assignment discussion
neacych04-solutions_examples-1.xls
#4.2
4.2. | Liquidity ratios: Flying Penguins Corp. has total current assets of $11,845,175, | |||
current liabilities of $5,311,020, and a quick ratio of 0.89. | ||||
What is its level of inventory? | ||||
Total current assets | $ 11,845,175.00 | |||
Total current liabilities | $ 5,311,020.00 | |||
Quick ratio | 0.89 | |||
Quick ratio = (Total Current assets - Inventory) | ||||
Current Liabilities | ||||
Inventory = Total Current assets -(Quick ratio * Current Liabilities) | ||||
Inventory = | $ 7,118,367.20 | |||
Check: | ||||
Quick ratio= | 0.89 |
#4.3
4.3. | Efficiency ratio: If Newton Manufacturers have an accounts receivable | |||||
turnover of 4.8 times and net sales of $7,812,379, what is its level of receivables? | ||||||
Accounts receivable turnover | 4.8 | times | ||||
Net sales | $ 7,812,379 | |||||
A/R Turnover = | Net sales | |||||
A/R | ||||||
A/R = | Net sales | |||||
A/R Turnover | ||||||
A/R = | 1,627,578.96 |
#4.5
4.5. | Efficiency ratio: Sorenson Inc. has sales of $3,112,489, | |||
a gross profit margin of 23.1 percent, and inventory of $833,145. | ||||
What are the company’s inventory turnover ratio and days’ sales in inventory? | ||||
Sales | $ 3,112,489 | |||
Gross profit margin | 23.10% | |||
Inventory | $ 833,145 | |||
Inventory turnover ratio = Cost of Goods Sold/Inventory | ||||
Day's sales in inventory = 365 days/Inventory turnover ratio | ||||
Cost of goods sold = | $ 2,393,504 | |||
Inventory turnover ratio | 2.87 | |||
Day's sales in inventory | 127.05 | days |
#4.7
4.7. | Leverage ratios: Norton Company has a debt-to-equity ratio of 1.65, | ||||
ROA of 11.3 percent, and total equity of $1,322,796. What are the | |||||
company’s equity multiplier, debt ratio, and ROE? | |||||
Debt-to-equity ratio | 1.65 | ||||
ROA | 11.30% | ||||
Total equity | $ 1,322,796 | ||||
Equity multiplier = Total Assets/Total Equity | |||||
Debt ratio= | Total Debt/Total Assets | ||||
ROE = ROA * Equity multiplier | |||||
Debt-to-equity ratio = Total Debt/Total equity -->Total Debt = Debt-to-equity ratio*Total equity | |||||
Total Debt= | 2,182,613.40 | ||||
Total Assets = Total Debt + Total Equity = | 3,505,409.40 | ||||
Equity multiplier= | $ 2.65 | ||||
Debt ratio = | 62.26% | ||||
ROE | 29.95% |
#4.8
4.8. | DuPont equation: The Rangoon Timber Company has the following relationships: | |||
Sales/Total assets = 2.23; | ROA = 9.69%; | ROE = 16.4% | ||
What are Rangoon’s profit margin and debt ratio? | ||||
Sales/Total Assets= | 2.23 | |||
ROA= | 9.69% | |||
ROE= | 16.40% | |||
Profit margin = Net Income/Sales | ||||
Debt ratio = Total Debt/Total Assets | ||||
ROA = Net Income/Total Assets | ||||
ROE = Net Income/ Total equity | ||||
Based on the Du Pont Breakdown: | ||||
ROA = (Net Income/Sales)*(Sales/Total Assets) | ||||
and | ||||
ROE = (Net Income/Sales)*(Sales/Total Assets)*(Total Assets/Equity) | ||||
ROA Breakdown: | ||||
9.69% | =(Net Income/Sales)* | 2.23 | ||
==>(Net Income/Sales) = | 4.35% | |||
Profit Margin = | 4.35% | |||
ROE= | 9.69% | *TA/Equity | ||
16.40% | =(TA/Equity) X | 9.69% | ||
==>(TA/Equity)= | 1.692 | |||
==>Equity/Total Assets= | 1/(TA/Equity) | |||
==>Equity/Total Assets= | 59.09% | |||
Debt/Total Assets = 1-(Equity/Total Assets)= | 40.91% | |||
Alternative way: | ||||
TA/Equity = (ROE/ROA)= | 1.692 | |||
Equity/TA=1/(TA/EQ) | 59.09% | |||
Debt /TA= 1- (E/TA) | 40.91% |
#4.12
4.12 | Market value ratios: Rockwell Jewelers has announced net earnings of | ||
$6,481,778 for this year. The company has 2,543,800 shares outstanding, | |||
