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Chapter 3

Problems 1-30

Input boxes in tan


Output boxes in yellow
Given data in blue
Calculations in red
Answers in green

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equire that
Chapter 3
Question 1

Input area:

Net working capital $ 1,370


Current liabilities 3,720
Inventory 1,950

Output area:

Current assets $ 5,090

Current ratio 1.37

Quick ratio 0.84


Chapter 3
Question 2

Input area:

Sales $ 29,000,000
Total assets 17,500,000
Total debt 6,300,000
Profit margin 8%

Output area:

Net income $ 2,320,000

Return on assets 13.26%

Total equity $ 11,200,000

Return on equity 20.71%


Chapter 3
Question 3

Input area:

Accounts receivable $ 431,287


Credit sales 3,943,709

Output area:

Receivables turnover 9.14

Days' sales in receivables 39.92

The average collection period for an outstanding


accounts receivable was 39.92 days.
Chapter 3
Question 4

Input area:

Ending inventory $ 407,534


Cost of goods sold 4,105,612

Output area:

Inventory turnover 10.07

Days' sales in inventory 36.23

On average, a unit of inventory sat on the shelf


36.23 days.
Chapter 3
Question 5

Input area:

Total debt ratio 0.63

Output area:

Debt/equity ratio 1.70

Equity multiplier 2.70


Chapter 3
Question 6

Input area:

Addition to retained earnings $ 430,000


Cash dividends $ 175,000
Total equity $ 5,300,000

Common shares outstanding 210,000

Share price $ 63

Sales $ 4,500,000

Output area:

Net income $ 605,000

Earnings per share $ 2.88

Dividends per share $ 0.83

Book value per share $ 25.24

Market-to-book ratio 2.50

P/E ratio 21.87

Sales per share $ 21.43

P/S ratio 2.94


Chapter 3
Question 7

Input area:

Equity multiplier 2.80


Total asset turnover 1.15
Profit margin 5.50%

Output area:

Return on equity 17.71%


Chapter 3
Question 8

Input area:

Profit margin 6.80%


Total asset turnover 1.95
Return on equity 18.27%

Output area:

Equity multiplier 1.38

Debt/equity ratio 0.38


Chapter 3
Question 9

Input area:

Decrease in inventory $ 375


Decrease in accounts payable 190
Increase in notes payable 210
Increase in accounts receivable 105

Output area:

Decrease in inventory is a source of cash $ 375


Decrease in accounts payable is a use of cash (190)
Increase in notes payable is a source of cash 210
Increase in accounts receivable is a use of cash (105)

Change in cash $ 290


Chapter 3
Question 10

Input area:

Cost of goods sold $ 28,384


Accounts payable balance 6,105

Output area:

Payables turnover 4.65

Days' sales in payables 78.51

The company left its bills to suppliers outstanding f 78.51 days on average.
A large value for this ratio could imply that either (1) the company is having liquidity
problems, making it difficult to pay off its short-term obligations, or (2) that the
company has successfully negotiated lenient credit terms from its suppliers.
on average.
y is having liquidity
or (2) that the
s suppliers.
Chapter 3
Question 11

Input area:

Increase in net fixed assets account $ 835


Depreciation expense 148

Output area:

Net investment in net fixed assets $ 983

The company bought $ 983 in new fixed


assets. This is a use of cash.
Chapter 3
Question 12

Input area:

Debt/equity ratio 0.65


Return on assets 8.5%
Total equity $ 540,000

Output area:

Equity multiplier 1.65

Return on equity 14.03%

Net income $ 75,735


Chapter 3
Questions 13 -15

Input area:

2008 2009
Current Assets
Cash $ 8,436 $ 10,157
Accounts receivable 21,530 23,406
Inventory 38,760 42,650
Total $ 68,726 $ 76,213

Net plant and equipment $ 226,706 $ 248,306

Total assets $ 295,432 $ 324,519

Output area:

2008 #13
Assets
Current assets
Cash $ 8,436 2.86%
Accounts receivable 21,530 7.29%
Inventory 38,760 13.12%
Total $ 68,726 23.26%
Fixed assets
Net plant and equipment 226,706 76.74%
Total assets $ 295,432 100%

Liabilites and Owners' Equity


Current liabilities
Accounts payable $ 43,050 14.57%
Notes payable 18,384 6.22%
Total $ 61,434 20.79%
Long-term debt $ 25,000 8.46%
Owners' equity
Common stock and paid-in surplus $ 40,000 13.54%
Accumulated retained earnings 168,998 57.20%
Total $ 208,998 70.74%
Total liabilities and owners' equity $ 295,432 100%
2008 2009
Current liabilities
Accounts payable $ 43,050 $ 46,821
Notes payable 18,384 17,382
Total $ 61,434 $ 64,203

