The King Mattress Company Had the Following Operating Results for 2018-2019

question 29

Multiple Choice

The King Mattress Company had the following operating results for 2018-2019. In addition, the company paid dividends in both 2018 and 2019 of $60,000 per year and made capital expenditures in both years of $30,000 per year. The company's stock price in 2018 was $8 and $7 in 2019. The industry average earnings multiple for the mattress industry was 9 in 2019 and the free cash flow and sales multiples were 18 and 1.5, respectively. The company is publicly owned and has 1,200,000 shares of outstanding stock at the end of 2019.
$\text { Balance Sheet, Dec 31, }$
$\begin{array}{lllll} & 2019 & 2018 \\\text { Cash } & \$ 340,000 & \$ 100,000 \\\text { Accounts Receivable } & \$ 350,000 & \$ 400,000 \\\text { Inventory } & \$ 250,000 & \$ 300,000 \\\hline\text { Total Current Assets }&\$940,000&\$800,000\\\text { Long-lived Assets }&1,080,000&1,100,000\\\hline\text { Total Assets }&\$2,020,000&\$1,900,000\\\hline \text { Current Liabilities }&\$200,000&\$300,000\\\text { Long-term Debt } & 600,000 & 500,000 \\\text { Shareholder Equity } & 1,220,000 & 1,100,000\\\hline\text { Total Debt and Equity }&\$2,020,000&\$1,900,000\end{array}$

$\text { Income Statement, for year ended Dec } 31 \text {, }$
$\begin{array}{lcc} & 2019 & 2018 \\\text { Sales } & \$ 4,750,000 & \$ 4,500,000 \\\text { Cost of Sales } & 4,100,000 & 4,000,000\\\hline\text { Gross Margin } & 650,000 & 500,000 \\\text { Operating Expenses } & 350,000 & 400,000 \\\hline\text { Operating Income } & 300,000 & 100,000 \\\text { Taxes } & 120,000 & 40,000\\\hline\text { Net Income }&\$180,000&\$60,000\\\\\text { Cash Flow from Operations } & 2019 & 2018 \\\text { Net Income } & \$ 180,000 & \$ 60.000\\\text { Plus Depreciation Expense } & 50,000 & 50,000 \\\text { + Decrease (-inc) in AccRec. and Inv. } & 100,000&-\\\text { + Increase (-dec) in Cur. Liabl. }&(100,000) &-\\\text { Cash Flow from Operations }&\$230,000&\$110,000\end{array}$
The gross margin percentage for 2019 is (rounded) :

• A)11.2%
• B)12.7%
• C)13.7%
• D)14.9%

---

Definitions:

Depletion Expense

The allocation of the cost of natural resources over their productive life.

Residual Value

The estimated amount that an asset will realize upon its disposal at the end of its useful life, after deducting any potential costs of disposal.

Extracted Ore

Raw minerals taken from the ground, which may be processed to extract valuable metals or other resources.

Loss On Disposal

The financial loss incurred when disposing of an asset for less than its book value or carrying amount.