Financial Analysis Homework - Baylor University



Financial Analysis Homework

Business 4385, Dr. Norman

Financial Analysis of Gateway Inc.

50 points

Due: Beginning of class on Wednesday, January 23rd.

Instructions: I encourage you to use an Excel or another spreadsheet to calculate the ratios in Question 1. If you calculate them manually, you may handwrite your results. Regardless of the method used, show the formula used to calculate the ratio and show your calculations using numbers from the financial statements. Your answer to Question 2 must be typed and should not exceed one (1) typed, single-spaced page.

Evaluation: Question 1 will be evaluated according to your calculation of the ratios. Question 2 will be evaluated by how thoroughly you answer the question and by the logic and support provided for your arguments. In addition, grammar, spelling, and the organization of your answer will all be considered.

1. Using the income statements and balance sheets provided, calculate the following financial ratios for Gateway Inc. for the most recent three full years shown (2000, 1999, and 1998) and for the nine-month period ending on 9/30/01. Show both your answer and how you calculated your answer.

• Profitability Ratios

• Return on Total Assets

• Return of Stockholder’s Equity

• Operating Profit Margin

• Net Profit Margin

• Liquidity Ratios

• Current Ratio

• Quick Ratio

• Leverage Ratios

• Debt-To-Assets

• Debt-to-Equity

• Activity Ratios

• Inventory turnover

• Fixed assets turnover

• Total assets turnover

• Average collection period

• Shareholder’s Return Ratios

• Earnings per share

• Other Ratios of Interest

• Cost of Goods Sold/Sales (amount per sales dollar spent on producing a good)

• SG&A (Selling, General, & Administrative Expenses)/Sales (amount per sales dollar spent on overhead expenses)

2. Provide an overall assessment of Gateway’s financial health. Which of the ratios may indicate problems? For these, explain the potential problems. Because the financial ratios are usually symptoms of deeper problems, use the following sources (attached) to better analyze the potential problems:

“Can Gateway Round Up the Suits?” Business Week, 5/26/97

“Gateway Loses the Folksy Shtick,” Business Week, 7/6/98

“A Net Gain for Gateway?” Business Week, 7/19/99

“Top of the News: Can Gateway Pull It Off?” , 8/29/01

“Gateway’s Opportunity,” , 9/4/01

|GATEWAY INC |ANNUAL INCOME STATEMENT |

|TICKER: GTW | ($ MILLIONS, EXCEPT PER SHARE) |

|SIC: 3571 | | | | | |

|GICS: 45202010 | | | | | |

| |Dec-00 |Dec-99 |Dec-98 |Dec-97 |Dec-96 |

|Sales |9600.6 |8645.561 |7467.925 |6293.68 |5035.228 |

| Cost of Goods Sold |7352.522 |6611.639 |5816.127 |5130.465 |4009.838 |

| |------------------- |------------------ |------------------ |------------------ |------------------ |

|Gross Profit |2248.078 |2033.921 |1651.798 |1163.215 |1025.39 |

| Selling, General, & | | | | | |

| Administrative Expense |1528.601 |1304.147 |1052.047 |786.168 |607.533 |

| |------------------- |------------------ |------------------ |------------------ |------------------ |

|Operating Income Before Deprec. |719.477 |729.775 |599.751 |377.047 |417.857 |

| Depreciation, Depletion, & | | | | | |

| Amortization |189.084 |134.105 |105.524 |86.774 |61.763 |

| |------------------- |------------------ |------------------ |------------------ |------------------ |

|Operating Profit |530.393 |595.67 |494.227 |290.273 |356.094 |

| Interest Expense | | | | | |

| Non-Operating Income/Expense |-102.693 |67.809 |47.021 |27.189 |26.622 |

| Special Items |-19.1 |0 |0 |-113.842 |0 |

| |------------------- |------------------ |------------------ |------------------ |------------------ |

|Pretax Income |408.6 |663.479 |541.248 |203.62 |382.716 |

| Total Income Taxes |155.266 |235.535 |194.849 |93.823 |132.037 |

| Minority Interest |0 |0 |0 | | |

| |------------------- |------------------ |------------------ |------------------ |------------------ |

|Income Before Extraordinary | | | | | |

| Items & Discontinued Operations |253.334 |427.944 |346.399 |109.797 |250.679 |

|Preferred Dividends |0 |0 |0 |0 |0 |

| |------------------- |------------------ |------------------ |------------------ |------------------ |

|Available for Common |253.334 |427.944 |346.399 |109.797 |250.679 |

| Savings Due to Common | | | | | |

| Stock Equivalents |0 |0 |0 |0 |0 |

| |------------------- |------------------ |------------------ |------------------ |------------------ |

