FINC 3331 chapter 4 HW/quiz

b. Merchandise is sold for cash. Total Current Assets Current Ratio Effect on Net Income

(0) Total Current Assets, (0) Current Ratio, (+) Effect on Net Income (Cash increases, but no impact on current assets; net income increases as a result of the sale)

Why is ratio analysis useful?

It is a way of standardizing numbers and can facilitate comparisons between firms.

All other things being equal, which of the following would decrease the current ratio?

a cash dividend is declared and paid

4.8 DuPONT AND NET INCOME precious metal mining has $17 million in sales, its ROE is 17%, and its total assets turnover is 3.2x. common equity on the firm's balance sheet is 50% of its total assets. What is its net income?

total assets turnover= sales/ total assets total assets= 17000000/3.2 total assets=5,312,500 Net income= (ROE x Sales x Total assets x Common equity)/ total assets turnover x Assets (0.17 x 17000000 x 5,312,500 x .50)/3.2 x 5,312,500 net income= 7,676,562,500,000/170,000,000 net income = 451,562.50

e. A fixed asset is sold for more than book value. Total Current Assets Current Ratio Effect on Net Income

(+) Total Current Assets, (0) Current Ratio, (+) Effect on Net Income (Cash increases, total current assets increase; net income increases due to the gain on the sale)

indicate the effects of the transactions listed in the following table on total current assets, current ratio, and net income, use (+) to indicate an increase. (-) to indicate a decrease, and (0) to indicate either no effect or an indeterminate effect. Be prepared to state any necessary assumptions and assume an initial current ratio of more than 1.0. a. Cash is acquired through issuance of additional common stock. Total Current Assets Current Ratio Effect on Net Income

(+) Total Current Assets, (0) Current Ratio, (0) Effect on Net Income (Assuming common stock issuance doesn't impact current ratio or net income directly)

r. Equipment is purchased with short-term notes. Total Current Asset Current Ratio Effect on Net Income

(+) Total Current Assets, (0) Current Ratio, (0) Effect on Net Income (Assuming no direct impact on net income)

n. Short-term promissory notes are issued to trade creditors in exchange for past due accounts payable. Total Current Asset Curent Ratio Effect on Net Income

(+) Total Current Assets, (0) Current Ratio, (0) Effect on Net Income (Assuming no direct impact on net income) (m &n) The current ratio is a liquidity metric that assesses a company's ability to cover its short-term obligations. An initial current ratio above 1.0 suggests solvency, and changes in assets or liabilities impact it accordingly: (+) for increases, (-) for decreases.

t. The estimated taxes payable are increased. Total Current Asset Current Ratio Effect on Net Income

(-) Total Current Assets, (0) Current Ratio, (-) Effect on Net Income (Assuming no direct impact on net income) Transactions b, e, f, i, and r would generally increase net income, while transactions c, d, g, h, k, m, and t would decrease net income. The effect on net income for other transactions is assumed to be neutral or requires specific information.

h. A cash dividend is declared and paid. Total Current Assets Current Ratio Effect on Net Income

(-) Total Current Assets, (0) Current Ratio, (-) Effect on Net Income (Cash decreases, impacting total current assets; net income decreases) ( a-h) represent the sum of a company's short-term assets, including cash, accounts receivable, inventory, and other assets that are expected to be converted into cash or used up within one year. Changes in total current assets reflect shifts in a company's liquidity and operating cycle.

o. 10-year notes are issued to pay off accounts payable. Total Current Asset Current Ratio Effect on Net Income

(-) Total Current Assets, (0) Current Ratio, (0) Effect on Net Income (Assuming no direct impact on net income)

q. Accounts receivable are collected. Total Current Asset Current Ratio Effect on Net Income

(-) Total Current Assets, (0) Current Ratio, (0) Effect on Net Income (Assuming no direct impact on net income)

m. Current operating expenses are paid. Total Current Asset Current Ratio Effect on Net Income

(-) Total Current Assets, (0) Current Ratio, (0) Effect on Net Income (Cash decreases, impacting total current assets; net income decreases)

p. A fully depreciated asset is retired. Total Current Asset Current Ratio Effect on Net Income

(0) Total Current Assets, (0) Current Ratio, (0) Effect on Net Income (Assuming no direct impact on net income)

Over the year, company blah had an increase in its current ratio and a decline in its total assets turnover ratio. However, the company's sales , cash and equivalents , DSO and fixed assets turnover ratio remain constant. What balance sheet amounts must have changed to produce the indicated changes?

