,
000
Totalassets $1,
100,
000 $1,
350,
000 $2,
100,
000

Liabilit
iesand
Stockhol ders'Equi
ty 199X 199Y 199Z
Account spay able $ 200,
000 $ 310,
000 $ 505,
000
Accruedexpenses 20,
400 30,
000 35,
000
Totalcurrentl i
abili
ti
es $ 220,
400 $ 340,
000 $ 540,
000
Long-terml i
abi l
it
ies 325,
000 363,
600 703,
900
Totalli
abili
ti
es $ 545,
400 $ 703,
600 $1,
243,
900
Commonst ock( $2par ) 60,
000 60,
000 76,
000
Capitalpaidinexcessofpar 190,
000 190,
000 264,
000
Retai
nedear nings 304,
600 396,
400 516,
100
Totalstockhol ders'equi
ty $ 554,
600 $ 646,
400 $ 856,
100
Totalli
abili
ti
esand
st
ockhol ders' equit
y $1,
100,
000 $1,
350,
000 $2,
100,
000

Exhi
bit3 Sel
ect
edI
ndust
ryRat
ios

199X 199Y 199Z

Growt hi nsal es -
--
-- 10.00% 12.00%
Profitmar gi
n 7.71% 7.82% 7.96%
Returnonasset s( invest
ment
) 7.94$ 8.68% 8.95%
Returnonequi ty 14.31% 15.26% 16.01%
Recei vablest urnov er 9.
02x 8.
86x 9.
31x
Averagecol lectionper i
od 39.9days 40.6days 38.7days
I
nv entor yturnov er 4.
24x 5.
10x 5.
11x
Fi
xedassett urnov er 1.
60x 1.
64x 1.
75x
Total assett urnov er 1.
05x 1.
10x 1.
12x
Currentr atio 1.
96x 2.
25x 2.
40x
Quickr atio 1.
37x 1.
41x 1.
38x
Debtt ot otal assets 43.47% 43.11% 44.10%
Ti
mesi nterestear ned 6.
50x 5.
99x 6.
61x
Fi
xedchar gecov erage 4.
70x 4.
69x 4.
73x
Growt hi near ningspershare -
--
-- 10.10% 13.30%

S-
85
CP3-1 LamarSwi
mwear
Sol
uti
on:
199X 199Y 199Z
Growt hi nsal es (Company ) 25% 25%
(
Indust
ry) 10% 12%
Prof i
tmar gin (
Company )7.35% 6.
12% 6.
38%
(
Indust
ry) 7.71% 7.
82% 7.
96%
Ret urnonasset s (
Company )8.02% 6.
80% 5.
70%
(
Indust
ry) 7.94% 8.
68% 8.
95%
Ret urnonequi ty (
Company )15.90% 14.20% 13.98%
(
Indust
ry) 14.31% 15.26% 16.01%
Recei vable (
Company )7.06x 5.
79x 5.
21x
turnov er (
Indust
ry) 9.02x 8.
86x 9.
31x
Av erage (
Company )51.0days 62.2days 69.1days
collectionper iod (
Indust
ry) 39.9days 40.6days 38.7days
Invent oryturnover(
Company )5.22x 5.
75x 6.
47x
(
Indust
ry) 4.24x 5.
10x 5.
11x
Fixedasset (
Company )1.85x 1.
96x 1.
35x
turnov er (
Indust
ry) 1.60x 1.
64x 1.
75x
Tot alasset (
Company )1.09x 1.
11x 0.
89x
turnov er (
Indust
ry) 1.05x 1.
10x 1.
12x
Cur rentrat i
o (
Company )2.04x 1.
72x 1.
31x
(
Indust
ry) 1.96x 2.
25x 2.
40x
Qui ckr at
io (
Company )1.00x .
95x 0.
78x
(
Indust
ry) 1.37x 1.
41x 1.
38x
Debtt ot otal (
Company )49.58% 52.12% 59.23%
asset s (
Indust
ry) 43.47% 43.11% 44.10%
Timesi nterest (
Company )4.57x 4.
13x 3.
06x
ear ned (
Indust
ry) 6.50x 5.
99x 6.
61x
Fixedchar ge (
Company )3.50x 3.
35x 2.
75x
cov erage (
Indust
ry) 4.70x 4.
69x 4.
73x
Growt hi nE. P.S. (
Company )--
-- 4.
1% 2.
9%
(
Indust
ry) --
-- 10.1% 13.3%

S-
86
 Di
scussi
onofRat
ios

Whil
eLamarSwi mwearisexpandingitssalesmuch
morerapi
dlythanot her
sintheindustr
y,thereare
somecleardefi
cienciesint
heirperf
ormance.These
canbeseenint ermsofat r
endanalysisovertimeas
well
asacompar ati
veanaly
siswithindustrydata.

