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#1 Assignment 3.4 Exercises Problem 1: Calculating Liquidity Ratios5 Points Flugel, Inc., has Net Working Capital of $8,920, current liabilities of $11,380, and inventory of $16,750. a) What is the current ratio? b) What is the quick (acid test) ratio? c) If the company's Current Ratio is unusually high, what might this indicate? Use the Template Provided Below to Create Your Solution - Pay close attention to the formulas and formatting of the inputs. Input area: The Current Ratio is = Current Assets / Current Liabilities, but we aren't given Current assets. Net Working Capital$8,920NWC = CA - CL Current Liabilities$11,380CL + NWC = CA Inventory$16,750CL = CA - NWC = $11,380-8,920 CL = $2,460 Current Ratio: $2,460 Output area: Current Assets$ 20,300 Current Ratio1.78 Quick Ratio 0.3119507909 Intepretation: What might an unusually high Current Ratio indicate? As discussed in the practice questions usually, a high current ratio is preferred. It signifies high liquidity (a position of safety). However, if the current ratio is too high (i.e. above 2), it might be that the company is unable to use its current assets efficiently. This means they can meet their short term debits. This is the Student Template, provided in the assignment instructions October 2019 #2 Assignment 3.4 Exercises Problem 2: Calculating Profitability Ratios5 Points Sousa, Inc., has Sales of $37.3 million, Total Assets of $26.5 million, and Total Debt of $11.3 million. The company's Profit Margin is 6 percent. a) What is the company's Net Income? b) What is the ROA? c) What is the ROE? Create your Original Solution Below - Be sure to show all calculations and clearly indicate answers. Input area: These types of problems often have little puzzles to solve, designed to test your understanding of the relationships between ratios. Sales$37,300,000To find Net Income, you need to know the relationship between Net Income and the other information given. Total Assets$26,500,000The formula for Return on Assets is = Net Income / Total Assets Total Debt$11,300,000We are given ROA and Total Assets, so with a little algebra can find Net Income Return on Assets11%We are given ROA and Total Assets, so with a little algebra can find Net Income ROA = NI / TA NI = ROA X TA Output area:NI = 0.11 X $4,500,000 NI = $495,000 Net Income $495,000We can then use this information to find the Profit Margin… Profit Margin = Net Income / Sales = $495,000 / $9,000,000 Profit Margin5.50%Profit Margin = 0.055 or 5.5% Total Equity $2,200,000The second puzzle is that Equity is not given, and it is needed to calculate ROE. We can find it with the Balance Sheet Equation. Total Equity = Total Assets - Total Liabilities Return on Equity 22.50%Total Equity = $4,500,000 - $2,300,000 = $2,200,000 ROE = Net Income / Total Equity = $495,000 / $2,200,000 = 0.2250 or 22.50% It is worthwhile to note ROE will always be higher than ROA (if the company has even $1 of liabilities in any form) This is the Student Template, provided in the assignment instructions October 2019 #3 Assignment 3.4 Exercises Problem 3: Calculating Inventory Turnover5 Points The Piccolo Corporation has ending inventory of $3,720,180. Material costs for the year just ended were $4,573,820. a) What is the inventory turnover? b) What is the days' sales in inventory? c) If the company's Inventory Turnover is unusually low, what might this indicate? Use the Template Provided Below to Create Your Solution - Pay close attention to the formulas and formatting of the inputs. Input area: Ending Inventory$ 3,720,180 Cost of Goods sold4,573,820 Output area: Inventory Turnover1.23 Days' Sales in Inventory296.9 Intepretation: What might an unusually low Inventory Turnover indicate? If inventory turnover is low, it might indicate that product demand is declining. Also, this hints you that there are potential issues with the marketing of the product. A product or service with a low inventory turnover rate sells slowly and is likely to be overstocked. This is the Student Template, provided in the assignment instructions October 2019 #4 Assignment 3.4 Exercises Problem 4: Dupont Identity5 Points The famous Dupont