and the year-end stock price is $54.21. What are the company’s earnings | |||
per share and P/E ratio? | |||
Net earnings | 6,481,778 | ||
# of shares outstanding | 2,543,800 | ||
Year-end stock price | $54.21 | ||
Earnings per share | 2.55 | ||
P/E ratio | $21.27 |
#4.11
4.11 | Benchmark analysis: Trademark Corp.’s financial manager collected | ||||
the following information for its peer group so it can compare | |||||
its own performance against the peers. | |||||
Ratios | Trademark | Peer Group | |||
DSO | 33.5 days | 27.9 days | |||
Total assets turnover | 2.3 X | 3.7 X | |||
Inventory turnover | 1.8 X | 2.8 X | |||
Quick ratio | 0.6 X | 1.3 X | |||
a .Explain how Trademark is doing relative to its peers. | |||||
b. How do the industry ratios help Trademark’s management? | |||||
a. | Trademark is lagging behind its peer group in all four areas. It takes, on | ||||
average, about 6 more days to collect its receivables, has a slower inventory and total assets turnover, and | |||||
lower liquidity than its peers. | |||||
b. | The industry ratios help Trademark's management by giving them a benchmark | ||||
representing the average performance in the industry, against which they can compare | |||||
the firm's performance. Accordingly, corrective action can be taken by determining how much | |||||
the firm's assets and liabilities need to be changed to match the peer group. |
#4.14
4.14 | Liquidity ratios: Laurel Electronics has a quick ratio of 1.15, | |||
current liabilities of $5,311,020, and inventories of $7,121,599. | ||||
What is the firm’s current ratio? | ||||
Quick ratio | 1.15 | |||
Current liabilities | $ 5,311,020 | |||
Inventories | $ 7,121,599 | |||
Current ratio = Current assets/Current Liabilities | ||||
Quick ratio =( Total Current Assets - Inventories)/ Current Liabilities | ||||
==> | Total Current Assets = (Quick ratio * Current Liabilities)+Inventories | |||
==> | Total Current Assets = | $ 13,229,272 | ||
Current ratio= | 2.49 |
#4.16
4.16 | Efficiency ratio: Norwood Corp. currently has accounts receivable of | ||||
$1,223,675 on net sales of $6,216,900. What are its accounts | |||||
receivable turnover ratio and days’ sales outstanding? | |||||
Accounts receivable | $ 1,223,675 | ||||
Net sales | $ 6,216,900 | ||||
Days' sales outstanding = 365/Accounts receivable turnover | |||||
Accounts receivable turnover = Net sales/Accounts receivable | |||||
Accounts receivable turnover= | 5.081 | ||||
Days' sales outstanding= | 72 | days |
#4.6
4.6. | Leverage ratios: Breckenridge Ski Company has total assets of | ||
$422,235,811 and a debt ratio of 29.5 percent. Calculate the company’s | |||
debt-to-equity ratio and the equity multiplier. | |||
Total assets | $ 422,235,811 | ||
Debt ratio | 29.50% | ||
Debt ratio = Total Debt / Total Assets --> Total Debt = Debt ratio * Total assets | |||
Debt-to-equity ratio = Total debt/Shareholder's equity | |||
Equity Multiplier = Total Assets/Shareholder's equity | |||
Shareholder's equity = Total Assets - Total Debt | |||
Total Debt = | 124,559,564.24 | ||
Shareholders' equity = | 297,676,246.76 | ||
Debt-to-equity ratio = | 41.84% | ||
Equity Multiplier | 1.42 |
#4.30
4.30 | Blackwell Automotive’s balance sheet at the end of its most recent fiscal year shows the following information: | |||||
Assets | As of 3/31/2011 | Liabilities and Equity | ||||
Cash and marketable sec. | $23,015 | Accounts payable and accruals | $163,257 | |||
Accounts receivable | $141,258 | Notes payable | $21,115 | |||
Inventories | $212,444 | |||||
Total current assets | $387,940 | Total current liabilities | $184,372 | |||