|Adjusted Available for Common |253.334 |427.944 |346.399 |109.797 |250.679 |

| Extraordinary Items |-11.851 |0 |0 |0 |0 |

| Discontinued Operations |0 |0 |0 |0 |0 |

| |------------------- |------------------ |------------------ |------------------ |------------------ |

|Adjusted Net Income |241.483 |427.944 |346.399 |109.797 |250.679 |

|Earnings Per Share Basic - | | | | | |

| Excluding Extra Items & Disc Op |0.79 |1.36 |1.12 |0.35 |0.8 |

|Earnings Per Share Basic - | | | | | |

| Including Extra Items & Disc Op |0.75 |1.36 |1.12 |0.35 |0.8 |

|Earnings Per Share Diluted- | | | | | |

| Excluding Extra Items & Disc Op |0.76 |1.32 |1.09 |0.35 |0.8 |

|Earnings Per Share Diluted - | | | | | |

| Including Extra Items & Disc Op |0.73 |1.32 |1.09 |0.35 |0.8 |

|EPS Basic from Operations |0.83 |1.36 |1.12 |0.59 |0.8 |

|EPS Diluted from Ops |0.8 |1.32 |1.09 |@NA |@NA |

|Dividends Per Share |0 |0 |0 |0 |0 |

|Com Shares for Basic EPS |321.742 |313.974 |311.084 |307.68 |312.464 |

|Com Shares for Diluted EPS |331.32 |324.421 |317.858 |312.402 |@NA |

|GATEWAY INC |ANNUAL BALANCE SHEET |

|TICKER: GTW | ($ MILLIONS) |

|SIC: 3571 | | | | | |

|GICS: 45202010 | | | | | |

| |Dec-00 |Dec-99 |Dec-98 |Dec-97 |Dec-96 |

|ASSETS | | | | | |

| Cash & Equivalents |614.07 |1336.371 |1328.467 |632.249 |516.36 |

| Net Receivables |544.755 |646.339 |558.851 |510.679 |449.723 |

| Inventories |315.069 |191.87 |167.924 |249.224 |278.043 |

| Prepaid Expenses |0 |0 |0 |0 |0 |

| Other Current Assets |793.166 |522.225 |172.944 |152.531 |74.216 |

| |------------------- |------------------ |------------------ |------------------ |------------------ |

| Total Current Assets |2267.06 |2696.805 |2228.186 |1544.683 |1318.342 |

| Gross Plant, Property & Equipment |1308.696 |1092.004 |765.578 |453.304 |324.479 |

| Accumulated Depreciation |411.282 |346.344 |234.59 |116.835 |82.114 |

| |------------------- |------------------ |------------------ |------------------ |------------------ |

| Net Plant, Property & Equipment |897.414 |745.66 |530.988 |336.469 |242.365 |

| Investments at Equity |0 |0 |0 |0 |0 |

| Other Investments | | |0 |0 |0 |

| Intangibles |165.914 |52.302 |65.944 |82.59 |@CF |

| Deferred Charges |0 |0 |0 |0 |0 |

| Other Assets |822.156 |459.921 |65.262 |75.529 |112.704 |

| |------------------- |------------------ |------------------ |------------------ |------------------ |

|TOTAL ASSETS |4152.544 |3954.688 |2890.38 |2039.271 |1673.411 |

|LIABILITIES | | | | | |

| Long Term Debt Due In One Year |0 |5.49 |11.415 |13.969 |15.041 |

| Notes Payable |0 |0 |0 |0 |0 |

| Accounts Payable |785.345 |898.436 |718.071 |488.717 |411.788 |

| Taxes Payable |0 |0 |0 |26.51 |40.334 |

| Accrued Expenses |694.769 |762.972 |583.138 |430.668 |316.032 |

| Other Current Liabilities |150.92 |142.812 |117.05 |44.042 |16.574 |

| |------------------- |------------------ |------------------ |------------------ |------------------ |

| Total Current Liabilities |1631.034 |1809.71 |1429.674 |1003.906 |799.769 |

| Long Term Debt |0 |2.998 |3.36 |7.24 |7.244 |

| Deferred Taxes | | | | | |

| Investment Tax Credit |0 |0 |0 |0 |0 |

| Minority Interest |0 |0 |0 |0 | |

| Other Liabilities |141.171 |124.862 |112.971 |98.081 |50.857 |

|EQUITY | | | | | |

| Preferred Stock - Redeemable |0 |0 |0 |0 |0 |

| Preferred Stock - Nonredeemable |0 |0 |0 |0 |0 |

| |------------------- |------------------ |------------------ |------------------ |------------------ |