Int ermsofpr ofitabili

ty,thepr ofitmar gini sdeclining
ov ert i
me.Thi si ssur prisi
ngi nlightoft he56. 25
per centincr easei nsal esov ertwoy ears(25per cent
pery ear).Thereobv iouslyar enoeconomi esofscal e
fort hisfirm.Hi ghercost sofgoodssol dandi nterest
expenseappeart obecausi ngthepr oblem.Ther eturn
onassetr ati
ost ar t
souti n199Xabov et hei ndustry
aver age( 8.02per centv ersus7. 94per cent)andends
upwel l
bel owit( 5.70per centv er sus8. 95per cent )in
199Z.Thedecl ineof2. 32per centf orreturnonasset s
i
sser ious, andcanbeat t
ributedt ot hepr eviously
ment ioneddecl iningpr ofitmar ginaswel lasa
slowi ngt otalassett urnov er(goi ngf rom 1. 09Xto
0.89X) .

Ret urnonequi tyishigherthant heindustryaverage

thef i
rsty ear,
andt henalsof al
lsfarbelowi t
.This
decl i
neispar ti
cularl
ysigni
ficantinlightofthe
progr essivel
ylargerdebtthatthef ir
mi susing.High
debtut il
izati
ont endstocont ri
butetohi ghretur
non
equi t
y ,
butnoti nthiscase.Ther eissimpl ytoomuch
deteriorationinretur
nonasset stranslati
ngintolow
returnonequi t
y.

Theprev
iouslymenti
onedslowerturnoverofasset
s
canbeanalyzedt
hroughthetur
nov errat
ios.A
probl
em canbefoundinaccountsreceivabl
ewhere

S-
87
turnoverhasgonef rom 7.06Xt o5.21X.Thi scanal so
best atedintermsofanav eragecollectionper i
odthat
hasi ncreasedfrom 51day sto69. 1day s.Whi l
e
i
nv entoryturnoverhasbeenandr emai nssuper i
orto
theindust r
y,thesamecannotbesai dforf ixedasset
turnover.Adecl i
nef r
om 1. 85Xt o1.35Xwascaused
byani ncreasei n113.8per centinfixedasset s
(representi
ng$740, 000).Wecansummar izet he
discussionoft heturnoverr ati
osbysay i
ngt hat
despi t
ea56. 25per centincreaseinsal es,asset sgrew
ev enmor erapidlycausingadecl i
neint otal asset
turnoverfrom 1.09Xt o0.89X.

Theli
quidi
tyrati
osalsoarenotencouraging.Boththe
cur
rentandquickrati
osarefal
li
ngagai nstastable
i
ndustrynorm ofapproxi
matel
ytwot ooneandonet o
onerespect
ively
.

Thedebtt otot alassetsrati

oispar t
icularl
ynot i
ceable
i
nr egardtoindust rycompar i
sons.LamarSwi mwear
hasgonef rom bei ngonly6.11per centov erthe
i
ndust r
yav eraget o15.13percentabov ethenor m
(59.23percentv ersus44.10per cent).Theirheavy
debtpositi
oni sclearlyoutoflinewitht heir
compet i
tors.Theirdownt rendintimesi nterestearned
andf i
xedchar gecov erageconf i
rmst heheav ydebt
burdenont hecompany .

Finally,
weseet hatthefir
m hasasl owergr owt hrat
e
i
near ni
ngspersharethant heindustry.Thisisa
funct i
onoflessrapi
dgr owthinearningsaswel lasan
i
ncr easeinsharesoutstanding(wit
ht hesal eof8,000
shar esin199Z).Onceagain, weseet hatther api
d
growt hinsalesisnotbeingtransl
ateddowni nto
signifi
cantearni
ngsgains.Thi si
struei nspiteofthe

S-
88
 f
actt
hatt
her
eisav
eryst
abl
eeconomi
cenv
ironment
.

I
nvest
mentComment
s:

Hewoul dpr obablyhav edif

ficultl
yjust
ifyi
ngsuchan
i
nvestmentbasedont heper formanceoft hef i
rm.
Therear enodi vi
dendpay out, soretur
nt otheinvestor
wouldhav et ocomei nt heform ofcapi t
al
appreciationifandwhenhewasabl etoresellt
he
shares.Thepr ospects,atthispoi nt
,wouldnotappear
tojusti
fyt hepur chase.Thisispar ti
cular
lytruewhen
oneconsi der sthatMr .Adkinswoul dbebuy i
nga
minorit
yi nterest(15%)andwoul dnothav econtrolof
thefir
m.

