Finance Ch 3

The three parts of the Dupont equation are:

Profit margin, Total asset turnover, & Equity Multiplier.

If Rogers, Inc., has an equity multiplier of 1.43, total asset turnover of 1.87, and a profit margin of 6.05 percent, what is its ROE?

ROE = (Profit Margin) (Total Assets Turnover) (Equity Multiplier) ROE = (0.0605) (1.87) (1.43) ROE = 16.18%

Return on equity can be calculated as ROA × Equity multiplier. What is another way to express this equation?

ROE = ROA × (1 + Debt − Equity Ratio)

Dahlia Corp. has a current accounts receivable balance of $513,260. Credit sales for the year just ended were $4,986,340. What is the receivables turnover? The days' sales in receivables?

Receivable turnover = Credit sales/Receivable 4,986,340/513,260= 9.72 Days sales receivable =Receivable*365/Credit sales 513,260*365/4,986,340 = 37.57

Efran's Auto Repair has total equity of $815,280, long-term debt of $391,900, net working capital of $49,500, and total assets of $1,292,485. What is the total debt ratio?

.37

Sunshine Rentals has a debt-equity ratio of .67. The return on assets is 8.1 percent, and total equity is $595,000. What is the net income?

$80,485.65 Explanation: Debt-equity ratio=Debt/Equity Hence Total debt=(0.67*$595000)=$398650. Hence total assets=(Debt+equity) =($398650.+$595000)=$993,650. Hence ROA=Net income/Total assets. Hence net income=($993,650*8.1%)=$80,485.65

Khalid Warehouse has total assets of $485,390, net fixed assets of $250,000, current liabilities of $23,456, and long-term liabilities of $148,000. What is the total debt ratio?

0.35 Explanation: Calculation of Total debt ratio Total Fixed Assets = $485,390 Current Liabilities = $23,456 Non- Current Liabilities = $148,000 Total Debt = Current + Non Current Liabilities = $23,456 + $148,000 = $171,456 Total debt ratio = Total debt/ Total Assets = 171,456/ 485,390 = 0.35

Stowell Horse Farms has total assets of $689,400, long-term debt of $198,375, total equity of $364.182, net fixed assets of $512,100, and sales of $1,021,500. The profit margin is 6.2 percent. What is the current ratio?

1.40 Explanation: Total assets=fixed assets+current assets current assets=(689,400-512,100)=$177300 Total assets=Total equity+Total liabilities 689400=364182+(Current liabilities+Long term debt) Current liabilities=689400-364182-198,375 =126843 Current ratio=current assets/Current liabilities =$177300/126843 =1.40(Approx).

Bed Bug Inn has annual sales of $137,000. Earnings before interest and taxes are equal to 5.8 percent of sales. For the period, the firm paid $4,700 in interest. What is the profit margin if the tax rate is 21 percent?

1.87% Explanation: EBIT=5.8%*sales =5.8%*137,000 =7,946 EBT= EBIT-Interest =7,946-4,700 =3,246 Net Income= EBT * (1-tax) =3,246*(1-21%) =2,564 Profit Margin= net income/sales =2,564/137,000 =1.87%

Darnell's Place has total assets of $152,080, a debt-equity ratio of .62, and net income of $14,342 What is the return on equity?

15.28% Explanation: ROE=(Net income/Total assets)*(1+Debt equity ratio) (14342/152080)*+(1+0.62) =0.152775 =15.28%

The Saw Mill has a return on assets of 7.92 percent, a total asset turnover rate of 1.18, and a debt-equity ratio of 1.46. What is the return on equity?

19.48% Explanation: ROA=profit margin*total asset turnover Equity multiplier=1+debt-equity ratio ROE=Profit margin*total asset turnover*equity multiplier

Goshen Pools has total equity of $358,200 and net income of $47,500. The debt-equity ratio is .68 and the total asset turnover is 1.2. What is the profit margin?

6.58% Explanation: Total Asset Turnover = Net Sales/Total Asset 1.2 = Net Sales/Total Asset 1.2 = Net Sales/ 601776 Net Sales = 722131.20 # Total Asset = Equity + Debt = 358200 + 243576 = 601776 Debt Equity = Debt/Equity 0.68 = Debt/358200 Debt = 243576 PROFIT MARGIN = NET INCOME/ NET SALES = 47500/ 722131 = 6.58 %

Rogers Radiators has net income of $48,200, sales of $947,100, a capital intensity ratio of .87, and an equity multiplier of 1.53. What is the return on equity?

