Explain  benchmarking. Indicate whether the asset management ratios of the company have improved or worsened relative to the industry.

Hemingway Corporation manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives in the United States. The company is considering expanding its operations worldwide to boost its income and cash flows. The expansion project will require the company to raise $100 million capital to finance the project. Mike Schenk, MBA has been hired to assist the company with the preparation of financial statement analysis and to suggest actions needed to raise the needed funds. Schenk is directed to send copies of the financial statement analysis to management of the company, potential lenders, and strategic investors. The balance sheet and income statement for the company are shown below.

Balance Sheet (Millions of Dollars)

       2019   2020  2021Est.
Assets   
Cash and equivalents625252
Short-term investments1021252
Accounts receivable402522532
Inventories640840680
Total current assets1,2061,4261,316
Net fixed assets2,9203,5203,720
Total assets4,1264,9465,036
Liabilities and equity   
Accounts payable330430365
Notes payable182252120
Accruals200240272
Total current liabilities712922757
Long-term bonds8001,1001,100
Total liabilities1,5122,0221,857
Common stock (100,000 shares)1,0001,0001,000
Retained earnings1,6501,9242,216
Total common equity2,6502,9243,216
Total liabilities and equity4,1264,9465,036

Income Statement (millions of Dollars)

 201920202021Est.
Net sales6,5007,0007,600
Cost of goods sold4,4004,8005,320
Depreciation292322372
Other operating expenses360400410
Earnings before interest and taxes (EBIT)1,4481,4781,498
Less interest68108100
Pre-Tax earnings1,3801,3701,398
Taxes (25%)345343350
Net Income1,0351,0281,049

Industry average for selected ratios

Profit margin16.0%Inventory turnover6.0
Operating profit margin22.0%Fixed assets turnover2.3
Basic Earning power35.5%Total assets turnover1.6
ROA25.6%Current2
ROE36.5%Quick0.85
P/E ratio9.4Debt ratio30.0%

1. The financial ratio analysis of the company is being conducted for management, equity investors, and long-term potential creditors. Explain the primary emphasis of each of these groups in evaluating the ratios.

2. Calculate the following profitability ratios for Hemingway Corporation for 2020:

i. Operating profit margin

ii. Return on assets (ROA)

iii. Return on equity (ROE)

iv. Basic Earning Power (BEP)

3. Calculate the following asset management ratios for Hemingway Corporation for 2020:

i. total assets turnover

ii. Fixed assets turnover

iii. Inventory turnover

4. Calculate the following liquidity and debt management ratios for Hemingway Corporation in 2020:

 i. Current ratio

ii. Quick ratio

iii. Debt ratio

5. Explain  trend analysis. Calculate the projected  profitability ratios for Hemingway Corporation for 2021.

6. Using the trend analysis indicate whether the financial performance of Hemingway Corporation has improved or worsened over the years.

7. Explain  benchmarking. Indicate whether the asset management ratios of the company have improved or worsened relative to the industry.

8. Mike Schenk is using the extended Dupont equation to predict the Return on Equity (ROE) for Hemingway Corporation for 2022. He forecasts the following ratios for 2022.

Ratio 
Profit margin16.0%
Total assets turnover1.6
Equity multiplier1.7

Calculate the Return on Equity (ROE) for Hemingway Corporation for 2022.

9. Mike Schenk explains to the CEO that although financial ratio provides useful information concerning the company’s operation, it has limitations that necessitate care and judgment. Identify  four  limitations of ratio analysis that Mike is addressing.

10. In the report sent to investors and credit lenders, Mike indicated that financial statement analysis goes beyond comparing ratios, and that qualitative factors must be considered as well. Identify  five  such qualitative factors that the users of the financial statement should consider when evaluating the company’s future financial performance.

Submit your answers in a Word document.

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