ASPEN SKI COMPANY


Balance Sheet ASPEN SKI COMPANY

December 31, 2008



Assets

Cash . . . . . . . . . . . . . . . . . . . . . . $ 40,000

Marketable securities . . . . . . . . . 60,000

Accounts receivable . . . . . . . . . . 1,000,000

Inventory . . . . . . . . . . . . . . . . . . . 3,000,000

Gross plant and

equipment . . . . . . . . . . . . . . . . 5,000,000

Less: Accumulated

depreciation . . . . . . . . . . . 2,000,000

Total assets . . . . . . . . . . . . . . . . . $7,100,000

Liabilities and Stockholders’ Equity

Accounts payable . . . . . . . . . . . . $1,800,000

Accrued expenses. . . . . . . . . . . . 100,000

Notes payable (current). . . . . . . . 600,000

Bonds (10%) . . . . . . . . . . . . . . . . 2,000,000

Common stock (1.5 million

shares, par value $1) . . . . . . . . 1,500,000

Retained earnings . . . . . . . . . . . . 1,100,000

Total liabilities and

stockholders’ equity . . . . . . . . . $7,100,000



Income Statement—2004

Sales (credit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,000,000

Fixed costs* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,800,000

Variable costs (0.60) . . . . . . . . . . . . . . . . . . . . . . . . . . 3,600,000

Earnings before interest and taxes . . . . . . . . . . . . . . 600,000

Less: Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000

Earnings before taxes . . . . . . . . . . . . . . . . . . . . . . . . 400,000

Less: Taxes @ 40% . . . . . . . . . . . . . . . . . . . . . . . . 160,000

Earnings after taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 240,000

Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,200

Increased retained earnings . . . . . . . . . . . . . . . . . . . . $ 196,800

*Fixed costs include (a) lease expense of $190,000 and (b) depreciation of

$400,000.

Note: Aspen Ski also has $100,000 per year in sinking fund obligations associated with its bond issue. The sinking fund represents an annual repayment

of the principal amount of the bond. It is not tax-deductible.



Ratios

Aspen Ski

(to be filled in) Industry

Profit margin 6.1%

Return on assets 6.5%

Return on equity 8.9%

Receivables turnover 4.9x

Inventory turnover 4.4x

Fixed-asset turnover 2.1x

Total-asset turnover 1.06x

Current ratio 1.4x

Quick ratio 1.1x

Debt to total assets 27%

Interest coverage 4.2x

Fixed charge coverage 3.0x



a. Analyze Aspen Ski Company, using ratio analysis. Compute the ratios above for Aspen and compare them to the industry data that is given. Discuss the weak

points, strong points, and what you think should be done to improve the

company’s performance.

b. In your analysis, calculate the overall break-even point in sales dollars and the

cash break-even point. Also compute the degree of operating leverage, degree of

financial leverage, and degree of combined leverage.



c. Use the information in parts a and b to discuss the risk associated with this

company. Given the risk, decide whether a bank should loan funds to Aspen Ski.

Aspen Ski Company is trying to plan the funds needed for 2009. The management

anticipates an increase in sales of 20 percent, which can be absorbed without

increasing fixed assets.

d. What would be Aspen’s needs for external funds based on the current balance

sheet? Compute RNF (required new funds). Notes payable (current) are not part

of the liability calculation.

e. What would be the required new funds if the company brings its ratios into line

with the industry average during 2005? Specifically examine receivables

turnover, inventory turnover, and the profit margin. Use the new values to

recompute the factors in RNF (assume liabilities stay the same).

f. Do not calculate, only comment on these questions. How would required new

funds change if the company:

1. Were at full capacity?

2. Raised the dividend payout ratio?

3. Suffered a decreased growth in sales?

4 Faced an accelerated inflation rate?

Additional Question

1.What does the term structure of interest rates indicate?
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