4-3 Given that sales have not changed, a decrease in the total assets turnover means that the company's assets have increased. Also, the fact that the fixed assets turnover ratio remained constant implies that the company increased its current assets. Since the company's current ratio increased, and yet, its cash and equivalents and DSO are unchanged means that the company has increased its inventories. This is also consistent with a decline in the total assets turnover ratio.

If a firms ROE is low and managements want to improve it, explain how using more debt might help

4-6 ROE is calculated as the return on assets multiplied by the equity multiplier. The equity multiplier, defined as total assets divided by common equity, is a measure of debt utilization; the more debt a firm uses, the lower its equity, and the higher the equity multiplier. Thus, using more debt will increase the equity multiplier, resulting in a higher ROE.

Why is it sometimes misleading to compare a company's financial ratios with those of other firms that operate in the same industry?

4-8 Firms within the same industry may employ different accounting techniques that make it difficult to compare financial ratios. More fundamentally, comparisons may be misleading if firms in the same industry differ in their other investments. For example, comparing Pepsi and Coca-Cola may be misleading because apart from their soft drink business, Pepsi also owns other businesses, such as Frito‑Lay.

why would the inventory turnover ratio be more important for someone analyzing a grocery store chain than an insurance company?

4.2 The inventory turnover ratio is important to a grocery store because of the much larger inventory required and because some of that inventory is perishable. An insurance company would have no inventory to speak of since its line of business is selling insurance policies or other similar financial products—contracts written on paper and entered into between the company and the insured. This question demonstrates that the student should not take a routine approach to financial analysis but rather should examine the business that he or she is analyzing before conducting a ratio analysis.

4-23 RATIO ANALYSIS Data for barry computer co and its industry averages follow. the firm's debt is priced at par, so the market value of its debt equals its book value. Since dollars are in thousands, number of shares are shown in thousands too. a. Calculate the indicated ratios for Barry b. Construct the DuPont equation for both barry and the industry. Barry Computer Company:Balance Sheet as of December 31, 2018 (In Thousands) Cash$77,500 Accounts payable $129,000 Receivables 336,000 Other current liabilities 117,000 Inventories 241,500 Notes payable to bank 84,000 Total current assets $655,000 Total current liabilities $330,000 Long-term debt $256,500 Net fixed assets 292,500 Common equity (32,400 shares) 361,000 Total assets $947,500 Total liabilities and equity$947,500

A. Total Assets Turnover = Sales / Total Assets Sales = $1,607,500 Total Assets = $947,500 Total Assets Turnover 1,607,500/947,500=1.70 Days Sales outstanding = (Receivables/ Annual Sales) *365 Receivable = $336,000 Annual Sales = $1,607,500 Days sales outstanding = ($336,000 / $1,607,500 )*365 = 76.29 days Current Ratio = Current Assets/ Current Liabilities Current Ratio = $655,000/ $3,30,000 =1.98 Quick Ratio = Current Assets -Inventory/ Current Liabilities =$655,000−$241,000=$414,000 Current Assets -Inventory =$414,000 Current Liabilities =$330,000 Quick Ratio = $414,000/ $330,000 =1.25 B. Ratio Barry computer Co. Industry Average Current Ratio 2.0x 2.0x Quick Ratio 1.3x 1.3x Days Sales Outstanding 76.29 days 35 days Inventory Turnover 6.7x 6.7x Total Asset Turnover 1.7x 3.0x Profit Margin 1.7% 1.2% Return on Assets 2.9% 3.6% Return on Equity 7.6% 9.0% Total Debt Total asset ratio 27.1% 60%

4-20 DSO AND ACCOUNTS RECEIVABLE Ingraham Inc. currently has $205,000 in accounts receivable, and its days sales outstanding (DSO) is 71 days. It wants to reduce its DSO to 20 days by pressuring more of its customers to pay their bills on time. If this policy is adopted, the company's average sales will fall by 15%. What will be the level of accounts receivable following the change? Assume a 365-day year.

