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All Cases For Foundations Of Financial Management 12th Edition Stanley B Block, Geoffrey A Hirt
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All Cases forFoundations Of Financial Management 12th Edition Stanley B Block, Geoffrey A
Hirt
Chapter 1-19
CASE
1
Harrod’s Sporting Goods
Jim Harrod knew that service, above all, was one of thetop softball players in
was important tohis customers. Jim and thecity of Medicine Hat, and her
Becky Harrod had opened their first store extensive contacts throughout theprovince
in Medicine Hat, Alberta eighteen years help tobring in new business. While
ago. Harrod‘s carried a full line of sporting Alberta is primarily known as a hockey
goods including everything from baseball province, Medicine Hat hosts a Western
bats and uniforms tofishing gear and Canada baseball world series each year in
hunting equipment. By theyear 20XX, June and this generates a lot of interest in
there were twelve Harrod stores producing baseball (and softball as well).
$5 million in total sales and generating a Jim, who had been an offensive tackle
profit of over $200,000 per year. at theUniversity of Alberta took great
On thepositive side, there was an pride in his stores as well as his prior
increasing demand forsporting goods as university affiliation. He and Becky (also
leisure time activities continued togrow. a University of Alberta graduate)
Also, Western Canada, where all twelve contributed $2,000 annually tothe
stores were located, was experiencing University of Alberta athletic program.
moderate growth. Finally, there had been The growth in thestores was thegood
a sharp upturn in thelast decade news forJim and Becky. theless than good
forwomen‘s sporting goods equipment. news was theintense competition that they
This was particularly true of softball faced. Not only were they forced
uniforms forhigh school, college, and city tocompete with nationally established
league women‘s teams. Jim‘s wife Becky sporting goods stores such as Sport Chek
,and National Sports, but Walmart also and their employees offered great
represented intense competition personal service, and they hoped this
forthesporting goods dollar. thenational would allow them tocontinue with their
stores were extremely competitive in specialty niche.
terms of pricing. However, Jim, Becky
In January of 20XY, Becky, who served as thecompany‘s chief financial
officer, walked into Jim‘s office and said, ―I‘ve had it with theNational Bank
here in Medicine Hat. It is willing torenew our loan and line of credit, but
thebank wants tocharge us 2½ percent over prime. theprime rate is therate at
which banks make loans totheir most creditworthy customers. It was 4.75 percent
at thetime Becky had visited thebank, so that thetotal rate on theloan would be
7.25 percent. It was not so much thetotal rate that Becky objected to, as thefact
that Harrod‘s was being asked topay 2½ percent over prime. She felt that
Harrod‘s was a strong enough company that 1 percent over prime should be all
that thebank required. Her banker told her he would review thefirm‘s financial
statements with her next week and reconsider thepremium Harrod‘s was being
asked topay over prime.
While Becky knew thebank ―crunched all thenumbers,‖ she decided todo
some additional financial analysis on her own. She had a bachelor‘s degree in
finance with a 3.3 GPA. She began by examining Figures 1, 2, and 3.
Required 1. Compute theprofitability ratios (3‒1, 3‒2, 3‒3), including thea and b
components (DuPont Methods) of theratios as shown in thetextbook.
theprofitability ratios should be shown forall three years.
2. Write a brief one-paragraph description of any trends that appear
tohave taken place over thethree-year time period.
3. In examining theincome statement in Figure 1, note that there was an
extraordinary loss of $170,000 in 20XX. This might have represented
uninsured losses from a fire, a lawsuit settlement, etc. It probably does
not represent a recurring event or affect theearnings capability of
thefirm. forthat reason, theastute financial analyst might add back in
theextraordinary loss togauge thetrue operating earnings of thefirm.
Since it was a tax-deductible item, we must first multiply by (1-tax rate)
before adding it back in.* thetax rate was 35 percent fortheyear.