8.95% Explanation: First we will calculate total assets as per below: Capital intensity ratio = Total assets / Sales Putting the given values in the above formula, we get, 0.87 = Total assets / $947100 Total assets = $947100 * 0.87= $823977 Next we will calculate stockholder's equity as per below: Equity multiplier = Total assets / Stockholder's equity Putting the values in the above formula, we get, 1.53 = $823977 / Stockholder's equity Stockholder's equity = $823977 / 1.53 Stockholder's equity = $538547.05 Now, we will calculate return on equity as per below: Return on equity = Net income / Stockholder's equity * 100 Return on equity = $48200 / $538547.05 * 100 Return on equity = 8.95%

Davis Company has provided the following financial data: Total Asset Turnover = .245 Net Income = $400,000 Equity Multiplier = 1.20 Net Sales = $1,300,000 What is the Return on Equity?

9.1% Explanation: Total Asset Turnover = .245 Net Income = $400,000 Equity Multiplier = 1.20 Net Sales = $1,300,000 Profit Margin = Net Income/Net Sales Profit Margin = $400,000/$1,300,000 = .31 ROE = Profit Margin × Total Asset Turnover × Equity Multiplier ROE = .31 × .245 × 1.20 = .0911 ROE = 9.1%

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 14.7 percent. Sales were $1,745,000, the total debt ratio was .33, and total debt was $650,000. What is the return on assets (ROA)?

9.85% Explanation: Equity to total asset ratio = 1-total debt ratio= (1-0.33) = .67 Return on asset ROA = ROE*equity to total asset = 14.7%*0.67 = 9.85%

The DuPont identity can be used to help a financial manager determine the: i. degree of financial leverage used by a firm. ii. operating efficiency of a firm. iii. utilization rate of a firm's assets. iv. rate of return on a firm's assets.

All options

Bolton Corporation had additions to retained earnings for the year just ended of $629,000. The firm paid out $110,000 in cash dividends, and it has ending total equity of $7.24 million.

Answer a) Earnings per share = Retained earnings + dividends / No of shares = 629000 + 110,000 / 610,000 = 1.21 Dividends per share = 110,000 / 610,000 = 0.18 BV per share = 7,240,000 / 610,000 = 11.87 Answer b) Market Value = 29.40 * 610,000 = 17,934,000 Market to Book Ratio = 17,934,000 / 7,240,000 = 2.48 Price Earning Ratio = Price / Earnings = 29.40 / 1.21 = 24.30 Answer c) Sales per share = 10,540,000 / 610,000 = 17.28 Price to Sales Ratio = 29.40 / 17.28 = 1.70

What is the Balance Sheet identity or equation?

Assets = Liabilities + Equity

How do you calculate the average tax rate?

Average Tax Rate = Total Taxes Paid divided by Total Taxable Income

A useful way of standardizing financial statements is to choose a _______ year and then express each item relative to that amount.

Base

American Corporation has the following financial information. Year 1: Cash $202.95 A/R $398.02 Inventory $785.12 Year 2: Cash $245.90 A/R $485.34 Inventory $648.54 If Year 1 is the base year, what is the percentage increase/decrease of each current asset amount?

Cash = 21% increase, A/R = 22% increase, Inventory = 17% decrease Explanation: Cash $245.90/$202.95= 1.212 21% increase A/R $485.34/$398.02= 1.22 22% increase Inventory $648.54/$785.12= .83 17% decrease

Which one of these transactions will increase the liquidity of a firm?

Credit sale of inventory at cost

Mobius, Inc., has a total debt ratio of .57. What is its debt-equity ratio? What is its equity multiplier?

Debt ratio = total debt / total assets Therefore, it has a total debt of 0.57 and total assets of 1. And total assets = total debt + total equity 1 = 0.57 + total equity Total equity = 0.43 Now, Debt equity ratio = total debt/ total equity = 0.57 / 0.43 = 1.3256 Again, Equity multiplier = total assets / total equity = 1 / 0.43 = 2.3256 times

Steamboat Bike Shoppe has total assets of $536,712 and an equity multiplier of 1.36. What is the debt-equity ratio?

