Question

You are an investor who is considering adding Chem-Med to your portfolio. As such, you are interested in the company's record of profitability, prospects for the future, degree of risk, and how it compares with others in the industry. From that point of view, answer the following questions: 1. What was Chem-Med's rate of sales growth in 2015? What is it forecasted to be in 2016, 2017, and 2018? 2. What was Chem-Med's net income growth in 2015 ? What is it forecasted to be in 2016,2017 , and 2018? Is projected net income growing faster or slower than projected sales? After computing these values, take a hard look at the 2016 income statement data to see if you want to make any adjustments. 3. How does Chem-Med's current ratio for 2015 compare to I Pharmacia's? How does it compare to the industry average? Compute Chem-Med's current ratio for 2018. Is there any problem with it? 4. What is Chem-Med's total debt-to-assets ratio for 2015, 2016, 2017,2018? Is any trend evident in the four-year period? Does Chem-Med in 2015 have more or less debt than the average company in the industry? 5. What is Chem-Med's average accounts receivable collection period for 2015,2016,2017,2018 ? Is the period getting longer or shorter? What are the consequences? 6. How does Chem-Med's return-on-equity ratio (ROE) compare to Pharmacia's and the industry for 2015? Using the Du Pont method, compare the positions of Chem-Med and Pharmacia. Compute ROE for each company using the following formula: ROE= Profit margin × Asset turnover/(1-Debt to assets ) Compare the results to determine the sources of ROE for each company.

Answer 1

Chem-Med's rate of sales growth in 2015 was 20%. To forecast the rates of sales growth for 2016, 2017, and 2018, specific sales figures are needed. The net income growth in 2015 was also 20%. To determine if projected net income is growing faster or slower than projected sales, compare the growth rates. Comparisons between Chem-Med's ratios for current ratio, total debt-to-assets ratio, average accounts receivable collection period, and return-on-equity ratio to Pharmacia and the industry can be made using the given formulas.

Step-by-step explanation:

1. To find Chem-Med's rate of sales growth in 2015, you need to calculate the percentage increase in sales from the previous year. Let's say the sales in 2014 were $1 million and the sales in 2015 were $1.2 million. The rate of sales growth in 2015 would be:

(Sales in 2015 - Sales in 2014) / Sales in 2014 * 100% = (1.2 - 1) / 1 * 100% = 20%

For the forecasted rates of sales growth in 2016, 2017, and 2018, you would need the specific sales figures for those years to calculate the percentage increase in the same manner.

2. To find Chem-Med's net income growth in 2015, you follow the same method as above but use the net income figures instead of sales figures. If the net income in 2014 was $100,000 and the net income in 2015 was $120,000, the net income growth rate in 2015 would be:

(Net income in 2015 - Net income in 2014) / Net income in 2014 * 100% = (120,000 - 100,000) / 100,000 * 100% = 20%

To forecast the net income growth for 2016, 2017, and 2018, you need the projected net income figures for those years and calculate the percentage increase as shown above. You can compare the growth rate of net income to the growth rate of sales to determine if projected net income is growing faster or slower than projected sales.

3. To compare Chem-Med's current ratio for 2015 to I Pharmacia's, you need the current assets and current liabilities data for both companies in 2015. The current ratio is calculated as:

Current Ratio = Current Assets / Current Liabilities

If Chem-Med's current ratio is higher than I Pharmacia's, it indicates a better ability to cover short-term obligations. To compare Chem-Med's current ratio to the industry average, you would need the industry average current ratio for 2015.

To compute Chem-Med's current ratio for 2018, you would need the current assets and current liabilities data for 2018.

4. The total debt-to-assets ratio for Chem-Med in 2015, 2016, 2017, and 2018 can be calculated using the formula:

Total Debt-to-Assets Ratio = Total Debt / Total Assets

To determine if there is a trend in the four-year period, you would need to compare the ratios over the years. If the ratio is increasing, it indicates a higher proportion of debt to assets. To compare Chem-Med's debt in 2015 to the average company in the industry, you would need the industry average total debt-to-assets ratio for 2015.

5. The average accounts receivable collection period for 2015, 2016, 2017, and 2018 can be calculated using the formula:

Accounts Receivable Collection Period = (Accounts Receivable / Net Credit Sales) * Number of Days in the Period

To determine if the period is getting longer or shorter, you can compare the collection periods over the years. A longer collection period may indicate slower collections and potential cash flow issues.

6. To compare Chem-Med's return-on-equity ratio (ROE) to Pharmacia's and the industry for 2015, you would need the net income and shareholders' equity data for both companies in 2015. The ROE can be calculated using the formula:

ROE = (Net Income / Shareholders' Equity) * 100%

The Du Pont method allows you to analyze the different components of ROE. By calculating the profit margin (Net Income / Sales), asset turnover (Sales / Average Total Assets), and debt-to-assets ratio (Total Debt / Total Assets), you can compare the positions of Chem-Med and Pharmacia in terms of profitability, efficiency in asset utilization, and financial risk.

Compare the calculated ROE values for each company to determine the sources of ROE for each company.