CP

Problems 401

Problems

Ace Industries has current assets equal to $3 million. The company’s current ratio is 1.5, and its

quick ratio is 1.0. What is the firm’s level of current liabilities? What is the firm’s level of inven-

tories?

Baker Brothers has a DSO of 40 days. The company’s average daily sales are $20,000. What is

the level of its accounts receivable? Assume there are 365 days in a year.

Bartley Barstools has an equity multiplier of 2.4. The company’s assets are financed with some

combination of long-term debt and common equity. What is the company’s debt ratio?

Doublewide Dealers has an ROA of 10 percent, a 2 percent profit margin, and a return on eq-

uity equal to 15 percent. What is the company’s total assets turnover? What is the firm’s equity

multiplier?

Assume you are given the following relationships for the Brauer Corporation:

Sales/total assets 1.5

Return on assets (ROA) 3%

Return on equity (ROE) 5%

Calculate Brauer’s profit margin and debt ratio.

The Petry Company has $1,312,500 in current assets and $525,000 in current liabilities. Its ini-

tial inventory level is $375,000, and it will raise funds as additional notes payable and use them

to increase inventory. How much can Petry’s short-term debt (notes payable) increase without

pushing its current ratio below 2.0? What will be the firm’s quick ratio after Petry has raised the

maximum amount of short-term funds?

The Kretovich Company had a quick ratio of 1.4, a current ratio of 3.0, an inventory turnover

of 6 times, total current assets of $810,000, and cash and marketable securities of $120,000.

What were Kretovich’s annual sales and its DSO? Assume a 365-day year.

The H.R. Pickett Corporation has $500,000 of debt outstanding, and it pays an interest rate of

10 percent annually. Pickett’s annual sales are $2 million, its average tax rate is 30 percent, and

its net profit margin on sales is 5 percent. If the company does not maintain a TIE ratio of at

least 5 times, its bank will refuse to renew the loan, and bankruptcy will result. What is Pick-

ett’s TIE ratio?

Data for Barry Computer Company and its industry averages follow.

a.Calculate the indicated ratios for Barry.

b.Construct the extended Du Pont equation for both Barry and the industry.

c.Outline Barry’s strengths and weaknesses as revealed by your analysis.

d.Suppose Barry had doubled its sales as well as its inventories, accounts receivable, and com-

mon equity during 2002. How would that information affect the validity of your ratio analy-

sis? (Hint: Think about averages and the effects of rapid growth on ratios if averages are not

used. No calculations are needed.)

Barry Computer Company: Balance Sheet as of December 31, 2002 (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

Net fixed assets 292,500 Long-term debt 256,500

Common equity 361,000

Total assets $947,500 Total liabilities and equity $947,500

10–9

RATIO ANALYSIS

10–8
TIMES-INTEREST-EARNED RATIO

10–7

RATIO CALCULATIONS

10–6

LIQUIDITY RATIOS

10–5

RATIO CALCULATIONS

10–4

DU PONT ANALYSIS

10–3

DEBT RATIO

10–2

DAYS SALES OUTSTANDING

10–1

LIQUIDITY RATIOS

Analysis of Financial Statements 397