Assignment 1

FIN501: FINANCIAL MANAGEMENT

Section: 02

Submitted to:
Mahmudul Haq
Course Instructor FIN501
BRAC University

Submitted by:

Name ID
Arpita Mustafi 17364015
Tanim Ahmed 17364038
Janet Janifer Palma 18364020
Tahsin Subah Reza (Moumita) 18364087
Tahmid Ashraf Fahim 17164048

Date of Submission: 04.10.2018

PROBLEM 2-2

W.F. Bailey Company had a quick ratio of 1.4, a current ratio of 3.0, an inventory turnover
ratio of 5, total current assets of $ 810,000, and cash and equivalents of $120,000 in 2009. If
the cost of goods sold equaled 86 percent of sales, what were bailey’s annual sales and
DSO?

ANSWER:

Given,

Quick ratio= 1.4, Current ratio= 3.0, Inventory Turnover Ratio (ITR) = 5, Total current asset=
$810,000, Cash and equivalent= $ 120,000, Cost of goods sold= 86% of sales, find 1. Annual
sales 2. DSO=?

 Current ratio= Current asset ÷ Current liability

Here, Current asset ÷ Current liability = 3

 $810,000 ÷ current liability = 3

So, Current liability= $270,000

 Quick ratio= (Current asset – Inventory) ÷ Current liability

Again, (Current asset – Inventory) ÷ Current liability = 1.4

 ($810,000 – Inventory) ÷ $270,000 = 1.4

So, Inventory = $432000

We know, Current asset = Cash+ Marketable securities+ Accounts receivable+ Inventory

 $810,000 = $120,000 + account receivable + $432000

So, Account receivable = $258,000

  Inventory Turnover Ratio (ITR)= Cost of goods sold ÷ inventory

Here, Cost of goods sold ÷ Inventory = 5

 Cost of goods sold ÷ $432000 = 5

So, cost of goods sold = $2160, 000

1. Annual sales = $ 2160000 ÷ 0.86 = $2511628

2. DSO= Accounts receivable ÷ (Sales/ 360)

= $258000 ÷ ($2511628/360)

= 37 days

So, Annual sales = $2511628

DSO = 37 days (Ans.)

PROBLEM 2-4

Coastal Packaging’s ROE last year was only 3 percent, but its management has developed
a new operating plan designed to improve things. The new plan calls for a total debt ratio
of 60 percent, which will result in interest charges of $300 per year. Management projects
an EBIT of $1,000 on sales of $10,000, and it expects to have a total assets turnover ratio of
2.0. Under these conditions, the average tax rate will be 30 percent. If the changes are
made, what return on equity (ROE) will Coastal earn? What is the ROA?

ANSWER:

Given,
Total debt ratio 60%
Interest charges $300
EBIT $1000
Sales $10,000
Turnover Ratio 2.0
Tax 30%

We know,
Sales $10,000
(-) cost -
EBIT $1000
(-)Interest Expense $300
EBT $700
(-) Taxes (30%) $210
EAT $490
We know,
 Total Assets Turnover = Sales/Total Assets
 2.0 = $10,000/Total Assets
 Total Assets = $10,000/2.0
So, Total Assets = $5000
 Total debt ratio = (Total Assets-Total Equity) /Total Assets
 0.6 = ($5000-Total Equity) / $5000
 $5000*0.6 = $5000-Total Equity
 $3000 = $5000-Total Equity
 Total Equity = $5000- $3000
So, Total Equity = $2000

 ROE= EAT / Total Equity

= $490 / $2000
= 24.50%
 ROA = EAT / Total Assets
=$490/ $5000
= 9.8%
(Ans.)
PROBLEM 2-8

Assume you are given the following relationships for Zumwalt Corporation:

Sales/total assets 1.5×

Return on assets (ROA) 3.0%
Return on equity (ROE) 5.0%

Calculate Zumwalt’s net profit margin and debt ratio.

ANSWER:

Given,
ROA = 3%
Sales/total assets = 1.5×

We know,
 ROA = EAT/ (Total Asset)
= EAT/Sales*Sales/ (Total Asset)
 ROA = Profit Margin*Total Asset Turnover
3% = Profit Margin*1.5
 Profit Margin = 3% / 1.5
= 0.02
= 2%

Now,
 Equity/Asset = (NI / Asset) * (Equity/NI)
= 3% * (1/5%)
= 0.60
= 60%

 Debt Ratio = 1 - Equity/Asset

= 1 – 0.60
= 0.40
= 40%

Zumwalt’s net profit margin = 2% & Debt Ratio = 40%

(Ans.)
PROBLEM 2-14

Complete the balance sheet and Sales information in the table that follows for Isberg
Industries using the following data:

Debt ratio: 50%

Quick ratio: 0.80x

Total asset turnover: 1.5x

Days sales outstanding: 36.5days

Gross Profit margin on sale: (Sale - Cost of goods sold)/Sales = 25%

Inventory turnover ratio: 5.0x

Balance Sheet
Cash Accounts payable
Accounts receivable Long-term debt $60,000
Inventories Common stock
Fixed asset Retained earnings $97,000
Total asset $300,000 Total liabilities and equity
Sales Cost of goods sold
 ANSWER:

I. Total liabilities and equity = Total assets = $300,000.

II. Debt = (0.50)(Total assets) = (0.50)($300,000) = $150,000.
III. Accounts payable = Debt ─ Long-term debt = $150,000 ─ $60,000 = $90,000.
IV. Common stock = Total liabilities and equity – Debt – Retained earnings

= $300,000 - $150,000 - $97,500 = $52,500

V. Sales = 1.5 x Total assets = 1.5 x $300,000 = $450,000 [TAT=Sales/TA]

VI. Cost of goods sold = Sales(1 - 0.25) = $450,000(.75) = $337,500
VII. Inventory = (CGS)/5 = $337,500/5 = $67,500 [ITR=COGS/Inventory]
VIII. Accounts receivable = (Sales/360)(DSO) = ($450,000/360)(36.5) = $45,625.

[DSO= AcctRec./(sale/360]

IX. Cash + Accounts receivable)/(Accounts payable) = 0.80x

[QR=(Cash+AcctRec.)/AcctPay.]

 Cash + Accounts receivable = (0.80)(Accts payable)

 Cash + $45,625 = (0.80)($90,000)
 Cash = $72,000 ─ $45,625 = $26,375.

X. Fixed assets = Total assets ─ (Cash + Accts Rec. + Inventories)

= $300,000 ─ ($26,375.+ $45,625 + $67500
= $160,500.
(Ans.)