Hung Mark

Gaw Bryent

Yeung Alex

Tan Wayne

Yap Angelica

Ng Paolo

4-1 DAYS SALES OUTSTANDING Baxley Brothers has a DSO of 23 days, and its annual sales

are $3,650,000. What is its accounts receivable balance? Assume that it uses a 365-day year.

Solution:

Accounts Receivable = Annual sales * Days sales outstanding / 365

= $3,650,000 * 23 / 365

Accounts Receivable = 230,000

4-2 DEBT TO CAPITAL RATIO Kaye’s Kitchenware has a market/book ratio equal to 1. Its

stock price is $12 per share and it has 4.8 million shares outstanding. The firm’s total capital is
$110 million and it finances with only debt and common equity. What is its debt-to-capital ratio?

Market/Book Ratio = 1

Stock price per share= 12

Share outstanding= 4.8 million

Total Capital= $110 million

Formulas:

Debt to capital ratio= Total debt/ (total debt + equity)

Book value per share= market price per share/ book value per share

Book value of equity= book value per share × # of share outstanding

Total Capital = total debt + equity

Solution：

Debt to capital ratio= Total debt/ (total debt + equity)

Debt to capital ratio = 52.4 millions / (52.4 millions + 57.6 millions)

Debt to capital ratio= 0.4764 or 47.64%

Book value per share= market price per share/ book value per share

1=12/book value per share

Book value per share= 12

Book value of equity= book value per share × # of share outstanding

Book value equity= 12 × 4.8 millions

Book value equity= 57.6 millions

Total Capital = total debt + equity

$110 millions = total debt + 57.6 millions

$110 millions - 57.6 millions = total debt

Total debt= 52.4 millions

4-3 DuPONT ANALYSIS Henderson’s Hardware has an ROA of 11%, a 6% profit margin, and

an ROE of 23%. What is its total assets turnover? What is its equity multiplier?

11%*6%*29% = 23%

Total Assets turnover= 33.84%

4-5 PRICE/EARNINGS RATIO A company has an EPS of $2.40, a book value per share of
$21.84, and a market/book ratio of 2.73. What is its P/E ratio?

Formula: Price/earnings ratio= Market price per share/ Earnings per share
Solution:

Market/book ratio= Market price per share / book value per share

2.7= Market price per share/ $21.84

2.7x $21.84 = Market price per share

Market price per share= $58.968

Formula: P/E Ratio= Market price per share/ Earnings per share

Solution: P/E Ratio= $58.968/ $2.40

P/E Ratio = 24.45

4-18 TIE RATIO MPI Incorporated has $6 billion in assets, and its tax rate is 35%. Its basic
earning power (BEP) ratio is 11%, and its return on assets (ROA) is 6%. What is MPI’s times
interest-earned (TIE) ratio?

EBIT:

BEP= EBIT/TOTAL ASSETS

11%= EBIT/ 6,000,000,000

11% x 16,000,000,000 =EBIT

EBIT= 660,000,000

EBIT 660,000,000.00

Less:Interest expense 106,153,846.20

—————————

Income/EBT 553,846,153.80

Less: Income Tax 193,846,153.80

(360,000,000/(1-35%)x35%)————————-

Net income 360,000,000.00

Return on assets x assets

=6% x 6,000,000,000
=360,000,000

TIE = EBIT/interest expense

TIE = 660,000,000.00/ 106,153,846.20

TIE = 6.22

4-19 CURRENT RATIO The Stewart Company has $2,392,500 in current assets and
$1,076,625 in

current liabilities. Its initial inventory level is $526,350, and it will raise funds as additional

notes payable and use them to increase inventory. How much can its short-term debt (notes

payable) increase without pushing its current ratio below 2.0?

Current asset= 2,392,500 Current liabilities= 1,076,625

Inventory= 526,350

Let a = increase in short term debt and inventory

Current ratio = (current asset + a)/ (current liabilities + a)

2 = (2,392,500 + a)/ (1,076,625 + a)

2(1,076,625 + a) = (2,392,500 + a)

2,153,250+2a = 2,392,500 + a

2a - a = 2,392,500 - 2,153,250

a = 239,250

4-20 DSO AND ACCOUNTS RECEIVABLE Ingraham Inc. currently has $205,000 in accounts
receivable, and its days sales outstanding (DSO) is 71 days. It wants to reduce its DSO to 20
days by pressuring more of its customers to pay their bills on time. If this policy is adopted, the
company’s average sales will fall by 15%. What will be the level of accounts receivable following
the change? Assume a 365-day year.

