finance assignment

Assignment #2

NOTE: For all ratio calculations in this class:

BE SURE TO FORMAT YOUR ANSWERS AS THEY ARE SHOWN ON PAGES 76-78.

USING “%”, “X OR TIMES”, OR “DAYS” AS APPROPRIATE.

ROUND YOUR ANSWER AS THE TEXT DOES.

1. Arkansas Homes Inc. shows the following data:

Year Net Income Total Assets Stockholders’ Equity Total Debt 2011 $180,000 $2,390,000 $ 761,000 $1,629,000

2012 216,000 2,700,000 966,000 1,734,000

2013 243,000 2,730,000 1,770,000 960,000

2014 257,000 2,470,000 2,220,000 250,000

a. Compute the ratio of net income to total assets for each year and comment on the trend

(round your percentage answer to two decimal places).

b. Compute the ratio of net income to stockholders’ equity and comment on the trend

(round your percentage answer to two decimal places). Explain why there may be a

difference in the trends between parts a and b.

2. List the 13 ratios on p. 58. Describe, in your own words, the value/usefulness of

each ratio.

3. Given the financial statements for Able and Aztech Corporations shown below:

a. Compute all 13 ratios for both companies from the text, pgs. 60-64. Show all calculations.

b. To which company would you, as a Credit Manager for a supplier, approve the extension of

credit? Why?

c. In which company would you buy stock? Why?

d. As an industry analyst, what observations would you make for each company?

Notes:

*Use net fixed assets in computing fixed asset turnover.

*SG&A includes $10,500 in lease payments.

Current Assets: Liabilities:

Cash $35,000 Acct. Payable $75,000

Marketable Securities $7,500 Bonds $210,000

Accounts Receivable $70,000

Inventory $75,000

Long - Term Assets: Stockholders' Equity

Fixed Assets $500,000 Common Stock $75,000

Accumulated Depr. ($250,000) Paid in Capital $30,000

Net Fixed assets $250,000 Retained Earnings $47,500

Total Assets $437,500 Total S.E & Liabilities $437,500

Sales $1,100,000

Cost of Goods Sold ($600,000)

Gross Profit $500,000

SG&A expenses ($224,000)

Depr. Expense ($50,000)

Operating Profit $226,000

Interest Expense ($21,000)

Earnings before taxes $205,000

Tax expense ($52,500)

Net Income $152,500

Able CORPORATION

Notes:

*Use net fixed assets in computing fixed asset turnover.

*SG&A includes $23,000 in lease payments.

Aztech CORPORATION

Current Assets: Liabilities:

Cash $20,000 Acct. Payable $100,000

Accounts Receivable $80,000 Bonds $80,000

Inventory $50,000

Long - Term Assets: Stockholders' Equity

Fixed Assets $500,000 Common Stock $150,000

Accumulated Depr. ($150,000) Paid in Capital $70,000

Net Fixed assets $350,000 Retained Earnings $100,000

Total Assets $500,000 Total S.E & Liabilities$500,000

Sales $1,325,000

Cost of Goods Sold ($750,000)

Gross Profit $575,000

SG&A expenses ($257,000)

Depr. Expense ($50,000)

Operating Profit $268,000

Interest Expense ($8,000)

Earnings before taxes $260,000

Tax expense ($92,500)

Net Income $167,500