CP3-
2. Amgeni st heleadingcompanyi nthebi otechnologyindust r
y.Ithasthe
l
ar gestmar ketcapit
alizati
on,sal
es,andear ni
ngsofanyofi tsbi ot
ech
compet itors.Amgen' scur r
entearningsar edrivenbyi t
st wobl ockbuster
product s,EpogenandNeupogen.I nf act,
therear eonlytwo$1bi l
l
ion
drugsi nthebi otechindust r
yandbot hbel ongt oAmgen.Epogen, ananti
-anemi adr ug,andNeupogen, animmunesy stem sti
mul ator,accountfor
90%ofsal eswhi leat hirddrug,I
nfergen,hasbeencommer ci
alizedasa
possiblet r
eat mentforhepat it
isC.

Thei
ncomestatement
,bal
ancesheet
,andstat
ementofcashf
lowsf
or
AmgenareshowninExhi
bit1,
2,and3,r
espect
ivel
y.

S-
89
 Consol
i
datedStatementsofOper
ations
(
Inmill
i
ons,exceptpershar
edata)

Exhi
bit1 YearendedDecember31, 1998 1997 1996
Revenues:
Productsales $2,
514.
4 $2,
219.
8 $2,
088.
2
Corporatepartnerr
evenues 127.
9 125.
9 109.
9
Royalt
yi ncome 75.
9 55.
3 41.
7
Totalrevenues 2,
718.
2 2,
401.
0 2,
239.
8

Operati
ngexpenses:
Costofsal es 345.
2 300.
8 283.
2
Researchanddev el
opment 663.
3 630.
8 528.
3
Sell
i
ng, gener alandadmini
str
ati
ve 515.
4 483.
8 470.
6
Lossofaf fi
liates,net 28.
6 36.
1 52.
8
Legal(awar d)assessment (23.
0) 157.
0 -
--
Totaloperat i
ngexpenses 1,
529.
5 1,
608.
5 1,
334.
9

Oper
ati
ngi
ncome 1,
188.
7 792.
5 904.
9

Otherincome( expense)
:
I
nterestandot heri
ncome,net 45.
7 72.
6 63.
6
I
nterestexpense,net (
10.
0) (3.
7) (6.
2)
Totalotheri
ncome( expense) 35.
7 68.
9 57.
4

I
ncomebef
orei
ncomet
axes 1,
224.
4 861.
4 962.
3

Pr
ovi
sionf
ori
ncomet
axes 361.
2 217.
1 282.
5

Neti
ncome $863.
2 $644.
3 $679.
8

Earni
ngspershar
e:
Basic $ 1.
69 $ 1.
22 $ 1.
28
Dil
uted $ 1.
63 $ 1.
17 $ 1.
21

Sharesusedi
ncal
cul
ati
onofear
nings
pershare:
Basic 510.
1 528.
3 529.
7
Dil
uted 528.
7 549.
3 561.
4

S-
90
 Consoli
datedBalanceSheet
s
(
Inmill
ions,exceptpershar
edata)

Exhi
bit2 December31, 1998 1997
Asset
s
Currentasset s:
Cashandcashequi val
ents $ 201.
1 $ 239.
1
Mar ketablesecur i
ti
es 1,
074.
9 787.
4
Trader eceivables,netofall
owancef
ordoubt
ful 319.
9 269.
0
account sof$17. 1in1998and$14.2i
n1997
I
nv entories 110.
8 109.
2
Othercur rentassets 156.
6 138.
8
Total currentassets 1,
863.
3 1,
543.
5

Pr
oper t
y,pl
antandequipmentatcost
,net 1,
450.
2 1,
186.
2
I
nv est
mentsinaff
il
iat
edcompanies 120.
9 116.
9
Otherasset
s 237.
8 263.
6
$3,
672.
2 $3,
110.
2

Liabil
iti
esandSt ockhol
der
s'Equi
ty
Curr
entliabili
ti
es:
Accountspay able $ 121.
6 $ 103.
9
Commer ci
al paper 99.
7 --
--
Accruedl i
abili
ti
es 659.
7 608.
0
Curr
entpor ti
onofl ong-ter
m debt 6.
0 30.
0
Totalcurrentliabi
li
ti
es 887.
0 741.
9

Long-term debt 223.

