86 PART 1 Introduction to Managerial Finance
LG6LG6a. Calculate the following debt and coverage ratios for the two companies.
Discuss their financial risk and ability to cover the costs in relation to each
other.
(1) Debt ratio
(2) Times interest earned ratio
b. Calculate the following profitability ratios for the two companies. Discuss
their profitability relative to each other.
(1) Operating profit margin
(2) Net profit margin
(3) Return on total assets
(4) Return on common equity
c. In what way has the larger debt of Timberland Forest made it more prof-
itable than Pelican Paper? What are the risks that Timberland’s investors
undertake when they choose to purchase its stock instead of Pelican’s?2–18 Ratio proficiency McDougal Printing, Inc., had sales totaling $40,000,000 in
fiscal year 2003. Some ratios for the company are listed below. Use this informa-
tion to determine the dollar values of various income statement and balance
sheet accounts as requested.Calculate values for the following:
a. Gross profits
b. Cost of goods sold
c. Operating profits
d. Operating expenses
e. Earnings available for common stockholders
f. Total assets
g. Total common stock equity
h. Accounts receivable2–19 Cross-sectional ratio analysis Use the following financial statements for Fox
Manufacturing Company for the year ended December 31, 2003, along with the
industry average ratios also given in what follows, to:
a. Prepare and interpret a complete ratio analysis of the firm’s 2003 operations.
b. Summarize your findings and make recommendations.McDougal Printing, Inc.
Year Ended December 31, 2003Sales $40,000,000
Gross profit margin 80%
Operating profit margin 35%
Net profit margin 8%
Return on total assets 16%
Return on common equity 20%
Total asset turnover 2
Average collection period 62.2 days