Chem Med Case
Chem Med Case 1
Chem-Med Company
1. What was Chem-Med 's rate of sales growth in 2003? What is it forecasted to be in 2004, 2005, and 2006?
Sales Growth
= (Sales this year - Sales last year)/Sales last year for 2003: ($ 3,814 - $3,051) / $3,051 = + 25% for 2004: ($ 5,340 - $3,814) / $3,814 = + 40% for 2005: ($ 7,475 - $5,340) / $5,340 = + 40% for 2006: ($ 10,466 - $7,475) / $7,475 = + 40%
2. What is the company 's rate of net income growth in 2004,2005, and 2006? Is projected net income growing faster or slower than projected sales? After computing these values, take a hard look at the 2004 income statement data to see if you want to make any adjustments.
Net income growth
= (Net income this year - Net income last year) / Net Income last year for 2004: ($1,609 - $1,150) / $1,150 = +40% for 2005: ($1,943 - $1,609) / $1,609 = +21% for 2006: ($2,903 - $1,943) / $1,943 = +49%
According to Dr. Swan 's estimates net income growth will match sales growth in 2004 then slack off and rebound in 2006. However, Dr. Swan 's figures are misleading: in 2004 they include $500,000 worth of extraordinary income expected to be received from the settlement of the suit with Pharmacia. This amount should be excluded from the calculations because (1) receiving the amount is by no means certain, and (2) it is a one-time event which has nothing to do with the operations of the company. When the amount is excluded from 2004 figures we see that net income growth for 2004 is actually considerably less than 40%.
Aftertax effect of removing $500,000 from gross income
= $500 x (1 - tax rate)
= $500 x (1 - .33)
= -$335
New net income
= $1,609 - $335
= $1,274
Appropriate net income growth for 2004
= ($1,274 - $1,150) / $1,150
= 11%
3. How does Chem-Med 's current ratio for 2003 compare to Pharmacia ' .How does it compare to the industry average? Compute Chem-Med 's current ratio for 2006. Is there any problem with it?
Chem-Med 's current ratio
= Current assets /
Chem-Med Company
1. What was Chem-Med 's rate of sales growth in 2003? What is it forecasted to be in 2004, 2005, and 2006?
Sales Growth
= (Sales this year - Sales last year)/Sales last year for 2003: ($ 3,814 - $3,051) / $3,051 = + 25% for 2004: ($ 5,340 - $3,814) / $3,814 = + 40% for 2005: ($ 7,475 - $5,340) / $5,340 = + 40% for 2006: ($ 10,466 - $7,475) / $7,475 = + 40%
2. What is the company 's rate of net income growth in 2004,2005, and 2006? Is projected net income growing faster or slower than projected sales? After computing these values, take a hard look at the 2004 income statement data to see if you want to make any adjustments.
Net income growth
= (Net income this year - Net income last year) / Net Income last year for 2004: ($1,609 - $1,150) / $1,150 = +40% for 2005: ($1,943 - $1,609) / $1,609 = +21% for 2006: ($2,903 - $1,943) / $1,943 = +49%
According to Dr. Swan 's estimates net income growth will match sales growth in 2004 then slack off and rebound in 2006. However, Dr. Swan 's figures are misleading: in 2004 they include $500,000 worth of extraordinary income expected to be received from the settlement of the suit with Pharmacia. This amount should be excluded from the calculations because (1) receiving the amount is by no means certain, and (2) it is a one-time event which has nothing to do with the operations of the company. When the amount is excluded from 2004 figures we see that net income growth for 2004 is actually considerably less than 40%.
Aftertax effect of removing $500,000 from gross income
= $500 x (1 - tax rate)
= $500 x (1 - .33)
= -$335
New net income
= $1,609 - $335
= $1,274
Appropriate net income growth for 2004
= ($1,274 - $1,150) / $1,150
= 11%
3. How does Chem-Med 's current ratio for 2003 compare to Pharmacia ' .How does it compare to the industry average? Compute Chem-Med 's current ratio for 2006. Is there any problem with it?
Chem-Med 's current ratio
= Current assets /