Posted: April 13th, 2022

Skinner Industries from Conway, North Carolina has found an exclusive market

Skinner
IndustriesSkinner Industries from Conway, North Carolina has
found an exclusive market in supplementary equipment to support the ever
increasing motor sports market. In the
last ten years, the company has filed for patents on the portable fuel dispenser,
power lug nut remover, and the removable transparent windshield protector. Each of these items is critical when the race
car drivers have to make a pit stop during a race. When seconds count, having the best available
equipment can mean millions in prize dollars and sponsorship support.Sherry
Skinner has always been a big fan of motor sports having grown up in Conway,
North Carolina and going with her dad to many races during her youth. Sherry wanted to be a part of the action of
motor sports, but since this was a male dominated sport, she knew it could not
be as a driver, member of the pit crew or working in the engine shop. While the sport does have a few female
drivers, Sherry did not want to be a token, and she felt her gifts and talents
could be better utilized in other venues.Sherry
loved engineering, and went to Duke for her engineering degree. After excelling in college, she had her
choice of jobs at major companies around the country. However, Sherry passed up the prestige jobs and
went back to her roots in Conway. She
decided to start her own company and use her talents to develop unique products
that could be used in the motor sports arena.
Sherry knew that it would be hard to compete against the big boys and
major automobile corporations when it came to the race cars, however she
thought there could be a market in supplementary equipment items.Growing up
with the sport, Sherry always enjoyed the action on pit row. Races were often won or lost on how quickly
the pit crew got tires changed and fuel added to the car. Sherry reasoned correctly that this part of
the race would be a good place to start developing products. The two most critical activities during a pit
stop were changing tires and adding fuel.
Any equipment or product design which could enhance these activities
would certainly have instant appeal.After a
great start to the company, Sherry took the company public nine years ago when
Skinner Industries was just three years old.
1,200,000 shares of common stock were issued at a price of $10 per share
through the mid-Atlantic regional exchange.The company
has continued to prosper and enjoy a good growth rate as the motor sports craze
has mushroomed. In 20x3 the Skinner
Industries growth rate in earnings was 6% and in 20x4 the growth rate was
5%. Sherry does not want the company to
become too large, as she still likes the feeling of a “down home” business with
the boys. At the same time, the business
is virtually guaranteed to grow just because of the motor sport market
itself.Sherry is
happy with the current 5% growth rate and to support that projection she is
planning on a $3,000,000 capital expansion program in 20x5. She is currently close to capacity with many
of the operations and without the continued expansion the desired growth could
be in jeopardy.So far,
Sherry has been able to maintain a reasonable increase in long-term assets
without having to initiate subsequent issues of stock. She would like to continue funding growth
through both the company profits and with favorable bank loans. Ideally, the company wants to maintain a
target equity ratio of 70% of the total capital structure which includes
long-term liabilities plus equity.
Currently, the cost of borrowing is 11.5% before taxes. Sherry has also determined that the cost of
equity is 13%.When Sherry
started the business, she was able to work out an attractive lending agreement
for $5,000,000 in long-term bonds with a 15 year maturity. Part of the agreement with the bank was that
Sherry establishes a sinking fund that would have to match the $5,000,000 in
bonds one year prior to maturity. This
provision would guarantee the bank collateral on the bonds but allow Skinner to
earn some interest on marketable securities.
As of the end of the current year, that fund has grown to $3,000,000 and
Sherry is planning on adding $1,000,000 in each of the next two years. The bank also required that Sherry establish
an appropriated retained earnings account equal to the amount of the collateral
sinking funds so that she would be limited in the amount of dividends that
could be declared and paid in any given year.To
supplement some of the recent expansion, Sherry had funded the increase in
long-term assets with additional long-term notes. This funding has grown to $2,000,000 at the
end of the current year. The financial
institution providing these funds has identified some constraints on potential
dividend payments based on the overall financial performance of Skinner. The company must maintain a current ratio of
at least 1.20, a times interest earned ratio of at least 3.0, and a debt ratio
no greater than 60%.While the
company is growing and there continues to be a need for capital expansion,
Sherry also recognizes the need for dividends, and has established a once a
year dividend payment at the end of the year.
The investors seem to like their dividend bonus that comes in early
February just before the start of racing season. Many of the investors are value conscious and
want a return on their investment from both dividends and stock price
appreciation. Since this is a regional
company focusing on a very specific market, a large number of investors are
motor sport fans from the mid-Atlantic area.
Sherry has always believed in a significant dividend, last year it was
$700,000, and the dividend yield is over 6.0%.
The company has also maintained a pretty consistent dividend payout
ratio through 20x3.While
everything seems to be going right for the company, with a reasonable growth
rate in an exploding market plus an attractive dividend, Sherry is puzzled on
why the market price of the stock at around $8 7/8 seems so low. Perhaps the overall economy, which is
struggling and filled with uncertainty, is causing the price decline. Also, Sherry believes that the job market in
North and South Carolina has suffered with many textile and similar jobs going
overseas. In an effort to support the
price of the stock and maintain the confidence of the investors, Sherry thinks
it is important to retain and possibly even increase the current dividend per
share for 20x4.Sherry has
just received the financial statements as of December 31, 20x4 without the
inclusion of a 20x4 dividend payment.
She needs to determine what annual dividend payment the company should
make for 20x4. She also wanted to see
what happened last year so she obtained the income statement and balance sheet
from 20x3 along with the balance sheet figures at the end of 20x2. The corporate tax rate is 40%.Required:1. What amount should Sherry declare in
dividends for 20x4? Identify what
factors influenced your decision and how they helped you in determining the
dividend amount.2. Review the financial performance of Skinner
Industries and try to identify some possible reasons why the stock price could
be low.3. Companies sometimes repurchase their own
outstanding stock. How much company
stock should Sherry consider repurchasing at this time if any? Discuss why this may or may not be a good
time to repurchase the stock of Skinner Industries.Skinner IndustriesIncome StatementAs of December 31Dollars in $1,000s20x320x4Sales23,50026,150Cost of
Goods Sold14,70016,990Depreciation1,7501,840Gross Margin7,0507,320Operating
Expenses2,8502,900Operating
Income4,2004,420Financing
Expenses1,3001,370Net
Income Before Tax2,9003,050Taxes1,1601,220Net
Income1,7401,830Skinner IndustriesBalance SheetAs of December 31Dollars in $1,000s20x220x320x4Cash9501,000800Marketable
Securities2,2602,7503,000Accounts
Receivable4,0004,1304,850Inventory8,3008,6409,570Total
Current Assets
15,51016,52018,220Long-Term
Assets (net)
17,50018,38020,360Total
Assets
33,01034,90038,580Accounts Payable6,2006,2707,050Accruals1,5001,5301,600Short-Term
Notes Payable4,5005,0005,500Total
Current Liabilities
12,20012,80014,150Long-Term
Liabilities6,2506,5007,000Total
Liabilities
18,45019,30021,150Common
Stock
12,00012,00012,000Retained
Earnings - Appropriated1,7002,2503,000Retained
Earnings - Unappropriated8601,3502,430Total
Equity
14,56015,60017,430Total
Liabilities & Equity
33,01034,90038,580

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