Calculate Brauer S Profit Margin And Debt Ratio

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10-1

LIQUIDITY RATIOS

10-2

DAYS SALES OUTSTANDING

10-3

DEBT RATIO

10-4

DU PONT ANALYSIS

10-5

RATIO CALCULATIONS

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

RATIO ANALYSIS

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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Responses

  • hildifons
    What were Kretovich's annual sales?
    8 years ago
  • lennox
    What is the firm’s level of current liabilities?
    7 years ago
  • Samwise Bolger
    What is happen if profit margin ratio is 5%?
    7 years ago

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