Ch 3 Finance Review
Y3K, Incorporated, has sales of $7,485, total assets of $3,530, and a debt-equity ratio of .35. Assume the return on equity is 16 percent. What is its net income?
$418.37 We can rearrange the DuPont identity to calculate the profit margin. So, we need the equity multiplier and the total asset turnover. The equity multiplier is: Equity multiplier = 1 + Debt-equity ratio Equity multiplier = 1 + .35 Equity multiplier = 1.35 And the total asset turnover is: Total asset turnover = Sales/Total assets Total asset turnover = $7,485/$3,530 Total asset turnover = 2.12 times Now we can use the DuPont identity to find the profit margin as: ROE = (Profit margin)(Total asset turnover)(Equity multiplier) .16 = (Profit margin)(2.12)(1.35) Profit margin = .0559, or 5.59% Rearranging the profit margin ratio, we can find the net income which is: Profit margin = Net income/Sales .0559 = Net income/$7,485 Net income = $418.37
Jackson Corporation has a profit margin of 9 percent, total asset turnover of 1.11, and ROE of 14.35 percent. What is this firm's debt-equity ratio?
0.44 times We can use the DuPont identity and solve for the equity multiplier. With the equity multiplier we can find the debt-equity ratio. Doing so we find: ROE = (Profit margin)(Total asset turnover)(Equity multiplier) .1435 = (.09)(1.11)(Equity multiplier) Equity multiplier = 1.44 Now using the equation for the equity multiplier, we get: Equity multiplier = 1 + Debt-equity ratio 1.44 = 1 + Debt-equity ratio Debt-equity ratio = .44
Rogers, Incorporated, has an equity multiplier of 1.38, total asset turnover of 1.67, and a profit margin of 10 percent. What is the company's ROE?
23.05% With the information given, we must use the DuPont identity to calculate return on equity. Doing so, we find: ROE = (Profit margin)(Total asset turnover)(Equity multiplier) ROE = (.10)(1.67)(1.38) ROE = .2305, or 23.05%
PXG Company has total assets of $9,700,000 and a total asset turnover of 2.47 times. Assume the return on assets is 9 percent. What is its profit margin?
3.64% To find the profit margin, we need the net income and sales. We can use the total asset turnover to find the sales and the return on assets to find the net income. Beginning with the total asset turnover, we find sales are: Total asset turnover = Sales/Total assets 2.47 = Sales/$9,700,000 Sales = $23,959,000 And the net income is: ROA = Net income/Total assets .09 = Net income/$9,700,000 Net income = $873,000 Now we can find the profit margin, which is: Profit margin = Net income/Sales Profit margin = $873,000/$23,959,000 Profit margin = .0364, or 3.64%
Dexter, Incorporated, had a cost of goods sold of $66,382. At the end of the year, the accounts payable balance was $12,289. How long, on average, did it take the company to pay off its suppliers during the year?
67.57 days To find the days' sales in payables, we first need to find the payables turnover. The payables turnover was: Payables turnover = Cost of goods sold/Accounts payable Payables turnover = $66,382/$12,289 Payables turnover = 5.40 times Now we can use the payables turnover to find the days' sales in payables as: Days' sales in payables = 365 days/Payables turnover Days' sales in payables = 365 days/5.40 Days' sales in payables = 67.57 days The company left its bills to suppliers outstanding for 67.57 days on average. A large value for this ratio could imply that either (1) the company is having liquidity problems, making it difficult to pay off its short-term obligations, or (2) that the company has successfully negotiated lenient credit terms from its suppliers. PrevQuestion 7 of 17 Total7 of
Some recent financial statements for Smolira Golf, Incorporated, follow. [balance sheet & income statement] Construct the DuPont identity for Smolira Golf.
Profit margin 19.00% Total asset turnover 1.85 times Equity multiplier 1.27 times Return on equity 44.48% First, we need to calculate the components of the DuPont identity. So: Profit margin = Net income/Sales Profit margin = $35,831/$188,570 Profit margin = .1900, or 19.00% Total asset turnover = Sales/Total assets Total asset turnover = $188,570/$102,159 Total asset turnover = 1.85 times Equity multiplier = Total assets/Total equity Equity multiplier = $102,159/$80,550 Equity multiplier = 1.27 times Now we can use these components to calculate the DuPont identity, which is: ROE = (Profit margin)(Total asset turnover)(Equity multiplier) ROE = (.1900)(1.85)(1.27) ROE = .4448, or 44.48%
Bethesda Mining Company reports the following balance sheet information for 2021 and 2022. [insert balance sheet] Suppose that the Bethesda Mining Company had sales of $2,316,873 and net income of $93,381 for the year ending December 31, 2022. Calculate ROE using the DuPont identity.