Equity multiplier = 1 + Debt equity ratio 1.36 = 1 + Debt equity ratio Debt equity ratio = 1.36 - 1 Debt equity ratio = 0.36

Common size income statements show balance sheet items as a percentage of current assets. T/F

False

The accounting income statement equation is

Income = Revenue - Expenses

Firefly, Incorporated, has sales of $1,366,400, cost of goods sold of $897,575, and inventory of $148,630. What is the inventory turnover rate?

Inventory turnover rate =Cost of goods sold/Inventory =$897575/$148630 =6.04 times

Denver, Incorporated, has sales of $18.1 million, total assets of $13.1 million, and total debt of $3.9 million. The profit margin is 9 percent.

Net income= $1,629,000 ROA= 12.44% ROE= 17.71%

Dexter, Inc., had a cost of goods sold of $75,318. At the end of the year, the accounts payable balance was $18,452. How long on average did it take the company to pay off its suppliers during the year?

Payables turnover= Cost of Goods Sold/Accounts Payable Balance =$75,318/$18,452 =4.09 Days' sales in payable=(Accounts payable*No.of days)/Cost of goods sold =($18,452*365)/$75,318 =$6734,980/$75,318 =89.42 days

A firm has sales of $311,000 and net income of $31,600. The price-sales ratio is 3.24 and market price is $36 per share. How many shares are outstanding?

Price sales ratio = Stock price / Sales Per Share 3.24 = 36/311000/Number of shares 3.24*311000/36 = Number of shares Number of shares = 27990

Which ratio was primarily designed to monitor firms with negative earnings?

Price-sales ratio

Some recent financial statements for Smolira Golf, Incorporated, follow. [balance sheet/income statement] Find the following financial ratios for Smolira Golf (use year-end figures rather than average values where appropriate): Current Assets: $20,291 (2021) & $22,100 (2022) etc... Explanation: A) Current ratio= Current Assets / Current Liabilities 2021 Current ratio = $20,291/4,114= 4.93 2022 Current ratio = B) Quick ratio = (Current Assets - Inventory ) / Current Liabilities 2021 Current ratio = 2022 Current ratio = C) Cash ratio = Cash / Current Liabilities 2021 Cash Ratio = 2022 Cash Ratio = D) Total Asset Turnover = Net Sales / Total Assets TAT = E) Inventory turnover = Cost of goods sold / Inventory Inventory turnover = F) Receivables turnover = Net Sales / Accounts Receivable Receivables turnover = G) Total debt ratio = Total Debt / Total Assets 2021 Total debt ratio = 2022 Total debt ratio = H) Debt-equity ratio = Total Debt / Total Equity 2021 Debt-equity ratio = 2022 Debt-equity ratio = I) Equity multiplier = 1+ Total Debt / Total Equity 2021 Debt-equity ratio = 1+ 2022 Debt-equity ratio = 1+ J) Times interest earned = EBIT / Interest Times interest earned = K) Cash coverage ratio = (EBIT + Depriciation) / Interest Cash coverage ratio= L) Profit margin = Net Income / Net sales Profit margin = M) Return on assets = Net Income / Total Assets Return on assets = N) Return on equity = Net Income / Total Equity Return on equity =

Short-term solvency ratios- a. Current ratio: 4.93 times (2021) & 4.37 times (2022) b. Quick ratio: 1.85 times (2021) & 1.67 times (2022) c. Cash ratio: 0.70 times (2021) & 0.55 times (2022) Asset utilization ratio- d. Total asset turnover: 1.79 times e. Inventory turnover: 9.31 times f. Receivables turnover: 33.43 times Long-term solvency ratios- g. Total debt ratio: 0.24 times (2021) & 0.21 times (2022) h. Debt-equity ratio: 0.31 times (2021) & 0.27 times (2022) i. Equity multiplier: 1.31 times (2021) & 1.27 times (2022) j. Times interest earned ratio: 43.22 times k. Cash coverage ratio: 47.17 times Profitability ratios- l. Profit margin: 19.11% m. Return on assets: 34.29% n. Return on equity: 43.42%

Whipporwill, Incorporated's, net income for the most recent year was $13,331. The tax rate was 23 percent. The firm paid $4,905 in total interest expense and deducted $5,352 in depreciation expense. What was the company's cash coverage ratio for the year?

Taxable income = Net income/(1 - Tax rate) = 13331/(1 - 23%) =17312.987 EBIT = Taxable income + Interest =17312.987 + 4905 =22217.987 Cash coverage ratio = (EBIT + Depreciation expense)/(Interest) =>Cash coverage ratio = (22217.987 + 5352)/4905 =>Cash coverage ratio = 5.62 times

Jackson Corp. has a profit margin of 5.8 percent, total asset turnover of 1.75, and ROE of 13.85 percent. What is this firm's debt-equity ratio?