| Total Preferred Stock |0 |0 |0 |0 |0 |

| Common Stock |3.239 |3.2 |1.566 |1.541 |0.768 |

| Capital Surplus |741.646 |656.87 |365.986 |299.483 |289.512 |

| Retained Earnings |1657.402 |1408.844 |976.823 |629.02 |525.261 |

| Less: Treasury Stock |21.948 |51.796 |0 |0 |0 |

| |------------------- |------------------ |------------------ |------------------ |------------------ |

| Common Equity |2380.339 |2017.118 |1344.375 |930.044 |815.541 |

| |------------------- |------------------ |------------------ |------------------ |------------------ |

|TOTAL EQUITY |2380.339 |2017.118 |1344.375 |930.044 |815.541 |

| |------------------- |------------------ |------------------ |------------------ |------------------ |

|TOTAL LIABILITIES & EQUITY |4152.544 |3954.688 |2890.38 |2039.271 |1673.411 |

|COMMON SHARES OUTSTANDING |323.403 |319.286 |313.138 |308.256 |307.024 |

| |GATEWAY INC | |

| |INCOME STATEMENT | |

| |($ Millions, except per share) | |

| | | |

| | | |

| |Nine months ended |Nine months ended |

| |September 30, 2001 |September 30, 2000 |

| | | |

|Net sales |4,944,144 |7,154,257 |

|Cost of goods sold |4,346,673 |5,557,687 |

| |---------------------- |---------------------- |

|Gross profit |597,471 |1,596,570 |

|Selling, general, and administrative expenses |1,782,117 |1,060,025 |

| |---------------------- |---------------------- |

|Operating income (loss) |(1,184,646) |536,545 |

|Other income (loss), net |(113,755) |54,935 |

| |---------------------- |---------------------- |

|Income (loss) before income taxes and |(1,298,401) |591,480 |

|cumulative effect of change in accounting | | |

|principle | | |

|Provision (benefit) for income taxes |(278,900) |209,973 |

| |---------------------- |---------------------- |

|Net income (loss) before cumulative effect of |(1,019,501) |381,507 |

|change in accounting principle | | |

|Cumulative effect of change in accounting |(23,851) |(11,851) |

|principle, net of tax | | |

| |---------------------- |---------------------- |

|Net income (loss) |(1,043,352) |369,656 |

| | | |

| | | |

|Net income (loss) per share before cumulative | | |

|effect of change in accounting principle: | | |

|Basic |($3.16) |$1.19 |

|Diluted |($3.16) |$1.15 |

| | | |

|Net income (loss) per share: | | |

|Basic |($3.23) |$1.15 |

|Diluted |($3.23) |$1.11 |

| | | |

|Weighted average shares outstanding: | | |

|Basic |323,061 |321,221 |

|Diluted |323,061 |332,348 |

| |GATEWAY INC |

| |BALANCE SHEET |

| |($ Millions) |

| | |

| | |

| |September 30, 2001 |

| |(unaudited) |

|ASSETS: | |

|Current assets: | |

|Cash and cash equivalents |553,349 |

|Marketable securities |382,463 |

|Accounts receivable, net |322,702 |

|Inventory |126,412 |

|Other |398,070 |

| |------------------------- |

|Total current assets |1,782,996 |

| | |

|Property, plant and equipment, net |635,355 |

|Intangibles, net |39,866 |

|Other assets |545,746 |

| |------------------------- |

|Total Assets |3,003,963 |

| | |

| | |

|LIABILITIES AND STOCKHOLDERS' EQUITY: | |

|Current liabilities: | |

|Accounts payable |453,924 |

|Accrued liabilities |666,590 |

|Accrued royalties |114,829 |

|Other current liabilities |128,954 |

| |------------------------- |

|Total current liabilities |1,364,297 |

| | |

|Long-term obligations, net of current maturities |201,261 |

|Warranty and other liabilities |96,963 |

| |------------------------- |

|Total liabilities |1,662,521 |

| | |

|Stockholders' equity: | |

|Preferred stock, $.01 par value, 5000 shares authorized; | |

| none issued and outstanding | |

|Class A common stock, nonvoting, $.01 par value, 1,000 | |

| shares authorized; none issued and outstanding | |

|Common stock, $.01 par value, 1,000,000 authorized; |3,240 |

| 323,962 shares issued in 2001 | |

|Additional paid-in capital |732,859 |

|Retained earnings |609,983 |

|Accumulated other comprehensive income (loss) |-1,640 |

| |------------------------- |

|Total stockholders' equity |1,344,442 |

| |------------------------- |

|Total liabilities and equity |3,006,963 |

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