HW 3

Firm A and Firm B have debt-total asset ratios of 65 percent and 45 percent, respectively, and returns on total assets of 5 percent and 9 percent, respectively. What is the return on equity for Firm A and Firm B?

Firm A Firm B D/TA = .65 D/TA = .45 (TA - E)/TA = .65 (TA - E)/TA = .45 (TA/TA) - (E/TA) = .65 (TA/TA) - (E/TA) = .45 1 - (E/TA) = .65 1 - (E/TA) = .45 E/TA = .35 E/TA = .55 E = .35(TA) E = .55(TA) Rearranging ROA, we find: NI/TA = .05 NI/TA = .09 NI = .05(TA) NI = .09(TA) Since ROE = Net income/Equity, we can substitute the above equations into the ROE formula, which yields: ROE = .05(TA)/.35(TA) ROE = .09(TA)/.55(TA) ROE = .05/.35 ROE = .09/.55 ROE = .1429, or 14.29% ROE = .1636, or 16.36%

The market value of the equity of Hudgins, Inc., is $645,000. The balance sheet shows $53,000 in cash and $215,000 in debt, while the income statement has EBIT of $91,000 and a total of $157,000 in depreciation and amortization. What is the enterprise value-EBITDA multiple for this company?

First, we need the enterprise value, which is: Enterprise value = Market capitalization + Debt − Cash Enterprise value = $645,000 + 215,000 - 53,000 Enterprise value = $807,000 And EBITDA is: EBITDA = EBIT + Depreciation & Amortization EBITDA = $91,000 + 157,000 EBITDA = $248,000 So, the enterprise value-EBITDA multiple is: Enterprise value-EBITDA multiple = $807,000/$248,000 Enterprise value-EBITDA multiple = 3.25 times

SME Company has a debt-equity ratio of .57. Return on assets is 7.9 percent, and total equity is $620,000. a.What is the equity multiplier? b.What is the return on equity? c.What is the net income?

The equity multiplier is: EM = 1 + D/E EM = 1 + .57 EM = 1.57 One formula to calculate return on equity is: ROE = ROA(EM) ROE = .079(1.57) ROE = .1240, or 12.40% ROE can also be calculated as: ROE = NI/TE So, net income is: Net income = ROE(TE) Net income = .1240($620,000) Net income = $76,898.60

Just Dew It Corporation reports the following balance sheet information for 2017 and 2018. 2017 2018 Assets Current assets $12,157 $14,105 Accounts receivable 29,382 32,815 Inventory 54,632 57,204 Total $96,171 $104,124 Net plant and equipment $367,241 $375,830 Total assets $463,412 $479,954 Current liabilities Accounts payable $46,382 $49,276 Accounts payable $46,382 $49,276 Total $64,628 $69,060 Long-term debt $49,000 $45,000 Owners' equity Common stock & paid-in surplus $50,000 $50,000 Retained earnings 299,784 315,894 Total $349,784 $365,894 Total liabilities & owners' equity $463,412 $479,954 Prepare the 2017 and 2018 common-size balance sheets for Just Dew It.

2017 2018 Assets Current Assets Cash 2.62% 2.94% Accounts receivable 6.34% 6.84% Inventory 11.79% 6.84% Total 20.75% 21.69% Fixed Assets Net plant & equipment 79.25% 78.31% Total assets 100% 100% Liabilities and Owners' Equity Current liabilities Accounts payable 10.01% 10.27% Notes payable 3.94% 4.12% Total 13.95% 14.39% Long-term debt 10.57% 9.38% Owners equity Common stock & paid-in surplus 10.79% 10.42% Accumulated retained earnings 64.69% 65.82%

Some recent financial statements for Smolira Golf Corp. follow. Assets 2017 2018 Current assets Cash $34,385 $37,837 Accounts receivable 17,801 27,766 Inventory 36,310 42,632 Total $88,496 $108,235 Net plant & equipment $464,315 $519,633 Total assets $552,811 $627,868 Current Liabilities Accounts payable $36,722 $42,582 Notes payable 19,008 16,200 Other 19,864 24,634 Total $75,594 $83,416 Long-term debt $115,000 $145,000 Owners' equity Common stock and paid-in surplus $55,000 $55,000 Accumulated retained earnings 307,217 344,452 Total $362,217 $399,452 Total liabilities and owners' equity $552,811 $627,868 SMOLIRA GOLF CORP.2018 Income Statement Sales $506,454 Cost of goods sold 359,328 Depreciation 44,463 Earnings before interest and taxes $102,663 Interest paid 19,683 Taxable income $82,980 Taxes (25%) 20,745 Net income $62,235 Dividends$25,000 Retained earnings 37,235 Smolira Golf Corp. has 20,000 shares of common stock outstanding, and the market price for a share of stock at the end of 2018 was $58. a.What is the price-earnings ratio? b.What are the dividends per share? c.What is the market-to-book ratio at the end of 2018? d.If the company's growth rate is 9 percent, what is the PEG ratio?