Annual sales = accounts receivable/ annual sales x 365 annual sales= (205,000/71) x 365 annual sales= 1,053,873.24 Revised annual sales= original annual sales- decrease in annual sales =1,053,873.24- (1,053.873.24 x 15%) =1,053,873.24- 158,080.9861 =895,792.25 accounts receivable= (revised annual sales/365) x target DSO accounts receivable= (895,792.25/365) x 20 =49,084.51

4-22 BALANCE SHEET ANALYSIS Complete the balance sheet and sales information using the following financial data: total asset turnover: 1.5x Days sales outstanding: 36.5 days^a Inventory turnover ratio: 5x Fixed assets turnover: 3.0x Current ratio: 2.0x gross profit margin on sales: (sales-cost of goods sold)/sales= 25%

Cash total assets-fixed asset- inventory-accounts receivables =300,000-150,000-67,500-45,000= 37,500 accounts receivable 36.5 x sales/365 36.5 x 450,000/365 =45,000 inventories COGS/5 337,500/5=67,500 fixed assets sales/3 450,000/3=150,000 total assets $300,000 sales sales= 1.5 x total assets 1.5 x 300,000= 450,000 current liabilities current assets/2 150,000/2=75,000 long term debt 60,000 common stock total liability and equity- current liabilities-long term debt-retained earnings= 300,000-75,000-60,000-97,500 =67,500 retained earnings 97,500 total liabilities and equity cost of goods sold sales-25%xsale= 450,000-25%x450,000=337,500

Sheffield's Furniture has $1,334,000 in current assets and $570,000 in current liabilities. Its initial inventory level is $585,000, and it will raise funds as additional notes payable and use them to increase inventory. How much can its short-term debt (notes payable) increase without pushing its current ratio below 2.2?

Current ratio = current assets/ current liabilities 2.2= 1,334,000 + X/ 570,000 + X (570,000 x 2.2) +2.2(x)=1,334,000 + X =1,254,000+2.2x=1,334,000+x =2.2x-x=1,334,000-1,254,000 1.2x=80,000 x=80,000/1.2 x=66,666.67 or 66,667

4.16 RETURN ON EQUITY Commonwealth Construction (CC) needs $3 million of assets to get started, and it expects to have a basic earning power ratio of 35%. CC will own no securities, all of its income will be operating income. If it so chooses, CC can finance up to 30% of its assets with debt, which will have an 8% interest rate. If it chooses to use debt, the firm will finance using only debt and common equity, so no preferred stock will be used. Assuming a 25% tax rate on taxable income, what is the difference between CC's expected ROE if it finances these assets with 30% debt versus its expected ROE if it finances these assets entirely with common stock?

EBIT = basic earning power x total assets EBIT= 35% x 3,000,000 =1,050,000 operating income (EBIT) 1,050,000 less: interest expense (0) earnings before taxes 1,050,000 less: income tax expense 262,500 net income 787,500 interest expense= assets x debt ratio x interest rate = 3,000,000 x 30% x 8% =72,000 Operating Income (EBIT) ​$1,050,000 less: Interest Expense (72,000) Earnings Before Taxes ​978,000 less: Income Tax Expense (244,500) Net Income​ $733,500 no debt net income/equity= return equity 787,500/3,000,000=26.25% 30% debt net income/equity=return on equity 733,500/2,100,000= 34.93% Difference =ROE with debt -ROE without debt =34.93%-26.25% =8.68%

4-21 P/E AND STOCK PRICE Ferrell Inc. recently reported net income of $8 million. It has 540,000 shares of common stock, which currently trades at$21 a share. Ferrell continues to expand and anticipates that 1 year from now, its net income will be $13.2 million. Over the next year, it also anticipates issuing an additional 81,000 shares of stock so that 1 year from now it will have 621,000 shares of common stock. Assuming Ferrell's price/earnings ratio remains at its current level, what will be its stock price 1 year from now?

