Week 2 Assignment

W2 Assignment "Chapter 3 Questions"

•QUESTIONS: 3-2, 3-4

(3-2) Financial ratio analysis is conducted by managers, equity investors, long-term creditors,

and short-term creditors. What is the primary emphasis of each of these groups in

evaluating ratios?

(3-4) Profit margins and turnover ratios vary from one industry to another. What differences

would you expect to find between a grocery chain such as Safeway and a steel company?

Think particularly about the turnover ratios, the profit margin, and the Du Pont equation.

•PROBLEMS: 3-13

(3-13) Data for Lozano Chip Company and its industry averages follow.

a. Calculate the indicated ratios for Lozano.

b. Construct the extended Du Pont equation for both Lozano and the industry.

c. Outline Lozano%u2019s strengths and weaknesses as revealed by your analysis.

Lozano Chip Company: Balance Sheet as of December 31, 2013 (Thousands

of Dollars)

Cash                                  $ 225,000      Accounts payable $ 601,866

Receivables                        1,575,000       Notes payable                            326,634

Inventories                        1,125,000      Other current liabilities             525,000

Total current assets      $2,950,000            Total current liabilities   $1,453,500

Net fixed assets                1,350,000      Long-term debt                       1,068,750

                                      __________         Common equity                       1,752,750

Total assets                     $4,275,000       Total liabilities and equity $4,275,000

Lozano Chip Company: Income Statement for Year Ended December 31, 2013

(Thousands of Dollars)

Sales                                                                            $ 7,500,000

Cost of goods sold                                                        6,375,000

Selling, general, and administrative expenses               825,000

Earnings before interest and taxes (EBIT) $ 300,000

Interest expense                                                                 111,631

Earnings before taxes (EBT)                                          $ 188,369

Federal and state income taxes (40%)                              75,348

Net income                                                                     $ 113,022

Ratio                                                                      Lozano                       Industry Average

Current assets/Current liabilities __________                            2.0

Days sales outstanding (365-day year)      __________                           35.0 days

COGS/Inventory                               __________                              6.7

Sales/Fixed assets                                          __________                            12.1

Sales/Total assets                                          __________                             3.0

Net income/Sales                                           __________                             1.2%

Net income/Total assets                               __________                            3.6%

Net income/Common equity                        __________                            9.0%

Total debt/Total assets                                  __________                          30.0%

Total liabilities/Total assets                           __________                         60.0%