We have, Equity Multiplier= ROE/(Profit margin * Asset Turnover) ROE=13.85% = 0.1385 Asset Turnover =1.75 Profit margin= 5.8%= 0.058 Then equity multiplier= 0.1385/(1.75*0.058) => 1.3645 Also we have equity multiplier -1 = Debt/Equity => Debt/Equity= 1.3645-1= 0.3645 Firms Debt Equity ratio is 0.36=

SDJ, Incorporated, has net working capital of $1,810, current liabilities of $5,650, and inventory of $1,275. a. What is the current ratio? b. What is the quick ratio?

a. 1.32 times b. 1.09 times Explanation: Working Capital = CA - CL 1,810.00 Current Liabilities. 5,650.00 CA = 5650 + 1810. 7,460.00 Current Ratio = 7460/5650. 1.32 Quick Assets = 7460 - 1275. 6,185.00 Quick Ratio = 6185/5650. 1.09

Dahlia Corporation has a current accounts receivable balance of $444,516. Credit sales for the year just ended were $8,053,510. 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. 18.12 times b. 20.15 days c. 20.14 days Explanation: a= credit sales/receivables $8,053,510/$444,516= 18.12 b= (receivables*365)/credit sales (444,516*365)/8,053,510= 20.15 c=365/AR turnover 365*18.12= 20.14

Kodi Company has a debt-equity ratio of 1.38. Return on assets is 7.63 percent, and total equity is $690,000. a. What is the equity multiplier? (round to 2 dec.) b. What is the return on equity? (round to 2 dec.) c. What is the net income? (round to nearest whole #)

a. 2.38 times b. 18.16% c. $125,300 (rounded)

In response to complaints about high prices, a grocery chain runs the following advertising campaign: "If you pay your child $1 to go buy $33 worth of groceries, then your child makes about twice as much on the trip as we do." You've collected the following information from the grocery chain's financial statements: (in millions $) Sales 752.00 Net income 11.35 Total assets 315.00 Total debt 152.00 a. What is the child's profit margin? b. What is the store's profit margin? c. What is the store's ROE?

a. 3.00% b. ******************* c. 6.96%

It takes Leila's Boutique an average of 53 days to sell its inventory and an average of 16.8 days to collect its accounts receivable. The firm has sales of $942,300 and costs of goods sold of $692,800. What is the accounts receivable turnover rate? Assume a 365-day year.

average days of collection = 365/accounts receivable turnover rate 16.80 = 365/x x = 365/16.80x=21.72619 or 21.73

Which one of the following statements is correct? a. Peer group analysis is easier when seasonal firms have different fiscal years. b. Adjustments have to be made when comparing the income statements of firms that use different methods of accounting for inventory. c. Comparing results across geographic locations is easier since all countries now use a common set of accounting standards. d. Peer group analysis is easier when a firm is a conglomerate versus when it has only a single line of business. e. Peer group analysis is simplified when firms use varying methods of depreciation.

b. Adjustments have to be made when comparing the income statements of firms that use different methods of accounting for inventory.

Financial statement analysis: a. is enhanced by comparing results to those of a firm's peers but not by comparing results to prior periods. b. provides useful information that can serve as a basis for forecasting future performance. c. provides useful information to shareholders but not to debt-holders. d. is limited to internal use by a firm's managers. e. is primarily used to identify account values that meet the normal standards.

b. provides useful information that can serve as a basis for forecasting future performance.

You would like to borrow money three years from now to build a new building. In preparation for applying for that loan, you are in the process of developing target ratios for your firm. Which set of ratios represents the best target mix considering that you want to obtain outside financing in the relatively near future? a. Times interest earned = 1.5; debt-equity ratio = 1.2 b. Cash coverage ratio = .8; debt-equity ratio = .8 c. Cash coverage ratio = 2.6; debt-equity ratio = .3 d. Cash coverage ratio = .5; total debt ratio = .2 e. Times interest earned = 1.7; debt-equity ratio = 1.6

e. Cash coverage ratio = 2.6; debt-equity ratio = 0.3:

If a firm has an inventory turnover of 15, the firm:

sells its entire inventory an average of 15 times each year.