EPS= net income/ common shares outstanding =8,000,000/540,000 =14.814 P/P ratio= price per share/ earnings per share =21/14.814 =1.4175 EPS= net income/ common shares outstanding 13,200,000/621,000 =21.256 price per share= P/E ratio x earnings per share 1.4175 x 21.256= 30.13

The Venetian Corporation recently reported net income of $1,000,000. It has 500,000 shares of common stock, which currently trades at $35 a share. Venetian continues to expand and expects that 1 year from now its net income will be $1,375,000. Over the next year it also anticipates issuing an additional 150,000 shares of stock, so that 1 year from now it will have 650,000 shares of common stock. Assuming its price/earnings ratio remains at its current level, what will be its stock price 1 year from now?

Earnings per share (EPS)= net income/ shares outstanding 1,000,000/500,000=2 current market price per share (MPS) =35 P/E ratio=MPS/EPS =35/2 =17.5 New EPS= New net income/ New shares outstanding 1,375,000/(500,000+150,000) 1,375,000/650,000 =2.11538462 New MPS=New EPS x P/E ratio =2.11538462 x 17.5 =37.02

Concrete Constructors has a return on assets (ROA) of 5 percent, a 3 percent profit margin, and a return on equity (ROE) of 15 percent. What is its equity multiplier?

Equity multiplier=ROE/ROA 15/5=3

4.6 DuPONT AND ROE a firm has a profit margin of 3% and an equity multiplier of 1.9. Its sales are $150 million, and it has total assets of $60 million. What is its ROE?

First, we can find the net income: Net Income = Profit Margin * Sales Net Income = 0.03 * $150 million Net Income = $4.5 million Next, we can find the average shareholders' equity: Shareholders' Equity = Total Assets / Equity Multiplier Shareholders' Equity = $60 million / 1.9 Shareholders' Equity = $31.58 million Finally, we can calculate the ROE: ROE = (Net Income / Average Shareholders' Equity) * 100 ROE = ($4.5 million / $31.58 million) * 100 ROE ≈ 14.25%

Which is true about the quick ratio?

It is a liquidity ratio.It cannot exceed the current ratio.It is also called the acid-test ratio.It measures the ability of the firm to pay off its short-term obligations without relying on inventory.

4.10 M/B SHARE PRICE, AND EV/EBITDA You are given the following information: Stockholders' equity as reported on the firm's balance sheet =$6.5 billion, price/earnings ratio =9, common shares outstanding =180 million, and market / book ratio =2.0. The firm's market value of total debt is $7 billion, the firm has cash and equivalents totaling $250 million, and the firm's EBITDA equals $2 billion. What is the price of a share of the company's common stock? What is the firm's EV/EBITDA?

Market value of Equity= Market/book ratio x book value of Equity =2.0 x 6.5 billion =13 billion price per share= market value of equity/ common shares outstanding =13 billion/180 million =$72.22 EV= Market value of Equity + market Value of Total Debt - cash and equivalents = 13 billion + 7 Billion -.25 billion = 19.75 billion EV/EBITDA= EV/EBITDA =19.75 Billion/2 billion =9.875

4.4 MARKET/BOOK AND EV/EBITDA RATIOS Edelman Engines has $17 billion in total assets - of which cash and equivalents total $100 million. Its balance sheet shows $1.7 billion in current liabilities - of which the notes payable balance totals $1 billion. The firm also has $10.2 billion in long-term debt and $5.1 billion in common equity. It has 300 million shares of common stock outstanding, and its stock price is $20 per share. The firm's EBITDA totals $1.368 billion. Assume the firm's debt is priced at par, so the market value of its debt equals its book value. What are Edelman's market/book and its EV/EBITDA ratios?