$170,000 Extraordinary loss
.65 (1-tax rate)
$110,500 Aftertax addition toprofits from eliminating
This adjustment was made because the$170,000 deduction saved 35 percent of this amount in taxes. If we
eliminate the$170,000, thetax benefit would also be eliminated. Thus, thefirm would only benefit by 65
percent of $170,000, based on a 35 percent tax rate. theaftertax benefit of thetax adjustment
fortheextraordinary loss is $110,500.
,Genuine Motor Products
theextraordinary loss from net income
The more representative net income number for20XX would now
be:
Initially reported (Figure 1) $200,318
Adjustment forextraordinary loss being eliminated +110,500
Adjusted net income $310,818
Based on theadjusted net income figure ($310,818), recompute
theprofitability ratios for20XX (include parts a and b forratios 2 and 3).
Required
4. Now with theadjusted net income numbers as part of theratios
for20XX, write a brief one-paragraph description of trends that
appear tohave taken place over thethree-year time period (refer back
tothe data in Question 1 for20XV and 20XW).
5. Once again, using therevised profitability ratios for20XX that you
developed in Question 3, write a complete one paragraph analysis of
thecompany‘s profitability ratios compared tothe industry ratios
(figure 3). Make sure toinclude asset turnover and debt tototal assets
as supplemental material in your analysis.
6. Harrod‘s has superior sales tototal assets ratio compared tothe
industry. for20XX, compute ratios 3‒4a, 3‒5a and 3‒7a as described
in thetext and compare them toindustry data tosee why this is so.
Write a brief one-paragraph description of theresults. Note: forratio
4, only half thesales are on credit terms.
7. Conclusion: Based on your analysis in answering Questions 4 and 5,
do you think that Becky Harrod has a legitimate complaint about
being charged 2½ percent over prime instead of one percent over
prime? There is no absolute right answer tothis question, but use
your best judgment.
Figure 1
Harrod’s Sporting Goods
Income Statement
(20XV-20XX)
20XV 20XW 20XX
Sales $4,269,871 $4,483,360 $5,021,643
Cost of goods sold 2,991,821 2,981,434 3,242,120
Gross Profit $1,278,050 $1,501,926 $1,779,523
Selling and administrative expense 865,450 1,004,846 1,175,100
Operating profit $412,600 $497,080 $604,423
Block 12ce Copyright ©2021 McGraw Hill Education
, Genuine Motor Products Case 2
Interest expense 115,300 122,680 126,241
Extraordinary loss ‒‒ ‒‒ 170,000
Net income before taxes 297,300 374,400 308,182
Taxes 104,100 131,300 107,864
Net income $ 193,200 $ 243,100 $ 200,318
Figure 2
Harrod’s Sporting Goods
Balance Sheet
(20XV-20XX)
20XV 20XW 20XX
Cash $ 121,328 $ 125,789 $ 99,670
Marketable securities 56,142 66,231 144,090
Accounts receivable 341,525 216,240 398,200
Inventory 972,456 1,250,110 1,057,008
Total current assets $1,491,451 $1,658,370 $1,698,968
Net plant and equipment 1,678,749 1,702,280 1,811,142
Total assets $3,170,200 $3,360,650 $3,510,110
Liabilities and Shareholders’ Equity
Accounts payable $ 539,788 $ 576,910 $ 601,000
Notes payable 160,540 180,090 203,070
Total current liabilities $700,328 $757,000 $804,070
Long-term liabilities 1,265,272 1,292,995 1,372,240
Total liabilities $1,965,600 $2,049,995 $2,176,310
Common stock 367,400 368,000 368,000
Retained earnings* 837,200 942,665 965,800
Total shareholders‘ equity 1,204,600 1,310,655 1,333,800
Total liabilities and shareholders‘ equity $3,170,200 $3,360,650 $3,510,110
Figure 3
Harrod’s Sporting Goods
Selected Industry Ratios for20XX
1. Net income/Sales 4.51%
2a. Net income/Total Assets 5.10%
2b. Sales/Total Assets 1.33 ×
3a. Net income/Shareholder‘s Equity 9.80%
*
Withdrawal of funds in theform of dividends or other means makes theincrease in retained earnings less
than net income.
Block 12ce Copyright ©2021 McGraw Hill Education
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