Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 47

Business Analysis Johnson Home Products, Inc. (JHP) manufactures plumbing fixtures and other home improvement products that are sold in Home Depot and Wal-Mart as well as hardware stores. JHP has a solid reputation for providing value products, good quality, and a good price. The company has been approached by an investment banking firm representing a third company, Garden Specialties Inc. (GSI) that is interested in acquiring JHP. The acquiring firm (GSI) is a retailer of garden supplies; it sees the potential synergies of the combined firm and is willing to pay JHP shareholders $25 cash per share for their stock which is greater than the current stock price; the stock has traded at about $23.45 in recent months. Summary financial information about JHP follows.

Required Evaluate JHP as a company using financial ratio analysis. Since the calculation of some ratios requires the averaging of balances, you may assume that the balances in 2008 are the same as those in 2009.

JOHNSON HOME PRODUCTS, INC. Selected Financial Information
	2010	2009	2010 Industry Average
Cash	$ 81,516,171	$ 2,546,000
Accounts receivable	56,778,465	84,776,336
Inventory	39,665,416	49,886,736
Long-lived assets:
Gross book value	168,163,461	145,663,461
Net book value	104,172,967	98,447,620
Replacement cost	175,483,000	175,483,000
Liquidation value	67,430,000	78,366,000
Current liabilities	122,365,299	101,667,355
Long-term debt	34,567,445	34,577,653
Capital expenditures	22,500,000	11,234,000
Sales	645,339,000	589,645,335
Cost of sales	498,657,788	453,887,390
Operating expense*	102,667,355	122,654,888
Income tax rate	38%	38%	38.0%
Depreciation expense	$ 16,774,653	$ 14,662,893
Dividends	$ 1,500,000	$ 1,000,000
Year-end stock price	$ 23.45	$ 17.22
Number of outstanding
shares	22,587,336	22,847,559
Sales multiplier			1.40
Free cash flow multiplier			8.80

* Operating expense includes depreciation expense

	2010	2009	2010 Industry Average
Earnings multiplier			13.50
Cost of capital	6.1%	6.1%
Accounts receivable
turnover			5.50
Inventory turnover			8.60
Current ratio			1.90
Quick ratio			1.10
Cash flow from operations
ratio			1.40
Free cash flow ratio			1.10
Gross margin percentage			33.0%
Return on assets (net book
value)			19.0%
Return on equity			28.0%
Earnings per share		$2.33

Step 1 of 4

Business Analysis:

Business analysis means analysing the financial and non-financial information of an entity. Focus is placed on analysis of financial information through analysis of balance sheet, income statement, cash flow statement and analysis of financial ratios of the company. These ratios are analysed by comparing the result of these ratios with the industry standards.