Earnings per share= Net income/Shares Earnings per share= $62,235/20,000 = $3.11 per share PE ratio= Shares price/Earnings per share PE ratio= $58/$3.11 = 18.64 times Dividends per share= Dividends/Shares Dividends per share= $25,000/20,000 = $1.25 per share Book value per share= Total equity/Shares Book value per share= $399,452/20,000 shares = $19.97 per share Market-to-book ratio= Share price/Book value per share Market-to-book ratio= $58/$19.97 = 2.90 times PEG ratio= PE ratio/Growth rate PEG ratio= 18.64/9 = 2.07 times

Some recent financial statements for Smolira Golf Corp. follow. Assets 2017 2018 Current assets Cash $34,385 $37,837 Accounts receivable 17,801 27,766 Inventory 36,310 42,632 Total $88,496 $108,235 Net plant & equipment $464,315 $519,633 Total assets $552,811 $627,868 Current Liabilities Accounts payable $36,722 $42,582 Notes payable 19,008 16,200 Other 19,864 24,634 Total $75,594 $83,416 Long-term debt $115,000 $145,000 Owners' equity Common stock and paid-in surplus $55,000 $55,000 Accumulated retained earnings 307,217 344,452 Total $362,217 $399,452 Total liabilities and owners' equity $552,811 $627,868 SMOLIRA GOLF CORP.2018 Income Statement Sales $506,454 Cost of goods sold 359,328 Depreciation 44,463 Earnings before interest and taxes $102,663 Interest paid 19,683 Taxable income $82,980 Taxes (25%) 20,745 Net income $62,235 Dividends$25,000 Retained earnings 37,235 Smolira Golf Corp. has 20,000 shares of common stock outstanding, and the market price for a share of stock at the end of 2018 was $58. What is Tobin's Q for Smolira Golf?

First, we will find the market value of the company's equity, which is: Market value of equity = Shares × Share price Market value of equity = 20,000($58) Market value of equity = $1,160,000 The total book value of the company's debt is: Total debt = Current liabilities + Long-term debt Total debt = $83,416 + 145,000 Total debt = $228,416 Now we can calculate Tobin's Q, which is: Tobin's Q = (Market value of equity + Book value of debt)/Book value of assets Tobin's Q = ($1,160,000 + 228,416)/$627,868 Tobin's Q = 2.21

The King Corporation has ending inventory of $386,735, and cost of goods sold for the year just ended was $4,981,315. 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?

Inventory turnover = COGS/Inventory Inventory turnover = $4,981,315/$386,735 Inventory turnover = 12.88 times Days' sales in inventory = 365 days/Inventory turnover Days' sales in inventory = 365/12.88 Days' sales in inventory = 28.34 days On average, a unit of inventory sat on the shelf 28.34 days before it was sold.

Makers Corp. had additions to retained earnings for the year just ended of $415,000. The firm paid out $220,000 in cash dividends, and it has ending total equity of $5.6 million. The company currently has 170,000 shares of common stock outstanding. a.What are earnings per share? b.What are dividends per share? c.What is the book value per share? d.If the stock currently sells for $65 per share, what is the market-to-book ratio? e.What is the price-earnings ratio? f.If the company had sales of $7.45 million, what is the price-sales ratio?

Net income = Addition to RE + Dividends = $415,000 + 220,000 = $635,000 Earnings per share = NI/Shares = $635,000/170,000 = $3.74 per share Dividends per share = Dividends/Shares = $220,000/170,000 = $1.29 per share Book value per share = TE/Shares = $5,600,000/170,000 = $32.94 per share Market-to-book ratio = Share price/BVPS = $65/$32.94= 1.97 times PE ratio = Share price/EPS = $65/$3.74 = 17.40 times Sales per share = Sales/Shares = $7,450,000/170,000 = $43.82 P/S ratio = Share price/Sales per share = $65/$43.82 = 1.48 times

If Roten Rooters, Inc., has an equity multiplier of 1.27, total asset turnover of 2.10, and a profit margin of 6.1 percent, what is its ROE?

ROE = (PM)(TAT)(EM) ROE = (.061)(2.10)(1.27) ROE = .1627, or 16.27%

Jack Corp. has a profit margin of 6.4 percent, total asset turnover of 1.77, and ROE of 15.84 percent. What is this firm's debt-equity ratio?

ROE = (PM)(TAT)(EM)ROE = .1584 = (.064)(1.77)(EM) EM = .1584/(.064)(1.77)EM = 1.40 D/E = EM - 1D/E = 1.40 - 1D/E = .40 Debt-equity ratio: 0.40

Highly Suspect Corp. has current liabilities of $415,000, a quick ratio of .79, inventory turnover of 9.5, and a current ratio of 1.25. What is the cost of goods sold for the company?

