Foundations of Financial Management: Comprehensive Problem 3-1 Bob Adkins has recently

Foundations of Financial Management 
Comprehensive Problem 3-1 
Bob Adkins has recently been approached by his first cousin, Ed Lamar, with a proposal to buy a 15% interest in Lamar Swimear. The firm manufactures stylish bathing suits and sunscreen products.
Mr. Lamar is quick to point out the increase in sales that has taken place over the last three years as indicated in the income statement, Exhibit 1. The annual growth rate is 25 percent. A balance sheet for a similar time period is shown in Exhibit 2, and selected industry ratios are presented in Exhibit 3. Note the industry growth rate in sales is only 10 to 12 percent per year. 
There was a steady real growth of 3 to 4 percent in gross domestic product during the period under study. 

Exhibit 1 
Lamar Swimwear 
Income Statement 
201X 201Y 201Z 
Sales (all on credit) 1,200,000 1,500,000 1,875,000 
Cost of goods sold 800,000 1,040,000 1,310,000 
Gross profit 400,000 460,000 565,000 
Selling and administrative expense* 239,900 274,000 304,700 
Operating profit (EBIT) 160,100 186,000 260,300 
Interest expense 35,000 45,000 85,000 
Net income before taxes 125,100 141,000 175,300 
Taxes 36,900 49,200 55,600 
Net income before taxes 88,200 91,800 119,700 
Shares 30,000 30,000 30,000 
Earnings per share $2.94 $3.06 $3.99 

* Includes $15,000 in lease payments for each year. 

Exhibit 2 
Lamar Swimwear 
Balance Sheet 
Assets 201X 201Y 201Z 
Cash 30,000 40,000 30,000 
Marketable securities 20,000 25,000 30,000 
Accounts receivable 170,000 259,000 360,000 
Inventory 230,000 261,000 290,000 
Total current assets 450,000 585,000 710,000 
Net plant and equipment 650,000 765,000 1,390,000 
Total Assets $1,100,000 $1,350,000 $2,100,000 

Liabilities and Stockholders' Equity 
Accounts payable 200,000 310,000 505,000 
Accrued expenses 20,400 30,000 35,000 
Total current liabilities 220,400 340,000 540,000 
Long-term liabilities 325,000 363,600 703,900 
Total Liabilities 545,400 703,600 1,243,900 
Common stock ($2 par) 60,000 60,000 76,000 
Capital paid in excess of par 190,000 190,000 264,000 
Retained earnings 304,600 396,400 516,100 
Total Stockholders' Equity 554,600 646,400 856,100 
Total Liabilities and Stockholders' Equity $1,100,000 $1,350,000 $2,100,000 

Exhibit 3 
Selected Industry Ratios 
201X 201Y 201Z 
Growth in sales 0.00% 10.00% 12.00% 
Profit margin 7.71% 7.82% 7.96% 
Return on assets (investment) 7.94% 8.86% 8.95% 
Return on equity 14.31% 15.26% 16.01% 
Receivables turnover 9.02X 8.86X 9.31X 
Average collection period 39.9 days 40.6 days 38.7 days 
Inventory turnover 4.24X 5.10X 5.11X 
Fixed asset turnover 1.60X 1.64X 1.75X 
Total asset turnover 1.05X 1.10X 1.12X 
Current ratio 1.96X 2.25X 2.40X 
Quick ratio 1.37X 1.41X 1.38X 
Debt to total assets 43.47% 43.11% 44.10% 
Times interest earned 6.50X 5.99X 6.61X 
Fixed charge coverage 4.70X 4.69X 4.73X 
Growth in EPS 0.00% 10.10% 13.30% 

The stock in the corporation has become available due to the ill health of a current stockholder, who is in need of cash. The issue here is not to determine the exact price for the stock, but rather whether Lamar Swimwear represents an attractive investment situation. Although Mr. Adkins has a primary interest in the profitability ratios, he will take a close look at all the ratios. He has no fast and firm rules about required return on investment, but rather wishes to analyze the overall condition of the firm. The firm does not currently pay a cash dividend, and return to the investor must come from selling the stock in the future. 
After doing a thorough analysis (including ratios for each year and comparisons to the industry), what comments and recommendations do you offer to Mr. Adkins?
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