QUESTION
1. Dupont Analysis: A company has a ROA of 10%, a 2% profit margin, and a ROE of 15%.
1.What is its total assets turnover?
2. What is its equity multiplier?
2. M/B and share price: Calculate the price of a share of the company's common stock by using this information - stockholders equity = $3.75 billion; price/earnings ratio = 3.5; common shares outstanding = 50 million; and market/book ratio = 1.9.
3. Return on equity and quick ration: A company 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 other current liabilities $ 20,000
Inventories $150,000 Long term debt $ 50,000
Net fixed assets$90,000 Common equity $200,000
Total assets $300,000 Total liabilities & 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 of 2.5x, without affecting either sales or net income. If inventories are sold off 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?
4. Current Ratio: A company has $1,312,500 in current assets and $525,000 in current liabilities. Its initial inventory level is $375,000, 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 2.0?
5. Ratio Analysis:
a. calculate the indicated ratios for the company (see the last table)
b. construct the extended Du Pont equation for the company and the industry
c. outline the company’s strengths and weaknesses as revealed by the analysis
d. Suppose the company had doubled its sales as well as its inventories, accounts receivable, and common equity during 2005. How would that information affect the validity of the ratio analysis? (Hint, think about averages and the effects of rapid growth on ratios if averages are not used. No calculations are needed)
Company Balance Sheet as of Dec. 31, 2005 (in thousands)
Cash $ 77,500 Accounts payable $129,000
Receivables 336,000 Notes payable 84,000
Inventories 241,500 Other current liabilities 117,000
Total current assets $655,000 Total current liabilities $330,000
Long term debt 256,500
Net fixed assets 292,500 Common equity 361,000
Total assets $947,500 Total liabilities and equity $947,500
Company Income Statement for year ended Dec. 31, 2005 (in thousands)
Sales $1,607,500
Cost of goods sold
Material $717,000
Labor 453,000
Heat, light, power 68,000
Indirect labor 113,000
Depreciation 41,500 1,392,500
Gross Profit $ 215,000
Selling expenses 115,000
General & administrative expenses 30,000
Earnings before interest and taxes (EBIT) $ 70,000
Interest expense 24,500
Earnings before taxes (EBT) $ 45,500
Federal & state income taxes (40%) 18,200 CLICK HERE FOR SOLUTION