0 229.
0
Cont i
ngenci es
Stockhol ders'equi t
y:
Prefer r
edst ock; $.
0001parv alue; 5shares
authorized; nonei ssuedorout standing -
--
- -
--
-
Commonst ockandaddi ti
onalpaid-incapit
al;
$.0001
parv alue;750shar esauthori
zed; 1,
671.
9 1,
218.
2
outstandi ng—509. 2
shar esi n1998and516. 6shar esi n1997
Retainedear nings 894.
3 943.
2
Accumul atedot hercompr ehensi v
el oss (4.
0) (22.
1)
Total stockhol ders'equi
ty 2,
562.
2 2,
139.
3
$3,
672.
2 $3,
110.
2

S-
91
 Consol
i
dat
edSt
atement
sofCashFl
ows
(I
nmill
i
ons)

Exhi
bit3 YearendedDecember31, 1998 1997 1996
Cashf l
owsf
rom oper
ati
ngact
ivi
ti
es:
Netincome $ 863.
2 $ 644.
3 $ 679.
8
Depr eciationandamor ti
zati
on 143.
8 117.1 100.
3
Othernon- cashexpenses 33.
1 -
--
- --
--
Gainonsal eofinv estments (17.
3) -
--
- --
--
Def er redincomet axes (5.
6) (31.
4) 25.
6
Lossofaf fi
li
ates,net 28.
6 36.1 52.
8
Cashpr ov i
dedby( usedin):
Trader eceivables,net (
50.9) (43.
6) (
26.1)
Inv ent ori
es (1.
6) (11.
8) (8.
6)
Ot hercur rentasset s (
21.2) 5.
0 (
11.8)
Account spay able 17.
7 28.
9 20.
6
Accr uedl iabil
it
ies 51.
7 158.
3 (
10.0)
Netcashpr ovidedbyoper at
ing
act ivi
ti
es 1,
041.
5 902.
9 822.
6
Cashf l
owsf rom investi
ngact iv
iti
es:
Pur chasesofpr oper t
y,plantand
equi pment (
407.
8) (
387.
8) (
266.
9)
Proceedsf r
om mat ur
iti
esof
mar ket abl e 20.
1 244.
3 168.
3
secur iti
es
Proceedsf r
om sal esofmar ketable
secur iti
es 466.
2 647.
1 762.
4
Pur chasesofmar ketablesecurit
ies (
766.
3) (
767.
5) (
854.
8)
Increasei ni nvestment sinaffi
li
ated
compani es (6.
5) (
3.3) (
14.
6)
Decr ease( increase)inot herassets 20.
6 (
35.0) (
104.
6)
Netcashusedi ninvestingactiv
iti
es (
673.7) (
302.2) (
310.
2)

Cashf lowsfrom f i
nancingact i
viti
es:
I
ncr ease(decrease)i ncommer cial $ 99.
7 $ -
--
- $(
69.
7)
paper
Repay mentofl ong-term debt (
30.
0) (
118.
2) -
--
-
Proceedsf r
om i ssuanceofl ong-term -
-- 200.
0 -
--
-
debt
Netpr oceedsfrom issuanceof
common
stockupont heexer ci
seofst ock
opti
ons 345.
5 134.
3 112.
6
andi nconnect i
onwi t
hanempl oyee

S-
92
 stockpur chaseplan
Taxbenef itsrel
atedtostockopti
ons 108.
2 54.
7 48.
6
Repur chasesofcommonst ock (
912.
1) (
737.9) (
450.0)
Other (
17.
1) (
63.8) (
51.3)
Netcashusedi nfinanci
ngacti
vi
ties (
405.
8) (
530.9) (
409.8)
(Decrease)increaseincashandcash
equivalents (
38.
0) 69.
8 102.
6
Cashandcashequi val
entsat
beginningof 239.
1 169.
3 66.
7
period
Cashandcashequi val
entsatendof $ 201. $239.
1 $169.
3
peri
od 1

S-
93
CPQuest
ions
1.Referr
ingt
oExhibi
t1,comput
ethechange(negat
iveorposi
ti
ve)i
n
di
lutedear
ningspershar
ebet
ween1996-1997andbetween1997-
1998.

2.ExamineExhibi
t1closelyandseeifyoucancomeupwi thareasonfor
therel
ati
vel
ypoorearningspersharefi
gurefor1997.Youdonot
actual
l
yhavet ocomputerati
osatthispoint
,butseeifyoucanfind
oneexpenseaccountthatimpair
searningsthemostin1997.

3.Basedonyouranswert
oquest
ion2,doy ouseet
hepr
obl
em y
ou
i
denti
fi
edasbeingcont
inui
ngi
nnature?