Market value= share price x number of shares outstanding = 20x 300 million= 6 billion Market to book value= market value/ book value of equity 6 billion/ 5.1 billion= 1.1765 debt= long term debt + notes payable =10.2 billion + 1 billion= 11.2 billion enterprise value= market value + debt - cash 6 billion + 11.2 billion - 100 million = 17.1 billion EV to EBITDA ration= EV/EBITDA = 17.1 billion/1.368 billion= 12.50

4.11 RATIO CALCULATIONS Assume the following relationships for the Caulder Corp.: Sales/Total assets= 1.3x Return on Assets (ROA) = 4.0% Return on Equity (ROE)= 8.0% Calculate caulder's profit margin and debt-to-capital ratio assuming the firm uses only debt and common equity, so total assets equal total invested capital.

Profit margin= return on assets/total asset turnover =(4%/1.3)x100 =3.0769 Debt-to-capital ratio= 1-(ROA/ROE) =1- (4%/8%) =1-.5 =50%

Consider the following financial data for Larry's Home Accessories: Balance Sheet as of December 31, 2023 Cash$68,500 Accounts payable$37,000Accounts receivable 113,000 Notes payable 82,500Inventories 191,000 Accrued wages and taxes 35,500 Total current assets$372,500 Total current liabilities$155,000 Long-term debt 243,000Net fixed assets 302,000 Common equity 276,500Total assets$674,500 Total liabilities & equity$674,500 Profit & Loss Statement for the Year Ended December 31, 2023 Sales$482,000Cost of goods sold 318,000Gross profit$164,000Operating expenses 90,500 Earnings before interest and taxes (EBIT)$73,500Interest expense 16,500 Earnings before taxes (EBT)$57,000Federal and state income taxes (20 percent) 11,400Net earnings$45,600 Calculate Larry's return on equity (ROE).

Return on Equity = ( Net Income / Shareholder's Equity ) x 100 45,600/276,500 =16.49

4.14 RETURN ON EQUITY Pacific Packaging's ROE last year was only 5%; but its management has developed a new operating plan that calls for a debt-to-capital ratio of 40%, which will result in annual interest charges of $561,000. The firm has no plans to use preferred stock and total assets equal total invested capital. Management projects an EBIT of$1,870,000 on sales of $17,000,000, and it expects to have a total assets turnover ratio of 2.1. Under these conditions, the tax rate will be 25%. If the changes are made, what will be the company's return on equity?

Solve EBIT EBIT = 1,870,000 less: interest $561,000 income before taxes 1,309,000 less:income tax( 1,309,000 x 35%) 458,510 net income= 850,850 total assets = sales/total asset turnover total assets = 17,000,000/2.1 total assets=8,095,238.10 debt= debt to capital ratio x total assets debt = 40% x 8,095,238.10 debt- 3,238,095.24 total equity= total asset-total debt total equity= 8,095,238.10-3,238,095.24 total equity= 4,857,142.86 taxes= tax rate x (EBIT -interest expense) .=.25 x (1,870,000-561,000) =327,250 net income =EBIT- interest expense-taxes =1,870,000-561,000-327,250 =981,750 ROE= net income/ total equity ROE= 981,750/4,857,142.86 = 0.202 or 20.2%

4.17 CONCEPTUAL:RETURN ON EQUITY Which of the following statements is most correct? (hint: work problems 4.16 before answering 4.17, and consider the solution setup for 4.16 as you think about 4.17.)

a. if a firm's expected basic earning power (BEP is constant for all of its assets and exceeds the interest rate on its debt, adding assets and financing them with debt will raise the firm's expected return on common equity (ROE)

Armstrong Brothers has a DSO of 21 days, and its annual sales are $5,000,000. What is its accounts receivable balance? Assume it uses a 365-day year.

accounts receivable = DSO/365 x annual sales (21/365) x 5,000,000 or 21 x (5,000,000/365) =287,671

4.1 DAY SALES OUTSTANDING Baxley brothers has a DSO of 23 days, and its annual sales are $3,650,000. What is its accounts receivable balance? assume that it uses a 365-day year.

accounts receivable balance= (DSO/365)x Annual sales (23/365)x3,650,000 =230,000

4-19 CURRENT RATIO The Stewart Company has $2,392,500 in current assets and$1,076,625 in current liabilities. Its initial inventory level is $526,350, and it will raise funds as additional notes payable and use them to increase inventory. How much can its short-term debt (notes payable) increase without pushing its current ratio below 2.0?

current ratio = current asset + X/ current liabilities + X 2= 2,392,500 + X / 1,076,625 + X 2(1,076,625 + x)= 2,392,500 + x 2,153,250 + 2x= 2,392,500 + x 2x-x= 2,392,500-2,153,250 x= 239,250

If a firm's ROE is low and management wants to improve it, the increased use of debt could help, most directly through its effect on the...

equity multiplier.