Long-term debt $ 25,000 $ 32,000

Owners' equity
Common stock and
paid-in surplus $ 40,000 $ 40,000
Retained earnings 168,998 188,316
Total $ 208,998 $ 228,316

Total liabilities and


owners' equity $ 295,432 $ 324,519

2009 #13 #14 #15

$ 10,157 3.13% 1.2040 1.0961


23,406 7.21% 1.0871 0.9897
42,650 13.14% 1.1004 1.0017
$ 76,213 23.48% 1.1089 1.0095

248,306 76.52% 1.0953 0.9971


$ 324,519 100% 1.0985 1.0000

$ 46,821 14.43% 1.0876 0.9901


17,382 5.36% 0.9455 0.8608
$ 64,203 19.78% 1.0451 0.9514
$ 32,000 9.86% 1.2800 1.1653

$ 40,000 12.33% 1.0000 0.9104


188,316 58.03% 1.1143 1.0144
$ 228,316 70.36% 1.0924 0.9945
$ 324,519 100% 1.0985 1.0000
Chapter 3
Questions 16,17

Input area:

2008 2009
Cash $ 8,436 $ 10,157
Accounts receivable 21,530 23,406
Inventory 38,760 42,650
Net plant and equipment 226,706 248,306
Accounts payable 43,050 46,821
Notes payable 18,384 17,382
Long-term debt 25,000 32,000
Common stock and paid in surplus 40,000 40,000
Retained earnings 168,998 188,316

Output area:
2008 Sources/Uses
Assets
Current assets
Cash $ 8,436 $ 1,721 U
Accounts receivable 21,530 1,876 U
Inventory 38,760 3,890 U
Total $ 68,726 $ 7,487 U
Fixed assets
Net plant and equipment $ 226,706 $ 21,600 U
Total assets $ 295,432 $ 29,087 U

Liabilites and Owners' Equity


Current liabilities
Accounts payable $ 43,050 $ 3,771 S
Notes payable 18,384 (1,002) U
Total $ 61,434 $ 2,769 S
Long-term debt $ 25,000 $ 7,000 S
Owners' equity
Common stock and paid-in surplus $ 40,000 0
Accumulated retained earnings 168,998 19,318 S
Total $ 208,998 $ 19,318 S
Total liabilities and owners' equity $ 295,432 $ 29,087 S

The firm $ 29,087 in cash to acquire new assets. It raised this amount of cash
by increasing liabilities and owners' equity by the same amount. In particular, the
needed frunds were raised entirely by internal financing (on a net basis), out of the
additions to retained earnings.

2008 2009
a. Current ratio 1.12 1.19
b. Quick ratio 0.49 0.52
c. Cash ratio 0.14 0.16
d. NWC to total assets ratio 2.47% 3.70%
e. Debt-equity 0.41 0.42
Equity mulitplier 1.41 1.42
f. Total debt ratio 0.29 0.30
Long-term debt ratio 0.11 0.12
2009

$ 10,157
23,406
42,650
$ 76,213

$ 248,306
$ 324,519

$ 46,821
17,382
$ 64,203
$ 32,000

$ 40,000
188,316
$ 228,316
$ 324,519

is amount of cash
articular, the
sis), out of the
Chapter 3
Question 18

Input area:

Sales $ 5,726
Total assets 3,105
Debt-equity ratio 1.40
Return on equity 15%

Output area:

Profit margin 0.0339

Net income $ 194.06


Chapter 3
Question 19

Input area:

Net income $ 218,000


Profit margin 8.70%
Accounts receivable $ 132,850
Percent credit sales 70%

Output area:

Total sales $ 2,505,747


Credit sales $ 1,754,023
Receivables turnover 13.20

Days' sales in receivables 27.65


Chapter 3
Question 20

Input area:

Long-term debt ratio 0.45


Current ratio 1.25
Current liabilities $ 875
Sales $ 5,780
Profit margin 9.5%
Return on equity 18.5%

Output area:

Current assets $ 1,093.75


Net income 549.10
Total equity 2,968.11
Long-term debt 2,428.45
Total debt 3,303.45
Total assets 6,271.56

Net fixed assets $ 5,177.81


Chapter 3
Question 21

Input area:

Child's payment $ 3.00


Amount purchased $ 50

Sales $ 750
Net income 22.5
Total assets 420
Total debt 280

Output area:

Child: Profit = Child's payment = 6.00%


Amount purchased

Store: Profit margin = Net income = 3.00%


Sales

The advertisement is referring to the store's profit margin, but a more


appropriate earnings measure for the firm's owners is the return on
equity:

Return on equity = Net income / (Total assets - Total debt) = 16.07%


Chapter 3
Question 22

Input area:

Firm A
D/TA 35.00%
ROA 12.00%
Firm B
D/TA 30.00%
ROA 11.00%

Output area:

Firm A ROE 18.46%

Firm B ROE 15.71%


Chapter 3
Question 23

Input area:

