Equity multiplier and debt ratio

#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