Profit margin 4.03% Total asset turnover 2.47times Equity multiplier 2.12times Return on equity 21.05% First, we need to calculate each of the components of the DuPont identity. So: Profit margin = Net income/Sales Profit margin = $93,381/$2,316,873 Profit margin = .0403, or 4.03% Total asset turnover = Sales/Total assets Total asset turnover = $2,316,873/$939,653 Total asset turnover = 2.47 times Equity multiplier = Total assets/Total equity Equity multiplier = $939,653/$443,704 Equity multiplier = 2.12 times Using the DuPont identity to calculate ROE, we get: ROE = (Profit margin)(Total asset turnover)(Equity multiplier) ROE = (.0403)(2.47)(2.12) ROE = .2105, or 21.05%
A fire has destroyed a large percentage of the financial records of the Inferno Company. You have the task of piecing together information in order to release a financial report. You have found the return on equity to be 16.1 percent. Sales were $1,780,000, the total debt ratio was .31, and total debt was $657,000. What is the return on assets (ROA)?
ROA 11.11% To find the return on equity, we need the net income and total equity. We can use the total debt ratio to find the total assets as: Total debt ratio = Total debt/Total assets .31 = $657,000/Total assets Total assets = $2,119,354.84 Using the balance sheet relationship that total assets is equal to total liabilities and equity, we find the total equity is: Total assets = Total debt + Equity $2,119,354.84 = $657,000 + Equity Equity = $1,462,354.84 We have the return on equity and the equity. We can use the return on equity equation to find net income is: ROE = Net income/Equity .1610 = Net income/$1,462,354.84 Net income = $235,439.13 We have all the information necessary to calculate the ROA. Doing so, we find the ROA is: ROA = Net income/Total assets ROA = $235,439.13/$2,119,354.84 ROA = .1111, or 11.11%
Nakamura, Incorporated, has a total debt ratio of .52, total debt of $327,000, and net income of $41,250. What is the company's return on equity?
ROE= 13.67% To find the ROE, we need the equity balance. Since we have the total debt, if we can find the total assets, we can calculate the equity. Using the total debt ratio, we find total assets as: Debt ratio = Total debt/Total assets .52 = $327,000/Total assets Total assets = $628,846 Total liabilities and equity is equal to total assets. Using this relationship, we find: Total assets = Total debt + Total equity $628,846 = $327,000 + Total equity Total equity = $301,846 Now we can calculate the ROE as: ROE = Net income/Total equity ROE = $41,250/$301,846 ROE = .1367, or 13.67%
Rocket, Incorporated, has a current stock price of $43.50. For the past year, the company had net income of $7,050,000, total equity of $21,740,000, sales of $40,600,000, and 5.7 million shares of stock outstanding. a. What are earnings per share (EPS)? b. What is the price-earnings ratio? c. What is the price-sales ratio? d. What is the book value per share? e. What is the market-to-book ratio?
a. $1.24 b. 35.17 times c. 6.11 times d. $3.81 e. 11.41 times The earnings per share are: EPS = Net income/Shares EPS = $7,050,000/5,700,000 EPS = $1.24 The price-earnings ratio is: PE = Price/EPS PE = $43.50/$1.24 PE = 35.17 times The sales per share are: Sales per share = Sales/Shares Sales per share = $40,600,000/5,700,000 Sales per share = $7.12 The price-sales ratio is: P/S = Price/Sales per share P/S = $43.50/$7.12 P/S = 6.11 times The book value per share is: Book value per share = Book value of equity/Shares Book value per share = $21,740,000/5,700,000 Book value per share = $3.81 And the market-to-book ratio is: Market-to-book = Market value per share/Book value per share Market-to-book = $43.50/$3.81 Market-to-book = 11.41 times
SDJ, Incorporated, has net working capital of $940, current liabilities of $6,700, and inventory of $1,110. a. What is the current ratio? b. What is the quick ratio?
a. 1.14 times b. 0.97 times To find the current assets, we must use the net working capital equation. Doing so, we find: NWC = Current assets − Current liabilities $940 = Current assets − $6,700 Current assets = $7,640 Now use this number to calculate the current ratio and the quick ratio. The current ratio is: Current ratio = Current assets/Current liabilities Current ratio = $7,640/$6,700 Current ratio = 1.14 times And the quick ratio is: Quick ratio = (Current assets − Inventory)/Current liabilities Quick ratio = ($7,640 − 1,110)/$6,700 Quick ratio = .97 times
Mobius, Incorporated, has a total debt ratio of .61. a. What is its debt-equity ratio? b. What is its equity multiplier?
a. 1.56 times b. 2.56 times To find the debt-equity ratio using the total debt ratio, we need to rearrange the total debt ratio equation. We must realize that the total assets are equal to total debt plus total equity. Doing so, we find: Total debt ratio = Total debt/Total assets .61 = Total debt/(Total debt + Total equity) .39(Total debt) = .61(Total equity) Total debt/Total equity = .61/.39 Debt-equity ratio = 1.56 And the equity multiplier is one plus the debt-equity ratio, so: Equity multiplier = 1 + D/E Equity multiplier = 1 + 1.56 Equity multiplier = 2.56
The Top Corporation has ending inventory of $696,873 and cost of goods sold for the year just ended was $7,151,165. a.What is the inventory turnover? b. What is the days' sales in inventory? c. How long, on average, did a unit of inventory sit on the shelf before it was sold?
a. 10.26 times b. 35.57 days c. 35.57 The inventory turnover for the company was: Inventory turnover = COGS/Inventory Inventory turnover = $7,151,165/$696,873 Inventory turnover = 10.26 times Using the inventory turnover, we can calculate the days' sales in inventory as: Days' sales in inventory = 365 days/Inventory turnover Days' sales in inventory = 365 days/10.26 Days' sales in inventory = 35.57 days On average, a unit of inventory sat on the shelf 35.57 days before it was sold.