Identity breaks Return on Equity (ROE) into three components: Profit Margin, Total Asset Turnover, and Financial Leverage (Assets/Equity). French Corp. has an Asset/Equity ratio of 1.55. Their current Total Asset Turnover has recently fallen to 1.20, bringing their ROE down to 9.1%. a) What is this firm's Profit Margin? B) If the company were able to improve its Total Asset Turnover to 1.8, what would be their new ROE? Create your Original Solution Below - Be sure to show all calculations and clearly indicate answers. This is the Student Template, provided in the assignment instructions October 2019 #5 Assignment 3.4 Exercises Problem 5: Calculating Market Value Ratios5 Points Euphonium Corp. had additions to retained earnings for the year just ended of $595,000. The firm paid out $395,000 in cash dividends, and it had ending total equity of $18.3 million. The company has 370,000 shares of common stock outstanding, and the stock sells for $47 per share. a) What are earning per share? b) What are dividends per share? c) What is the book value per share? d) What is the price-earnings ratio? e) Based on this data, would you consider purchasing this stock? Why or why not? Is it a good investment? Use the Template Provided Below to Create Your Solution - Pay close attention to the formulas and formatting of the inputs. Input area: Addition to retained earnings Cash dividends Total equity Common shares outstanding Share price Output area: Net Income $ - 0 Earnings per Share ERROR:#DIV/0! Dividends per Share ERROR:#DIV/0! Book Value per Share ERROR:#DIV/0! P/E ratio ERROR:#DIV/0! Intepretation: Given this data, is this stock a good investment? Why or why not? (briefly explain here) This is the Student Template, provided in the assignment instructions October 2019 #6 Assignment 3.4 Exercises Problem 6: Calculating Average Payables Period5 Points Saxhorn, Inc., had a Cost of Goods Sold of $138,572 last year. At the end of the year, the Accounts Payable balance was $32,681. a) How long on average did it take the company to pay its suppliers (what is the Payables Period)? b) What might a large value for this ratio imply? Create your Original Solution Below - Be sure to show all calculations and clearly indicate answers. This is the Student Template, provided in the assignment instructions October 2019 #7 Assignment 3.4 Exercises Problem 7: Trend Analysis5 Points Financial information is provided below for Saxabut Inc. Prepare the 2018 and 2019 balance sheets, and then use 2018 as the base-year to create a horizontal analysis. Account Category20182019 Cash$ 11,135$ 13,407 Accounts Receivable$ 28,419$ 30,915 Inventory$ 51,163$ 56,295 Accounts Payable$ 45,166$ 48,185 Notes Payable$ 17,773$ 18,257 Net Plant and Equipment$ 326,456$ 357,560 Long-Term Debt$ 44,000$ 39,000 Common Stock and Paid-in Surplus$ 50,000$ 50,000 Retained Earnings$ 260,234$ 302,735 Use the Template Provided Below to Create Your Solution - Pay close attention to the formulas and formatting of the inputs. Input / Ouput area: Saxabut, Inc. Balance Sheet December 31st Percentage ChangePercentage Change 2018201920182019 Current AssetsCurrent Liabilities CashERROR:#DIV/0! Accounts PayableERROR:#DIV/0! Accounts ReceivableERROR:#DIV/0! Notes PayableERROR:#DIV/0! InventoryERROR:#DIV/0! Total$ -$ -ERROR:#DIV/0! Total $ -$ -ERROR:#DIV/0! Long-Term DebtERROR:#DIV/0! Owners' Equity Common Stock and Paid-In SurplusERROR:#DIV/0! Retained EarningsERROR:#DIV/0! Net Plant and EquipmentERROR:#DIV/0! Total$ -$ -ERROR:#DIV/0! Total Assets$ -$ -ERROR:#DIV/0!Total Liabilities and Owners' Equity$ -$ -ERROR:#DIV/0! This is the Student Template, provided in the assignment instructions October 2019 #8 Assignment 3.4 Exercises Problem 8: Common-Size Financial Statements5 Points Use the financial information provided below to perform a vertical analysis on Mello Inc. Prepare the 2019 common-size balance sheet and income statement. Item2019 Cash$ 110,000 Accounts Receivable$ 30,000 Inventory$ 40,000 Short-Term Investments$ 20,000 Accounts Payable$ 75,000 Unearned Revenue$ 25,000 Net Plant and Equipment$ 50,000 Long-Term Debt$ 50,000 Common Stock$ 80,000 Retained Earnings$ 20,000 Net Sales$ 120,000 Cost of Goods Sold$