Question # 5: You are a financial manager in Gama Corporation.  You have the task of getting the company back into a sound financial position. Gama Corporation’s 2017 and 2018 balance sheets and income statements, together with projections for 2019, are shown in the following tables. The tables also show the 2017 and 2018 financial ratios, along with the industry average data. Your assignment is to answer the following questions.  Provide clear explanations, not yes or no answers. Show your work for the calculations. Balance Sheets Assets 2017                      2018           2019 (Projected) Cash $         9,000    $        7,282    $       14,000 Short-Term Investments. 48,600   20,000   71,632 Accounts Receivable 351,200   632,160   878,000 Inventories 715,200   1,287,360   1,716,480    Total Current Assets  $  1,124,000    $ 1,946,802    $  2,680,112 Gross Fixed Assets 491,000   1,202,950   1,220,000 Less: Accumulated Depreciation 146,200   263,160   383,160    Net Fixed Assets  $     344,800    $    939,790    $     836,840 Total Assets  $  1,468,800    $ 2,886,592    $  3,516,952             Liabilities And Equity 2017                        2018           2019 (Projected) Accounts Payable  $     145,600    $    324,000    $     359,800 Notes Payable 200,000   720,000   300,000 Accruals 136,000   284,960   380,000    Total Current Liabilities  $     481,600    $ 1,328,960    $  1,039,800 Long-Term Debt 323,432   1,000,000   500,000 Common Stock (100,000 Shares) 460,000   460,000   1,680,936 Retained Earnings 203,768   97,632   296,216    Total Equity  $     663,768    $    557,632    $  1,977,152 Total Liabilities And Equity  $  1,468,800    $ 2,886,592    $  3,516,952   Income Statements   2017                      2018         2019(Projected) Sales  $  3,432,000    $ 5,834,400    $  7,035,600 COGS except depr. 2,864,000   4,980,000   5,800,000 Depreciation 18,900   116,960   120,000 Other Expenses 340,000   720,000   612,960    Total Operating Costs  $  3,222,900    $ 5,816,960    $  6,532,960    EBIT  $     209,100    $      17,440    $     502,640 Interest Expense 62,500   176,000   80,000    EBT  $     146,600    $  (158,560)    $     422,640 Taxes (40%) 58,640   (63,424)   169,056 Net Income  $       87,960    $    (95,136)    $     253,584             Other Data 2017   2018           2019(Projected) Stock Price  $           8.50    $          6.00    $         12.17 Shares Outstanding 100,000   100,000   250,000 EPS (Earnings per share)  $         0.880    $      (0.951)    $         1.014 DPS (Dividend per share)  $         0.220    $        0.110    $         0.220 Tax Rate 40%   40%   40% Book Value Per Share  $         6.638    $        5.576    $         7.909   Ratio Analysis 2017   2018   2019(Projected)        Industry Average Current 2.3   1.5   ? 2.7 Quick 0.8   0.5   ? 1.0 Fixed Assets Turnover               10.0                  6.2   ?              7.0 Total Assets Turnover                 2.3                  2.0   ?              2.5 Debt to Asset Ratio 35.6%   59.6%   ? 32.0% TIE 3.3   0.1   ? 6.2 Profit Margin 2.6%   -1.6%   ? 3.6% Basic Earning Power 14.2%   0.6%   ? 17.8% ROA 6.0%   -3.3%   ? 9.0% ROE 13.3%   -17.1%   ? 17.9% Price/Earnings (P/E) 9.7   -6.3   ? 16.2 Market/Book 1.3   1.1   ? 2.9 Why are ratios useful? Calculate the 2019 current and quick ratios based on the projected balance sheet and income statement data. What can you say about the company’s liquidity position in 2017, 2018, and as projected for 2019? We often think of ratios as being useful (1) to managers to help run the business, (2) to bankers for credit analysis, and (3) to stockholders for stock valuation. Would these different types of analysts have an equal interest in the liquidity ratios? Calculate the 2019 fixed assets turnover, and total assets turnover. How does the firm’s utilization of assets stack up against other firms in its industry? Calculate the 2019 debt to asset ratio and times-interest-earned. How does the firm compare with the industry with respect to financial leverage? What can you conclude from these ratios? Calculate the 2019 profit margin, basic earning power (BEP), return on assets (ROA), and return on equity (ROE). What can you say about these ratios? Calculate the 2019 price/earnings ratio and market/book ratio. Do these ratios indicate that investors are expected to have a high or low opinion of the company?