Dahlia Corporation has a current accounts receivable balance of $440,016. Credit sales for the year just ended were $5,153,850. a. What is the receivables turnover? b. What is the days' sales in receivables? c. How long did it take, on average, for credit customers to pay off their accounts during the past year?
a. 11.71 days b. 31.16 days c. 31.16 days The receivables turnover for the company was: Receivables turnover = Credit sales/Receivables Receivables turnover = $5,153,850/$440,016 Receivables turnover = 11.71 times Using the receivables turnover, we can calculate the days' sales in receivables as: Days' sales in receivables = 365 days/Receivables turnover Days' sales in receivables = 365 days/11.71 Days' sales in receivables = 31.16 days The average collection period, which is the same as the days' sales in receivables, was 31.16 days.
Kodi Company has a debt-equity ratio of 1.28. Return on assets is 7.53 percent, and total equity is $640,000. a. What is the equity multiplier? b. What is the return on equity? c. What is the net income?
a. 2.28 times b. 17.17% c. $109,878 With the information provided, we need to calculate the return on equity using an extended return on equity equation. We first need to find the equity multiplier which is: Equity multiplier = 1 + Debt-equity ratio Equity multiplier = 1 + 1.28 Equity multiplier = 2.28 Now we can calculate the return on equity as: ROE = ROA(Equity multiplier) ROE = .0753(2.28) ROE = .1717, or 17.17% The return on equity equation we used was an abbreviated version of the DuPont identity. If we multiply the profit margin and total asset turnover ratios from the DuPont identity, we get: (Net income/Sales)(Sales/Total assets) = Net income/Total assets = ROA With the return on equity, we can calculate the net income as: ROE = Net income/Total equity .1717 = Net income/$640,000 Net income = $109,878
The Moraine Company has net income of $153,850. There are currently 27.05 days' sales in receivables. Total assets are $842,000, total receivables are $146,700, and the debt-equity ratio is .55. a. What is the company's profit margin? b. What is the company's total asset turnover? c. What is the company's ROE?
a. 7.77% b. 2.35 times c. 28.32 To calculate the profit margin, we first need to calculate the sales. Using the days' sales in receivables, we find the receivables turnover is: Days' sales in receivables = 365 days/Receivables turnover 27.05 days = 365 days/Receivables turnover Receivables turnover = 13.49 times Now we can use the receivables turnover to calculate the sales as: Receivables turnover = Sales/Receivables 13.49 = Sales/$146,700 Sales = $1,979,500.92 So, the profit margin is: Profit margin = Net income/Sales Profit margin = $153,850/$1,979,500.92 Profit margin = .0777, or 7.77% The total asset turnover is: Total asset turnover = Sales/Total assets Total asset turnover = $1,979,500.92/$842,000 Total asset turnover = 2.35 times We need to use the DuPont identity to calculate the return on equity. Using this relationship, we get: ROE = (Profit margin)(Total asset turnover)(1 + Debt-equity ratio) ROE = (.0777)(2.35)(1 + .55) ROE = .2832, or 28.32%
Some recent financial statements for Smolira Golf, Incorporated, follow. [balance sheet & income statement] Smolira Golf has 13,000 shares of common stock outstanding, and the market price for a share of stock at the end of 2022 was $84. a. What is the price-earnings ratio? b. What is the price-sales ratio? c. What are the dividends per share? d. What is the market-to-book ratio at the end of 2022?
a. Price-earnings ratio 30.41 times b. Price-sales ratio 5.78 times c. Dividends per share $0.92 d. Market-to-book ratio 13.46 times. To find the price-earnings ratio we first need the earnings per share. The earnings per share are: EPS = Net income/Shares outstanding EPS = $35,909/13,000 shares EPS = $2.76 So, the price-earnings ratio is: PE ratio = Share price/EPS PE ratio = $84/$2.76 PE ratio = 30.41 times The sales per share are: Sales per share = Sales/Shares outstanding Sales per share = $188,770/13,000 Sales per share = $14.52 So, the price-sales ratio is: P/S ratio = Share price/Sales per share P/S ratio = $84/$14.52 P/S ratio = 5.78 times The dividends per share are: Dividends per share = Total dividends/Shares outstanding Dividends per share = $11,975/13,000 shares Dividends per share = $.92 per share To find the market-to-book ratio, we first need the book value per share. The book value per share is: Book value per share = Total equity/Shares outstanding Book value per share = $81,123/13,000 shares Book value per share = $6.24 per share So, the market-to-book ratio is: Market-to-book ratio = Share price/Book value per share Market-to-book ratio = $84/$6.24 Market-to-book ratio = 13.46 times