Assume you are given the following relationships for the Porter Corporation: Total asset turnover 1.9x Net income / Total assets ROA 4.15% Net income / Common equity ROE 6.40% Calculate Porter's debt-to-capital ratio, assuming its assets are financed with only debt and common equity.

equity/assets= ROA/ROE 4.15/6.40= .6484375 debt to capital=1- equity of capital ratio =1-.6484 =.3516 or 35.16

Consider the following financial data for Guerrero Industries: Balance Sheet as of December 31, 2025 Cash & equivalents$115,000 Accounts payable$26,000Accts. receivable 122,500 Notes payable 145,000Inventories 57,000 Accrued wages & taxes 35,000 Total current assets$294,500 Total current liabilities$206,000 Long-term debt 133,500Net fixed assets 381,500 Common equity 336,500Total assets$676,000 Total liab. & equity$676,000 Statement of Earnings for 2025 Industry Average Ratios Sales revenue$750,500 Current ratio1.6´Cost of sales 585,500 Quick ratio1.3´Gross profit$165,000 Days sales outstanding53 daysOperating expenses 110,500 COGS/Inventory13.7´ EBIT$54,500 Total asset turnover0.7´Interest expense 20,000 Net profit margin2.4% Pre-tax income$34,500 Return on assets1.7%Income taxes (25%) 8,625 Return on equity3.2%Net profit$25,875 Debt-to-capital ratio36% Compared to its peers, Guerrero...

has lower total expenses per dollar of sales

Over the past year, Graham & Co. has realized an increase in its current ratio and a drop in its total asset turnover ratio. However, the company's sales, quick ratio, and fixed asset turnover ratio have remained constant. What explains these changes?

inventory levels have increased

Consider the following financial data for McGregor Manufacturing: Balance Sheet as of December 31, 2024 Cash & equivalents$83,000 Accounts payable$37,000Receivables 146,000 Short-term bank note 102,500Inventories 91,500 Accruals 19,000 Total current assets$320,500 Total current liabilities$158,500 Long-term debt 403,000Net fixed assets 1,019,000 Common equity 778,000Total assets$1,339,500 Total liab. & equity$1,339,500 Statement of Earnings for 2024 Industry Average Ratios Sales$1,031,500 Current ratio1.8´Cost of goods sold 701,500 Quick ratio1.2´Gross profit$330,000 Days sales outstanding57 daysOperating expenses 236,500 COGS/Inventory5.2´ EBIT$93,500 Total asset turnover0.4´Interest expense 27,500 Net profit margin5.1% Pre-tax income$66,000 Return on assets2.1%Income taxes (25%) 16,500 Return on equity5.4%Net profit$49,500 Debt-to-capital ratio49% Compared to other firms in the same industry, McGregor...

keeps a lower percentage of its sales as profit

You are given the following information about a company: Shareholders' equity (from balance sheet) $1,637,000 Price / earnings ratio 4.3 Common shares outstanding 80,000 Market / book ratio 2.5 Calculate the price of a share of the company's common stock.

market/book ratio= market value of equity/ book value of equity =2.5=market value of equity/1,637,000 market value of equity=1,637,000x2.5 =4,092,500 market value of equity = number shares outstanding x price per share 4,092,500= 80,000 x price per share price per share=4,092,500/80,000 =51.16

4.5 PRICE/EARNINGS RATIO a company has an EPS of $2.40, a book value per share of $21.84, and a market/book ratio of 2.7x. what is its P/E ratio?

