[SOLVED] Bob Adkins has recently been approached by

Bob Adkins has recently been approached by his first cousin, Ed Lamar, with a proposal to buy a 15 percent interest in Lamar Swimwear. The firm manufactures stylish bathing suits and sunscreen products. Mr. Lamar is quick to point out the increase in sales that has taken place over the last three years as indicated in the income statement, Exhibit 1. The annual growth rate is 25 percent. A balance sheet for a similar time period is shown in Exhibit 2, and selected industry ratios are presented in Exhibit 3. Note the industry growth rate in sales is only 10 to 12 percent per year. There was a steady real growth of 3 to 4 percent in gross domestic product during the period under study. The stock in the corporation has become available due to the ill health of a current stockholder, who is in need of cash. The issue here is not to determine the exact price for the stock, but rather whether Lamar Swimwear represents an attractive investment situation. Although Mr. Adkins has a primary interest in the profitability ratios, he will take a close look at all the ratios. He has no fast and firm rules about required return on investment, but rather wishes to analyze the overall condition of the firm. The firm does not currently pay a cash dividend, and return to the investor must come from selling the stock in the future. After doing a thorough analysis (including ratios for each year and comparisons to the industry), what comments and recommendations do you offer to Mr. Adkins? Exhibit 1:

Exhibit 2:

Exhibit 3:

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Exhibit 1 LAMAR SWIMWEAR Income Sheet 20x1 20X2 20X3 Sales (all on credit). Cost of goods sold. Gross profit.. $1,200,000 $1,500,000 $1,875,000 800,000 1,040,000 1,310,000 $ 400,000 $ 460,000 $ 565,000 Selling and administrative expense* . 239,900 274,000 304,700 Operating profit (EBIT). $ 160,100 $ 186,000 $ 260,300 Interest expense. 35,000 45,000 85,000 Net income before taxes $ 125,100 $ 141,000 $ 175,300 Taxes. 36,900 49,200 55,600 Net income $ 88,200 $ 91,800 $ 119,700 Shares.. 30,000 30,000 38,000 Earnings per share . $2.94 $3.06 $3.15 *Includes $15,000 in lease payments for each year. LAMAR SWIMWEAR Balance Sheet Assets 20X1 20X2 20X3 Cash. $ 30,000 $ 40,000 $ 30,000 Marketable securities 20,000 25,000 30,000 Accounts receivable. 170,000 259,000 360,000 Inventory.. 230,000 261,000 290,000 Total current assets $ 450,000 $ 585,000 $ 710,000 Net plant and equipment 650,000 765,000 1,390,000 Total assets... $1,100,000 $1,350,000 $2,100,000 .... Liabilities and Stockholders' Equity Accounts payable . $ 200,000 $ 310,000 $ 505,000 Accrued expenses. 20,400 30,000 35,000 Total current liabilities $ 220,400 $ 340,000 $ 540,000 Long-term liabilities. 325,000 363,600 703,900 Total liabilities .. $ 545,400 $ 703,600 $1,243,900 Common stock ($2 par) 60,000 60,000 76,000 Capital paid in excess of par 190,000 190,000 264,000 Retained earnings.. 304,600 396,400 516,100 $ 554,600 $ 646,400 $1,350,000 $ 856,100 $2,100,000 Total Stockholders' Equity . Total liabilities and stockholders' equity.. $1,100,000 Selected Industry Ratios 20x1 20X2 20X3 Growth in sales 10.00% 12.00% Profit margin... 7.71% 7.96% 7.82% Return on assets (investment) 7.94% 8.86% 8.95% Return on equity ... 14.31% 15.26% 16.01% Receivables turnover 9.02X 8.86X 9.31X Average collection period 39.9 days 40.6 days 38.7 days Inventory turnover . 4.24X 5.10X 5.11X Fixed Asset-turnover' data-toggle="tooltip" data-placement="top" title="Click to view definition...">Asset Turnover . 1.60X 1.64X 1.75X Total asset turnover 1.05X 1.10X 1.12X Current ratio.. 1.96X 2.25X 2.40X Quick ratio . 1.37X 1.41X 1.38X Debt to total assets 43.47% 43.11% 44.10% Times interest earned. 6.50X 5.99X 6.61X Fixed charge coverage . 4.73X 4.70X 4.69X Growth in EPS.. 10.10% 13.30%

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Question: Bob Adkins has recently been approached by

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