Long-term debt | $168,022 | |||||
Net plant and equipment | $711,256 | Total liabilities | $352,394 | |||
Goodwill and other assets | $78,656 | Common stock | $313,299 | |||
Retained earnings | $512,159 | |||||
Total assets | $1,177,852 | Total liabilities and equity | $1,177,852 | |||
In addition on, it was reported that the firm had a net income of $156,042 | ||||||
on sales of $4,063,589. | ||||||
a. What are the firm’s current ratio and quick ratio? | ||||||
b. Calculate the firm’s days’ sales outstanding (DSO), total asset | ||||||
turnover ratio, and fixed asset turnover ratio. | ||||||
Current ratio = Total current assets/Total current liabilities | 2.10 | times | ||||
Quick ratio = (Total current assets - Inventory)/Total current liabilities | 0.95 | times | ||||
Sales = | 4,063,589 | Net income = | 156,042 | |||
Days' sales outstanding = 365/Accounts receivables turnover | 12.69 | days | ||||
Accounts receivables turnover = Sales/Accounts receivables | 28.77 | |||||
Total asset turnover = | Sales/Total assets | 3.45 | times | |||
Fixed asset turnover = | Sales/Fixed assets | 5.71 | times |
#4.32
4.32 | Ratio analysis: Refer to the information above for Nederland Consumer | ||||
Products Company. Compute the firm’s ratios for the following categories and | |||||
briefly evaluate the company’s performance from these numbers. | |||||
a. Efficiency ratios | |||||
b. Asset turnover ratios | |||||
c. Leverage ratios | |||||
d. Coverage ratios | |||||
As Reported on Annual Income Statement | 9/30/08 | ||||
Net sales | $51,407 | ||||
Cost of products sold | $25,076 | ||||
Gross margin | $26,331 | ||||
Marketing, research, administrative exp. | $15,746 | ||||
Depreciation | $758 | ||||
Operating income (loss) | $9,827 | ||||
Interest expense | $629 | ||||
Other nonoperating income (expense), net | $152 | ||||
Earnings (loss) before income taxes | $9,350 | ||||
Income taxes | $2,869 | ||||
Net earnings (loss) | $6,481 | ||||
As Reported on Annual Balance Sheet | 9/30/08 | ||||
Assets | Liabilities and Equity | ||||
Cash and cash equivalents | 5,469 | Accounts payable | 3,617 | ||
Investment securities | 423 | Accrued and other liabilities | 7,689 | ||
Accounts receivable | 4,062 | Taxes payable | 2,554 | ||
Total inventories | 4,400 | Debt due within one year | 8,287 | ||
Deferred income taxes | 958 | ||||
Prepaid expenses and other receivables | 1,803 | ||||
Total current assets | 17,115 | Total current liabilities | 22,147 | ||
Property, plant, and equipment, at cost | 25,304 | Long-term debt | 12,554 | ||
Less: Accumulated depreciation | 11,196 | Deferred income taxes | 2,261 | ||
Net property, plant, and equipment | 14,108 | Other noncurrent liabilities | 2,808 | ||
Net goodwill and other intangible assets | 23,900 | Total liabilities | 39,770 | ||
Other noncurrent assets | 1,925 | Convertible class A preferred stock | 1,526 | ||
Common stock | 2,141 | ||||
Retained earnings | 13,611 | ||||
Total shareholders' equity (deficit) | 17,278 | ||||
Total assets | 57,048 | Total liabilites and shareholders' equity | 57,048 | ||
Efficiency ratios | 2008 | ||||
Inventory Turnover = Cost of goods sold/Inventory = | 5.70 | times | |||
Day's Sales in Inventory = 365 days/Inventory turnover = | 64.05 | days | |||
Accounts Receivable Turnover = Net sales/Account receivable = | 12.66 | times | |||
Days' Sales Outstanding = 365 Days/Account receivable turnover | 28.84 | days | |||
Asset turnover ratios | |||||
Total Asset Turnover = Net sales/Total assets | 0.90 | times | |||
Fixed Asset Turnover = Net sales/Net fixed assets | 3.64 | times | |||
Leverage ratios | |||||
