The Complete Debt Relief Manual
10-1
LIQUIDITY RATIOS
10-2
DAYS SALES OUTSTANDING
10-3
10-4
10-5
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 inventories?
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 equity 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 1.5X
Return on assets (ROA) 3%
Return on equity (ROE) 5%
10-6
LIQUIDITY RATIOS
10-7
RATIO CALCULATIONS
10-8
TIMES-INTEREST-EARNED RATIO
10-9
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 initial 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 common equity during 2002. How would that information affect the validity of your ratio analysis? (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)
Receivables 336,000
Inventories 241,500
Total current assets $655,000
Net fixed assets 292,500
Total assets $947,500
Accounts payable Notes payable Other current liabilities
Total current liabilities Long-term debt Common equity Total liabilities and equity
$129,000 84,000 117,000 $330,000 256,500 361,000 $947,500
Barry Computer Company: Income Statement for Year Ended December 31, 2002 (In Thousands)
Sales |
$1,607,500 |
Cost of goods sold |
1,392,500 |
Selling, general, and administrative expenses |
145,000 |
Earnings before interest and taxes (EBIT) |
$ 70,000 |
Interest expense |
24,500 |
Earnings before taxes (EBT) |
$ 45,500 |
Federal and state income taxes (40%) |
18,200 |
Net income |
$ 27,300 |
Ratio Barry Industry Average
Current assets/current liabilities __2.0X
Days sales outstanding21 __35 days
Sales/inventory __6.7X
Sales/fixed assets __12.1X
Sales/total assets 3.0X
Net income/sales 1.2%
Net income/total assets 3.6%
Net income/common equity __9.0%
Total debt/total assets 60.0%
aCalculation is based on a 365-day year.
10-10 Complete the balance sheet and sales information in the table that follows for Hoffmeister InBALANCE SHEET ANALYSIS dustries using the following financial data:
Debt ratio: 50%
Quick ratio: 0.80X
Total assets turnover: 1.5X
Days sales outstanding: 36.5 daysa
Gross profit margin on sales: (Sales — Cost of goods sold)/Sales = 25% Inventory turnover ratio: 5X
aCalculation is based on a 365-day year.
BALANCE SHEET
Cash
Accounts receivable Inventories Fixed assets Total assets
Sales
$300,000
Accounts payable Long-term debt Common stock Retained earnings Total liabilities and equity
Cost of goods sold
60,000 97,500
10-11
RATIO ANALYSIS
The Corrigan Corporation's forecasted 2003 financial statements follow, along with some industry average ratios.
a. Calculate Corrigan's 2003 forecasted ratios, compare them with the industry average data, and comment briefly on Corrigan's projected strengths and weaknesses.
b. What do you think would happen to Corrigan's ratios if the company initiated cost-cutting measures that allowed it to hold lower levels of inventory and substantially decreased the cost of goods sold? No calculations are necessary. Think about which ratios would be affected by changes in these two accounts.
Corrigan Corporation: Forecasted Balance Sheet as of December 31, 2003
Cash
Accounts receivable Inventories
Total current assets Fixed assets Total assets
Accounts and notes payable Accruals
Total current liabilities Long-term debt Common stock Retained earnings Total liabilities and equity
$ 72,000 439,000 894,000 $1,405,000 431,000 $1,836,000 $ 432,000 170,000 $ 602,000 404,290 575,000 254,710 $1,836,000
Corrigan Corporation: Forecasted Income Statement for 2003
Sales $4,290,000
Cost of goods sold 3,580,000
Selling, general, and administrative expenses 370,320
Depreciation 159,000
Earnings before taxes (EBT) $ 180,680
Net income $ 108,408
Per-Share Data
Cash dividends per share $0.95
P/E ratio 5X
Market price (average) $23.57
Number of shares outstanding 23,000
Industry Financial Ratios (2003)a
Quick ratio 1.0X
Current ratio 2.7X
Inventory turnoverb 7.0X
Days sales outstandingc 32 days
Fixed assets turnoverb 13.0X
Total assets turnoverb 2.6X
Return on assets 9.1%
Return on equity 18.2%
Debt ratio 50.0%
Profit margin on sales 3.5%
P/E ratio 6.0X
P/cash flow ratio 3.5X
aIndustry average ratios have been constant for the past 4 years. bBased on year-end balance sheet figures. cCalculation is based on a 365-day year.
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