Reference no: EM132568555

The Charter Company

Overview

The Charter Company was organized in 1959 as a consolidation of several existing corporations. The company's primary line of business was petroleum production and marketing, although it also maintained a significant equity investment in the Charter Security Life Insurance Company.

• In 1983, the Charter Company was listed by Fortune magazine among the 100 largest U.S. industrial companies. For the year ended December 31, 1983, revenues totaled $5.7 billion, and income from continuing operations was $50.4 million. For 1982, revenues were $4 billion, and earnings from continuing operations were $29.8 million.

• In spite of the continuing worldwide glut in crude oil and petroleum products, Charter had maintained its quarterly dividend of $.25 per share from the second quarter of 1980 through the first quarter of 1984. During 1983 and early 1984, Charter's common stock traded in a range of $8.00 to $13.75. In the latter half of 1983, however, a number of adverse articles began appearing in the financial press, questioning the quality of Charter's reported earnings. Nonetheless, the company's 1983 financial statements, released in early 1984, indicated no particular financial concerns. Moreover, the firm 's "Big Eight" auditing firm, Peat, Marwick, Mitchell & Co., had issued a "clean" opinion subject only to a consistency qualification (to which they concurred).

• During the first week of April 1984, however, Charter reported a substantial first quarter loss and announced plans to cut oil production and lay off employees. The company's common stock dropped in price from $9.50 per share on April 3 to $6,625 on April 5. The price then steadily decreased to $3.25 by the end of April.

Question 1. Calculate the following ratios for each year during the period 1980-1983. Comment on the trend indicated by each ratio with respect to the financial performance and condition of the Charter Company.

a. Profitability: Return on average total assets (assume a 46% income tax rate)

b. Turnover: i. Accounts receivable (based on average gross trade receivables). ii. Inventory (based on average total inventory). iii. Total assets (based on average total assets).

c. Liquidity: i. Current ratio ii. Quick ratio

d. Solvency i. Total liabilities to total equities ii. Total long-term debt to total long-term debt plus owner's equity.