#1
Assignment 3.4 Exercises
Problem 1: Calculating Liquidity Ratios 5 Points
Flugel, Inc., has Net Working Capital of $8,920, cu
ent liabilities of $11,380, and inventory of $16,750.
a) What is the cu
ent ratio?
b) What is the quick (acid test) ratio?
c) If the company's Cu
ent Ratio is unusually high, what might this indicate?
Use the Template Provided Below to Create Your Solution - Pay close attention to the formulas and formatting of the inputs.
Input area:
The Cu
ent Ratio is = Cu
ent Assets / Cu
ent Liabilities, but we aren't given Cu
ent assets.
Net Working Capital $8,920 NWC = CA - CL
Cu
ent Liabilities $11,380 CL + NWC = CA
Inventory $16,750 CL = CA - NWC = $11,380-8,920
CL = $2,460
Cu
ent Ratio: $2,460
Output area:
Cu
ent Assets $ 20,300
Cu
ent Ratio 1.78
Quick Ratio XXXXXXXXXX
Intepretation: What might an unusually high Cu
ent Ratio indicate?
As discussed in the practice questions usually, a high cu
ent ratio is prefe
ed. It signifies high liquidity (a position of safety). However, if the cu
ent ratio is too high (i.e. above 2), it might be that the company is unable to use its cu
ent assets efficiently. This means they can meet their short term debits.
This is the Student Template, provided in the assignment instructions October 2019
#2
Assignment 3.4 Exercises
Problem 2: Calculating Profitability Ratios 5 Points
Sousa, Inc., has Sales of $37.3 million, Total Assets of $26.5 million, and Total Debt of $11.3 million. The company's Profit Margin is 6 percent.
a) What is the company's Net Income?
b) What is the ROA?
c) What is the ROE?
Create your Original Solution Below - Be sure to show all calculations and clearly indicate answers.
Input area:
These types of problems often have little puzzles to solve, designed to test your understanding of the relationships between ratios.
Sales $37,300,000 To find Net Income, you need to know the relationship between Net Income and the other information given.
Total Assets $26,500,000 The formula for Return on Assets is = Net Income / Total Assets
Total Debt $11,300,000 We are given ROA and Total Assets, so with a little alge
a can find Net Income
Return on Assets 11% We are given ROA and Total Assets, so with a little alge
a can find Net Income
ROA = NI / TA
NI = ROA X TA
Output area: NI = 0.11 X $4,500,000
NI = $495,000
Net Income $495,000 We can then use this information to find the Profit Margin…
Profit Margin = Net Income / Sales = $495,000 / $9,000,000
Profit Margin 5.50% Profit Margin = 0.055 or 5.5%
Total Equity $2,200,000 The second puzzle is that Equity is not given, and it is needed to calculate ROE. We can find it with the Balance Sheet Equation.
Total Equity = Total Assets - Total Liabilities
Return on Equity 22.50% Total Equity = $4,500,000 - $2,300,000 = $2,200,000
ROE = Net Income / Total Equity = $495,000 / $2,200,000 = XXXXXXXXXXor 22.50%
It is worthwhile to note ROE will always be higher than ROA (if the company has even $1 of liabilities in any form)
This is the Student Template, provided in the assignment instructions October 2019
#3
Assignment 3.4 Exercises
Problem 3: Calculating Inventory Turnover 5 Points
The Piccolo Corporation has ending inventory of $3,720,180. Material costs for the year just ended were $4,573,820.
a) What is the inventory turnover?
b) What is the days' sales in inventory?
c) If the company's Inventory Turnover is unusually low, what might this indicate?
Use the Template Provided Below to Create Your Solution - Pay close attention to the formulas and formatting of the inputs.
Input area:
Ending Inventory $ 3,720,180
Cost of Goods sold 4,573,820
Output area:
Inventory Turnover 1.23
Days' Sales in Inventory 296.9
Intepretation: What might an unusually low Inventory Turnover indicate?
If inventory turnover is low, it might indicate that product demand is declining. Also, this hints you that there are potential issues with the marketing of the product. A product or service with a low inventory turnover rate sells slowly and is likely to be overstocked.
This is the Student Template, provided in the assignment instructions October 2019
#4
Assignment 3.4 Exercises
Problem 4: Dupont Identity 5 Points
The famous Dupont Identity
eaks Return on Equity (ROE) into three components: Profit Margin, Total Asset Turnover, and Financial Leverage (Assets/Equity).
