Aspen ski company | Accounting homework help
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?
