CASE Study Jack Arnold is a resident of Lubbock, Texas, where he is a prosperous rancher and… 1 answer below »

CASE Study

Jack Arnold is a resident of Lubbock, Texas, where he is a prosperous rancher and businessman. He has also built up a sizeable portfolio of common stock, which, he believes, is due to the fact that he thoroughly evaluates each stock he invests in. As Jack says, “You can’t be too careful about these things! Anytime I plan to invest in a stock can be bet I’m going to learn as much as I can about the company.’’ Jack prefers to compute his own ratios even though he could easily obtain analytical reports from his broker at no cost. (In fact, Bob Smith, his broker, has been volunteering such services for years). Recently Jack has been keeping an eye on a small chemical stock. The firm, South Plains Chemical Company, is big in the fertilizer business- which is something Jack knows a lot about. Not long ago, he received a copy of the firm’ latest financial statements (summarized here) and decided to take a closer look at the company.

South Plains Chemical Company Balance Sheet ($ thousands)

Cash $1,250

Account receivable 8,000 Current liabilities $10,000

Inventory 12,000 Long-term debt 8,000

Current assets 21,250 Stockholder’s equity 12,000

Fixed and other assets 8,750 Total liabilities and

Stockholder’s equity 30,000

Total assets 30,000

South Plains Chemical Company Income Statement ($ thousands)

Sales $50,000

Cost of goods sold 25,000

Operating expenses 15,000

Operating profit 10,000

Interest expenses 2,500

Taxes 2,500

Net profit 5,000

Dividends paid to common stockholders

($ in thousands) 1,250

Number of common shares outstanding 5 million

Recent market price of the common stock 25

A) What is your overall assessment of South Plains Chemical? Do you think Jack should continue with his evaluation of the stock? Explain.

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