French Corp. has an Asset/Equity ratio of XXXXXXXXXXTheir cu
ent Total Asset Turnover has recently fallen to 1.20,
inging their ROE down to 9.1%.
a) What is this firm's Profit Margin?
B) If the company were able to improve its Total Asset Turnover to 1.8, what would be their new ROE?
Create your Original Solution Below - Be sure to show all calculations and clearly indicate answers.
This is the Student Template, provided in the assignment instructions October 2019
#5
Assignment 3.4 Exercises
Problem 5: Calculating Market Value Ratios 5 Points
Euphonium Corp. had additions to retained earnings for the year just ended of $595,000. The firm paid out $395,000 in cash dividends, and it had ending total equity of $18.3 million. The company has 370,000 shares of common stock outstanding, and the stock sells for $47 per share.
a) What are earning per share?
b) What are dividends per share?
c) What is the book value per share?
d) What is the price-earnings ratio?
e) Based on this data, would you consider purchasing this stock? Why or why not? Is it a good investment?
Use the Template Provided Below to Create Your Solution - Pay close attention to the formulas and formatting of the inputs.
Input area:
Addition to retained earnings
Cash dividends
Total equity
Common shares outstanding
Share price
Output area:
Net Income $ - 0
Earnings per Share ERROR:#DIV/0!
Dividends per Share ERROR:#DIV/0!
Book Value per Share ERROR:#DIV/0!
P/E ratio ERROR:#DIV/0!
Intepretation: Given this data, is this stock a good investment? Why or why not?
(
iefly explain here)
This is the Student Template, provided in the assignment instructions October 2019
#6
Assignment 3.4 Exercises
Problem 6: Calculating Average Payables Period 5 Points
Saxhorn, Inc., had a Cost of Goods Sold of $138,572 last year. At the end of the year, the Accounts Payable balance was $32,681.
a) How long on average did it take the company to pay its suppliers (what is the Payables Period)?
b) What might a large value for this ratio imply?
Create your Original Solution Below - Be sure to show all calculations and clearly indicate answers.
This is the Student Template, provided in the assignment instructions October 2019
#7
Assignment 3.4 Exercises
Problem 7: Trend Analysis 5 Points
Financial information is provided below for Saxabut Inc. Prepare the 2018 and 2019 balance sheets, and then use 2018 as the base-year to create a horizontal analysis.
Account Category 2018 2019
Cash $ 11,135 $ 13,407
Accounts Receivable $ 28,419 $ 30,915
Inventory $ 51,163 $ 56,295
Accounts Payable $ 45,166 $ 48,185
Notes Payable $ 17,773 $ 18,257
Net Plant and Equipment $ 326,456 $ 357,560
Long-Term Debt $ 44,000 $ 39,000
Common Stock and Paid-in Surplus $ 50,000 $ 50,000
Retained Earnings $ 260,234 $ 302,735
Use the Template Provided Below to Create Your Solution - Pay close attention to the formulas and formatting of the inputs.
Input / Ouput area:
Saxabut, Inc.
Balance Sheet
December 31st
Percentage Change Percentage Change
2018 2019 2018 2019
Cu
ent Assets Cu
ent Liabilities
Cash ERROR:#DIV/0! Accounts Payable ERROR:#DIV/0!
Accounts Receivable ERROR:#DIV/0! Notes Payable ERROR:#DIV/0!
Inventory ERROR:#DIV/0! Total $ - $ - ERROR:#DIV/0!
Total $ - $ - ERROR:#DIV/0!
Long-Term Debt ERROR:#DIV/0!
Owners' Equity
Common Stock and
Paid-In Surplus ERROR:#DIV/0!
Retained Earnings ERROR:#DIV/0!
Net Plant and Equipment ERROR:#DIV/0! Total $ - $ - ERROR:#DIV/0!
Total Assets $ - $ - ERROR:#DIV/0! Total Liabilities and
Owners' Equity $ - $ - ERROR:#DIV/0!
This is the Student Template, provided in the assignment instructions October 2019
#8
Assignment 3.4 Exercises
Problem 8: Common-Size Financial Statements 5 Points
Use the financial information provided below to perform a vertical analysis on Mello Inc. Prepare the 2019 common-size balance sheet and income statement.
Item 2019
Cash $ 110,000
Accounts Receivable $ 30,000
Inventory $ 40,000
Short-Term Investments $ 20,000
Accounts Payable $ 75,000
Unearned Revenue $ 25,000
Net Plant and Equipment $ 50,000
Long-Term Debt $ 50,000
Common Stock $ 80,000
Retained Earnings $ 20,000
Net Sales $ 120,000
Cost of Goods Sold $