Total Debt Ratio = Total debt/Total assets | 0.70 | ||||
Debt-Equity Ratio = Total debt/Total equity | 2.30 | ||||
Equity Multiplier = Total assets/ Total equity | 3.30 | times | |||
Coverage ratios | |||||
Interest Coverage =Times Interest Earned = EBIT/Interest expense | 15.62 | times | |||
Cash Coverage = (EBIT + Depreciation)/Interest expense | 16.83 | times |
#4.31
4.31 | The following are the financial statements of Nederland | ||||||
Consumer Products Company reported for the fiscal year ended September 30, 2011. | |||||||
As Reported on Annual Income Statement | 9/30/11 | ||||||
Net sales | $51,407 | ||||||
Cost of products sold | $25,076 | ||||||
Gross margin | $26,331 | ||||||
Marketing, research, administrative exp. | $15,746 | ||||||
Depreciation | $758 | ||||||
Operating income (loss) | $9,827 | ||||||
Interest expense | $629 | ||||||
Other nonoperating income (expense), net | $152 | ||||||
Earnings (loss) before income taxes | $9,350 | ||||||
Income taxes | $2,869 | ||||||
Net earnings (loss) | $6,481 | ||||||
As Reported on Annual Balance Sheet | 9/30/11 | ||||||
Assets | Liabilities and Equity | ||||||
Cash and cash equivalents | 5,469 | Accounts payable | 3,617 | ||||
Investment securities | 423 | Accrued and other liabilities | 7,689 | ||||
Accounts receivable | 4,062 | Taxes payable | 2,554 | ||||
Total inventories | 4,400 | Debt due within one year | 8,287 | ||||
Deferred income taxes | 958 | ||||||
Prepaid expenses and other receivables | 1,803 | ||||||
Total current assets | 17,115 | Total current liabilities | 22,147 | ||||
Property, plant, and equipment, at cost | 25,304 | Long-term debt | 12,554 | ||||
Less: Accumulated depreciation | 11,196 | Deferred income taxes | 2,261 | ||||
Net property, plant, and equipment | 14,108 | Other noncurrent liabilities | 2,808 | ||||
Net goodwill and other intangible assets | 23,900 | Total liabilities | 39,770 | ||||
Other noncurrent assets | 1,925 | Convertible class A preferred stock | 1,526 | ||||
Common stock | 2,141 | ||||||
Retained earnings | 13,611 | ||||||
Total shareholders' equity (deficit) | 17,278 | ||||||
Total assets | 57,048 | Total liabilites and shareholders' equity | 57,048 | ||||
Calculate all the ratios (for which industry figures are available) for | |||||||
Nederland and compare the firm’s ratios with the industry ratios. | |||||||
Industry Ratios | Nederland Consumer Products Co. Ratios | Comment | |||||
Current ratio | 2.05 | 0.77 | Weak | ||||
Quick ratio | 0.78 | 0.57 | Weak | ||||
Gross margin | 23.90% | 51.22% | Much stronger | ||||
Profit margin | 12.30% | 12.61% | Slightly better | ||||
Debt ratio | 0.23 | 0.70 | Highly leveraged with more short term debt | ||||
Long-term debt to equity | 0.98 | 0.73 | Relatively less LTD | ||||
Interest coverage | 5.62 | 14.86 | Much higher | ||||
ROA | 5.30% | 11.36% | Much higher | ||||
ROE | 18.80% | 37.51% | Much higher |
#4.34
4.34 | Nugent, Inc., has a gross profit margin of 31.7 percent on | ||||
sales of $9,865,214 and total assets of $7,125,852. The company has a current | |||||
ratio of 2.7 times, accounts receivable of $1,715,363, cash and marketable | |||||
securities of $315,488, and current liabilities of $870,938. | |||||
a. What is Nugent’s level of current assets? | |||||
b. How much inventory does the firm have? What is the inventory turnover ratio? | |||||
c. What is Nugent’s days’ sales outstanding? | |||||
d. If management wants to set a target DSO of 30 days, what should | |||||
Nugent’s accounts receivable be? | |||||
Sales | $ 9,865,214 | ||||
Total assets | $ 7,125,852 | ||||