The only ratio given that includes cost of goods sold is the inventory turnover ratio, so it is the last ratio used. Since current liabilities is given, we start with the current ratio: Current ratio = Current assets/Current liabilities 1.25 = Current assets/$415,000 Current assets = $518,750 Using the quick ratio, we solve for inventory: Quick ratio = (Current assets - Inventory)/Current liabilities Inventory = Current assets - (Quick ratio × Current liabilities) Inventory = $518,750 - (.79 × $415,000) Inventory = $190,900 Inventory turnover = COGS/Inventory 9.50 = COGS/$190,900 COGS = $1,813,550

Queen, Inc., has a total debt ratio of .46. a.What is its debt-equity ratio? b.What is its equity multiplier?

Total debt ratio = .46 = TD/TA Substituting total debt plus total equity for total assets, we get: .46 = TD/(TD + TE) Solving this equation yields: .46(TE) = .54(TD) Debt-equity ratio = TD/TE = .46/.54 = .85 Equity multiplier = 1 + D/E = 1.85

SDJ, Inc., has net working capital of $2,170, current liabilities of $4,590, and inventory of $3,860. a.What is the current ratio? b.What is the quick ratio?

Using the formula for NWC, we get: NWC = CA - CL CA = CL + NWC CA = $4,590 + 2,170 CA = $6,760 So, the current ratio is: Current ratio = CA/CL Current ratio = $6,760/$4,590 Current ratio = 1.47 times And the quick ratio is: Quick ratio = (CA − Inventory)/CL Quick ratio = ($6,760 − 3,860)/$4,590 Quick ratio = .63 times

DTO, Inc., has sales of $16.7 million, total assets of $12.9 million, and total debt of $5.7 million. Assume the profit margin is 5 percent. a.What is net income? b.What is ROA? c.What is ROE?

We need to find net income first. So: Profit margin = Net income/Sales Net income = Profit margin(Sales) Net income = .05($16,700,000) Net income = $835,000 ROA = Net income/TA ROA = $835,000/$12,900,000 ROA = .0647, or 6.47% To find ROE, we need to find total equity. Since TL & OE equals TA: TA = TD + TE TE = TA − TD TE = $12,900,000 − 5,700,000 TE = $7,200,000 ROE = Net income/TE ROE = $835,000/$7,200,000ROE = .1160, or 11.60%

Just Dew It Corporation reports the following balance sheet information for 2017 and 2018. 2017 2018 Assets Current assets $12,157 $14,105 Accounts receivable 29,382 32,815 Inventory 54,632 57,204 Total $96,171 $104,124 Net plant and equipment $367,241 $375,830 Total assets $463,412 $479,954 Current liabilities Accounts payable $46,382 $49,276 Accounts payable $46,382 $49,276 Total $64,628 $69,060 Long-term debt $49,000 $45,000 Owners' equity Common stock & paid-in surplus $50,000 $50,000 Retained earnings 299,784 315,894 Total $349,784 $365,894 Total liabilities & owners' equity $463,412 $479,954 Based on the balance sheets given for Just Dew It: a.Calculate the current ratio for each year. b.Calculate the quick ratio for each year. c.Calculate the cash ratio for each year. d.Calculate the NWC to total assets ratio for each year. e.Calculate the debt-equity ratio and equity multiplier for each year. f.Calculate the total debt ratio and long-term debt ratio for each year.

a. Current ratio= Current assets/Current liabilities Current ratio 2017= $96,171/$64,628 = 1.49 times Current ratio 2018= $104,124/$69,060 = 1.51 times b. Quick ratio= (Current assets - Inventory)/Current liabilities Quick ratio 2017= ($96,171 - 54,632)/$64,628 = .64 times Quick ratio 2018= ($104,124 - 57,204)/$69,060 = .68 times c. Cash ratio= Cash/Current liabilities Cash ratio 2017= $12,157/$64,628 = .19 times Cash ratio 2018= $14,105/$69,060 = .20 times d. NWC ratio= NWC/Total assets NWC ratio 2017= ($96,171 - 64,628)/$463,412 = .0681, or 6.81% NWC ratio 2018= ($104,124 - 69,060)/$479,954 = .0731, or 7.31% e. Debt-equity ratio= Total debt/Total equity Debt-equity ratio 2017= ($64,628 + 49,000)/$349,784 = .32 times Debt-equity ratio 2018= ($69,060 + 45,000)/$365,894 = .31 times Equity multiplier= 1 + D/E Equity multiplier 2017= 1 + .32 = 1.32 Equity multiplier 2018= 1 + .31 = 1.31 f. Total debt ratio= (Total assets - Total equity)/Total assets Total debt ratio 2017= ($463,412 - 349,784)/$463,412 = .25 times Total debt ratio 2018= ($479,954 - 365,894)/$479,954 = .24 times Long-term debt ratio= Long-term debt/(Long-term debt + Total equity) Long-term debt ratio 2017= $49,000/($49,000 + 349,784) = .12 times Long-term debt ratio 2018= $45,000/($45,000 + 365,894) = .11 times