price= market/book ratio x book value per share =2.7x X $21.84 = 58.968 P/E ratio= price/EPS =58.968/$2.40 =24.57%

Consider the following financial data for Aldo's Computer Stores: Balance Sheet as of December 31, 2023 Cash & equivalents $59,000 Accounts payable $53,500 Receivables 113,500 Notes payable 95,000 Inventories 238,500 Accrued wages and taxes 57,500 Total current assets $411,000 Total short-term liab. $206,000 Long-term debt 175,500 Net fixed assets 352,500 Common equity 382,000 Total assets $763,500 Total liabilities & equity $763,500 Statement of Earnings for the Year Ended December 31, 2023 Sales $736,500 Cost of merchandise sold 446,500 Gross profit $290,000 Operating expenses 173,500 Earnings before interest and taxes (EBIT) $116,500 Interest expense 38,000 Earnings before taxes (EBT) $78,500 Federal and state income taxes (25 percent) 19,625 Net earnings $58,875 Calculate Aldo's quick ratio.

quick ratio= (current assets-inventory)/current liabilities (411,000-238,500)/206,000 =.84

4.15 RETURN ON EQUITY AND QUICK RATIO Lloyd Inc. has sales of $200,000, a net income of $15,000, and the following balance sheet: Cash $10.000 Accounts payable $30.000 Receivables 50.000 Notes payable to bank 20.000 Inventories 150.000 Total current liabilities $50.000 Total current assets $210.000 Long-term debt 50.000 Net fixed assets 90.000 Common equity 200.000 Total assets $300.000 Total liabilities and equity $300.000 The new owner thinks that inventories are excessive and can be lowered to the point where the current ratio is equal to the industry average, 2.5x without affecting sales or net income. If inventories are sold and not replaced (thus reducing the current ratio to 2.5x); if the funds generated are used to reduce common equity (stock can be repurchased at book value); and if no other changes occur,by how much will the ROE change? What will be the firm's new quick ratio?

quick ratio= quick(cash and receivables) assets/current liabilities 60,000/50,000 =1.2 current ratio= current asset/current liabilities 210,000/50,000 =4.2 ROE =net income/common equity 15,000/200,000 =7.5% current asset=current ratio x current liabilities 2.5 x 50,000 125,000 previous current assets - revised current assets= change|reduction in inventory 210,000-125,000 =85,000 common equity - change|reduction in inventory= new common equity 200,000-85,000= 115,000 ROE= net income/ common equity 15,000/115,000 =13.04% revised ROE -previous ROE 13.04%- 7,5%= 5.54% (increase) quick ratio= quick assets / current liabilities 60,000/50,000 =1.2x

4.3 DuPONT ANALYSIS Henderson's Hardware has an ROA of 11%, 6% profit margin, and an ROA of 23%. what is its total assets turnover? what is its equity multiplier?

return on assets (ROA)= 11% profit margin= 6% ROA=Profit Margin x Total asset turnover .11= .06 x total asset turnover total asset turnover=.11/.06 total asset turnover= 1.8333 return on equity (ROE)= 23% ROE=ROA x Equity Multiplier .23=.11 x Equity multiplier .23/.11= Equity multiplier Equity multiplier= 2.0909 or 2.091

Consider the following financial data for Tom's Pool Supply: Statement of Financial Position as of December 31, 2023 Cash$69,000 Accounts payable$143,500Accounts receivable 171,000 Short-term bank note 151,500Inventories 174,500 Accrued wages and taxes 83,000 Total current assets$414,500 Total short-term liab.$378,000 Long-term debt 258,500Net fixed assets 580,500 Common equity 358,500Total assets$995,000 Total liabilities & equity$995,000 Statement of Earnings for the Year Ended December 31, 2023 Sales revenue$946,500Cost of merchandise sold 632,000Gross profit$314,500Operating expenses 165,500 Earnings before interest and taxes (EBIT)$149,000Interest expense 53,500 Earnings before taxes (EBT)$95,500Federal and state income taxes (20 percent) 19,100Net profit$76,400 Calculate Tom's total asset turnover.

total asset turnover= net sales/ total assets =946,500/995,000 =.95