Net income $ 13,168


Tax rate 34%
Total interest expense $ 3,605
Depreciation expense $ 2,382

Output area:

Earnings before taxes $ 19,951.52

EBIT $ 23,556.52

EBITD $ 25,938.52

Cash coverage ratio 7.20


Chapter 3
Question 24

Input area:

Current liabilities $ 365,000


Quick ratio 0.85
Inventory turnover 5.80
Current ratio 1.40

Output area:

Current assets $ 511,000


Inventory $ 200,750

Cost of goods sold $ 1,164,350


Chapter 3
Question 25

Input area:

Net income - 13,482,000


Sales 138,793,000

Sales $ 274,213,000

Output area:

Profit margin -9.71%

As long as both net income and sales are measured


in the same currency, there is not problem; in fact,
except for some market value ratios like EPS and
BVPS, none of the financial ratios discussed in the
text are measured in terms of currency. This is one
reason why financial ratio analysis is widely used in
international finance to compare business operations
of firms and/or divisions across national economic
borders.

Net income $ (26,636,355)


Chapter 3
Questions 26-28

Input area:

Tax rate 35%


SMOLIRA GOLF CORP.
2008 and 2009 Balance Sheets
Assets
2008 2009
Current assets Current liabiliti
Cash $ 21,860 $ 22,050
Accounts receivable 11,316 13,850
Inventory 23,084 24,650
Total $ 56,260 $ 60,550
Long-term deb
Owners' equity

Fixed assets
Net plant and equipment 234,068 260,525
Total assets $ 290,328 $ 321,075 Total liabilities

SMOLIRA GOLF CORP.


2009 Income statement

Sales $ 305,830
Cost of goods sold 210,935
Depreciation 26,850
EBIT $ 68,045
Interest paid 11,930
Taxable income $ 56,115
Taxes (35%) 19,640
Net income $ 36,475

Dividends $ 20,000
Retained earnings 16,475
Output area:

26) Short-term solvency ratios:

2008 Current ratio 1.44


2009 Current ratio 1.40

2008 Quick ratio 0.85


2009 Quick ratio 0.83

2008 Cash ratio 0.56


2009 Cash ratio 0.51

Asset utilization ratios:

Total asset turnover 0.95


Inventory turnover 8.56
Receivables turnover 22.08

Long-term solvency ratios:

2008 Total debt ratio 0.39


2009 Total debt ratio 0.40

2008 Debt-equity ratio 0.65


2009 Debt-equity ratio 0.66

2008 Equity mulitplier 1.65


2009 Equity multiplier 1.66

Times interest earned ratio 5.70


Cash coverage ratio 7.95

Profitability ratios:

Profit margin 11.93%


Return on assets 11.36%
Return on equity 18.91%
27) Return on equity 0.1891

28) SMOLIRA GOLF, INC.


Statement of Cash Flows
For Period Ending December 31, 2009

Cash, beginning of the year $ 21,860

Operating activities
Net income $ 36,475
Plus:
Depreciation $ 26,850
Increase in accounts payable $ 3,530
Increase in other current liabilities $ 1,742
Less:
Increase in accounts receivable $ (2,534)
Increase in inventory $ (1,566)

Net cash from operating activities $ 64,497

Investment activities
Fixed asset acquisition $ (53,307)
Net cash from investment activities $ (53,307)

Financing activities
Decrease in notes payable $ (1,000)
Dividends paid $ (20,000)
Increase in long-term debt $ 10,000
Net cash from financing activities $ (11,000)

Net increase in cash $ 190

Cash, end of year $ 22,050


A GOLF CORP.
009 Balance Sheets
Liabilities and owners' equity
2008 2009
Current liabilities
Accounts payable $ 19,320 $ 22,850
Notes payable 10,000 9,000
Other 9,643 11,385
Total $ 38,963 $ 43,235
Long-term debt 75,000 85,000
Owners' equity
Common stock and paid-in surplus $ 25,000 $ 25,000
Accumulated retained earnings 151,365 167,840
Total $ 176,365 $ 192,840
Total liabilities and owners' equity $ 290,328 $ 321,075
Chapter 3
Question 29

Input area:

Net income $ 36,475


Common stock outstanding 25,000
Stock price $ 43
Dividends paid 20,000
Total equity 192,840
Growth rate 9%

Output area:

Earnings per share $ 1.46

P/E ratio 29.47

Dividends per share $ 0.80

Book value per share $ 7.71

Market-to-book ratio 5.57

PEG ratio 3.27


Chapter 3
Question 30

Input area:

Common stock outstanding 25,000


Stock price $ 43
Current liabilities $ 43,235
Long-term debt $ 85,000
Book value of assets $ 321,075

Output area:

Market value of equity $ 1,075,000

Book value of debt $ 128,235

Tobin's Q 3.75