4.Otherfi
rmsintheindustr
y,suchasBi
ogenandEliLi
ll
y(whichar
ein
otheri
ndustr
iesaswell)showthefol
l
owingret
urnsonstockhol
der
s'
equit
yfor1997and1998:

1997 1998
Bi
ogen 15.
67% 19.
37%
El
iLi
ll
y 26.
27% 34.
07%

Computenetincometost
ockholders'
equi
tyf
orAmgenfor1997and
1998,
usingExhibi
t1andExhi
bit2,andcomparet
her
esult
stoit
stwo
competi
tor
s.

5.Breakdownretur
nonstockholder
s'equit
yfor1998forAmgenbyusing
formul b.and3.
as2. b.i
nthechapter.Youshouldref
ert
oExhi
bit1and
Exhibi
t2togetyourdatatouseintheformulas.

6.Descri
betherel
ati
veimpor t
anceoftheprof
itmargi
n,tot
alasset
tur
nover,
andthetotaldebttotot
alasset
srati
osinproduci
ngthe
ret
urnonstockhol
ders'equi
tyval
uey oucomputedi
nquestion5.

7.I
nthestatementofcashf l
ows( exhi
bit3)
,undert
he"Cashf
lowsfrom
f
inanci
ngacti
vit
ies"sect
ion,doestheincr
easeincommerci
alpaper
r
epresentasourceoruseoff unds?

8.Thepr
iceofAmgencommonst ockwas$20atthebegi
nni
ngof1997.
Whati
sthecurr
entstockpr
ice?(Thecompanyi
slist
edonthe
NASDAQ).Hasthecompanyperformedwel
lint
hestockmarket
?

S-
94
CPSol
uti
on:

1.Changei
ndi
l
utedear
ningspershar
e

1997 $1.
17 1998 $1.
63
1996 1.
21 1997 1.
17
$(.
04) $.46

2.Theexpenseit
em thatimpairsearningsthemostf or
1997isthe$157(mi l
l
ion)chargeforlegal (
award)
assessment
.Althoughnotspelledoutint hefi
nancial
stat
ements,t
hiswasar esultoflegalact
ionbetween
AmgenandJohnsonandJohnsonov erfundsthey
bothhavecl
aimedt heri
ghtsto.

3.Iti
snotlikel
ytobecont i
nuinginnatur
easanor mal
operati
ngexpensewoul dbe.Forexamplein1998,
Amgenact uall
ycameout$23( mil
li
on)aheadofthi
s
accountasindicat
edbyt henegati
veexpenseit
em
(whichistheequiv
alentofincome).

4.Amgen=neti
ncome/
stockhol
der
s'equi
ty(
all
in
mil
l
ions)

1997 $644.
3/$2,
139.
3=30.
12%

1998 $863.
2/$2,
562.
2=33.
69%

S-
95
Amgenwassuperi
ortoBiogeninbot
hyears,andbet
ter
thanEl
iLi
l
lyi
n1997,butsli
ght
lybel
owEliLil
l
yin1998.

1997 1998
Amgen 30.
12% 33.69%
Bi
ogen 15.
67% 19.37%
El
iLi
ll
y 26.
27% 34.07%

5.For
mul
a2.
b.(
inmi
l
li
ons)

For
mul
a3.
b.(
inmi
l
li
ons)

S-
96
Notetheanswerof33.57%for1998isv
erycloset
othe
answerof33.69%forAmgenin1998,whichwas
computedforquest
ion4.Thedif
fer
enceisdueto
roundi
ngprocedur
es.

6.Itwoul dappeart hatAmgen' shi ghretur

non
stockholders'equi t
y( 33.57%)i srel
atedtot hehigh
profitmargin( 31.76%)andnott othelowt otalasset
s
rati
oof. 740x.Thehi ghpr ofitmargincontribut
est oa
highr et
urnont otalassets( 23.50%).Thehi ghretur
n
ont otalassetsr ati
oisf urtherenhancedbyt hedebt
rati
oof30%t opr ovi
dear eturnonst ockholders'
equityof33. 57%.

7.Iti
sasourceoff
undsint
hatmor ef
inancingisbei
ng
broughti
ntot
hecompany.Commercialpaperisa
securi
tyt
hati
ssol
dtothepubli
c.

8.Theanswertothisquestionwi l
ldependont heti
me
per
iodunderstudy.I
nMar chof2000, t
hestockwas
sel
l
ingat$60,whichindicatesa200per cent
i
ncreaseoveratimeperiodslightl
yoverthreeyears.
Byanystandar
d, t
hatisanexcel l
entperfor
mance.

S-
97