Accounts receivable | $ 1,715,363 | ||||
Cash and marketable securities | $ 315,488 | ||||
Current liabilities | $ 870,938 | ||||
Target DSO | 30 | days | |||
Gross profit margin | 31.70% | ||||
Current ratio | 2.7 | times | |||
a) | Current ratio = Current assets/Current liabilities | ||||
==> | Current assets = Current ratio * Current liabilities | ||||
==> | Current assets = | $ 2,351,532.60 | |||
b) | Total current assets = Cash and marketable securities + A/R + Inventory | ||||
==> | Inventory = Total current assets -Cash and M/S - A/R | ||||
Inventory = | $ 320,681.60 | ||||
c) | Days' sales outstanding = 365/Accounts receivable turnover | ||||
Accounts receivable turnover = Sales/Accounts receivable | |||||
Accounts receivable turnover = | $ 5.75 | ||||
DSO = | 63.47 | days | |||
d) | Target DSO = | 30 | days | ||
Since, Days' sales outstanding = 365/Accounts receivable turnover | |||||
==> | Accounts receivable turnover = 365/DSO | ||||
Accounts receivable turnover would have to be | 12.1666666667 | ||||
and since, Accounts receivable = Sales/Accounts receivabel turnover | |||||
Accounts receivable would have to be | 810,839.51 | ||||
i.e. A/R would have to decline by | $ 904,523.49 |
#4.35
4.35 | Recreational Supplies Co. has net sales of $11,655,000, | |||
an ROE of 17.64 percent, and a total asset turnover of 2.89 times. If the firm | ||||
has a debt-to-equity ratio of 1.43, what is the company’s net income? | ||||
Net sales | $ 11,655,000 | |||
ROE | 17.64% | |||
Total asset turnover | 2.89 | times | ||
Debt-equity ratio | 1.43 | |||
What is the company's net income? | ||||
Equity multiplier = 1 + Debt-to-equity ratio | 2.43 | |||
Return on equity = | Net profit margin * Total Asset turnover * Equity multiplier | |||
==> | Net profit margin = | Return on equity/(Total asset turnover * Equity multiplier) | ||
==> | Net profit margin = | 2.51% | ||
Net income = Net sales * Net profit margin = | $ 292,756.63 |
STP #4.1
STP #4.1. | Morgan Sports Equipment Company has accounts payable of $1,221,669, | |||||
cash of $ 677,423, inventory of $ 2,312,478, accounts receivable of $845,113, | ||||||
and net working capital of $2,297,945. What are the company’s current ratio | ||||||
and quick ratio? | ||||||
Accounts payable | $ 1,221,669 | |||||
Cash | $ 677,423 | |||||
Accounts receivable | $ 845,113 | |||||
Inventory | $ 2,312,478 | |||||
Net working capital | $ 2,297,945 | |||||
Current ratio = Current assets / Current liabilities | 2.50 | |||||
Current assets = Cash + A/R + Inventory = | $ 3,835,014 | |||||
Net working capital = Current assets - Current liabilities | ||||||
==> | Current liabilities = Current assets - Net working capital | $ 1,537,069 | ||||
Quick ratio = (Current assets - iInventories)/Current liabilities= | 0.99 |
STP #4.2
STP #4.2. | Southwest Airlines, Inc., has total operating revenues of $6.53 million | |||
on total assets of $11.337 million. Their property, plant, and equipment, | ||||
including their ground equipment and other assets, are listed at a historical cost | ||||
of $11.921 million, while the accumulated depreciation and amortization | ||||
amount to $3.198 million. What are the airline’s total asset turnover | ||||
and fixed asset turnover ratios? | ||||
Operating revenues | $ 6.53 | million | ||
Total assets | $ 11.337 | million | ||
Property, Plant, & Equipment (historical cost) | $ 11.92 | million | ||
Accumulated depreciation and amortization | $ 3.198 | million | ||
Total asset turnover = Operating revenues/Total assets = | $ 0.58 | |||
Fixed asset turnover = Operating revenues/Net fixed assets = | 0.749 |