Solution:

DSO= Accounts receivable / average sales per day

DSO= Accounts receivable/annual sales/ 365

71= $205,000/annual sales/365

Annual sales/365= $205,000/71

Annual sales= $205,000/71*365 days

Annual sales= $1,053,873.24

revised annual sales= original annual sales- decrease in annual sales

= $1,053,873.24-( $1,053,873.24*15%)

= $1,053,873.24-$158,080.9861

= $895,792.25

Target DSO= accounts receivable/ average sales per day

Target DSO= accounts receivable/ revised annual sales/365

20= accounts receivable / $895,792.25/365

20= accounts receivable / $2,454.2253

AR=20* $2,454,2253

AR= $49,084.51

4-22 BALANCE SHEET ANALYSIS Complete the balance sheet and sales information using
the following financial data:

Total assets turnover: 1.53

Days sales outstanding: 36.5 days

Inventory turnover ratio: 53

Fixed assets turnover: 3.03

Current ratio: 2.03

Gross profit margin on sales: (Sales 2 Cost of goods sold) ∕ Sales = 25%

*Calculation is based on a 365-day year.

1.) Solution for sales

Total asset turnover= Sales / Total assets

 1.5 = Sales / $300,000

1.5 x $300,000 = Sales

Sales = $450,000

2.) Solution for Accounts receivable

DSO= Accounts receivable / Average sales per day

DSO= Accounts receivable / Annual sales / 365

36.5 = Accounts receivable / $450,000 / 365

36.5 = Accounts receivable / $1,232,8767

36.5 x $1,232,8767 = Accounts receivable

Accounts receivable= $45,000

3.) Solution for Inventory

Inventory Turnover = Sales / Turnover

5 = $450,000 / Inventory

Inventory = $450,000/ 5

Inventory = $90,000

4.) Solution for fixed assets

Inventory turnover = Sales / Fixed assets

3 = $450,000 / Fixed assets

Fixed assets = $450,000 / 3

Fixed assets = $150,000

5.) Solution for cash

Total assets = Cash + Accounts receivable + Inventory + Turnover

 $300,000 = Cash + $45,000 + $90,000 + $150,000

$300,000 = Cash + $285,000

Cash = $300,000 - $285,000

Cash = $15,000

6.) Solution for current liabilities

Current ratio = Current assets / Current liabilities

Current ratio = Cash + Accounts receivable + Inventory / Current liabilities

2 = $15,000 + $45,000 + $90,000 / Current liabilities

2 = $150,000 / Current liabilities

Current Liabilities = $150,000 / 2

Current liabilities = $75,000

7.) Solution for common stocks

Total liabilities and equity = Current liabilities + Long term debt + common stock +
Retained earnings

$300,000 = $75,000 + $60,000 + common stock + $97,500

$300,000 = Common stock + $232,500

$300,000 - $232,500 = Common stock

Common stock = $67,500

8.) Solution for Cost of goods sold

Gross profit margin on sales = sales - cost of goods sold / sales

25% = $450,000 - Cost of goods sold / $450,000

25% x $450,000 = $450,000 - Cost of goods sold

$112,500 = $450,000 - Cost of goods sold

Cost of goods sold = $450,000 - $112,500

 Cost of goods sold = $337,500

Balance Sheet

Cash $15,000

Current liabilities $75,000

Accounts receivable $45,000

Long-term debt 60,000

Inventories $90,000

Common stock $67,500

Fixed assets $150,000

Retained earnings 97,500

4-23 RATIO ANALYSIS Data for Barry Computer Co. and its industry averages follow. The

firm’s debt is priced at par, so the market value of its debt equals its book value. Since dollars
are in thousands, number of shares are shown in thousands too.

a. Calculate the indicated ratios for Barry.

b. Construct the DuPont 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 2018. 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, 2018 (in Thousands)

Cash $ 77,500 Accounts payable $129,000

Receivables 336,000 Other current 117,000

liabilities

Inventories 241,500 Notes payable to 84,000

bank

Total current assets $ 655,000 Total current $330,000

liabilities

Net fixed assets 292,500 Long-term debt 256,500

Total assets $ 947,500 Common equity 361,000

(36,100 shares)

Total liabilities $947,500

and equity

Barry Computer Company: Income Statement for Year Ended

December 31, 2018 (in Thousands)

Sales $1,607,500
Cost of goods sold

Materials $717,000

Labor 453,000

Heat, light, and power 68,000

Indirect labor 113,000

Depreciation 41,500

Total 1,392,500

Gross profit $ 215,000

Selling expenses 115,000

General and administrative expenses 30,000

Earnings before interest and taxes $ 70,000

(EBIT)

Interest expense 24,500

Earnings before taxes (EBT) $ 45,500

Federal and state income taxes (40%) 18,200

Net income $ 27,300

Earnings per share $ 0.75623

Price per share on December 31, 2018 $ 12.00

A.

Ratio Barry Industry Average

Current 1.98 2.0X

Quick 1.25 1.3X

Days sales outstanding 76.29 days 35 days

Inventory turnover 6.66 6.7X

Total assets turnover 1.7 3.0X

Profit margin 1.7% 1.2%

ROA 2.88% 3.6%

ROE 7.56% 9.0%

ROIC 10% 7.5%

TIE 2.86 3.0X

Debt/Total capital 48.53% 47.0%

M/B 1.076 4.22

P/E 15.87 17.86

EV/EBITDA 13.46 9.14

Solution:

a)Current Ratio= CA / CL
=655K / 330K
=1.98
b)Quick Ratio= QA / CL
Quick asset = (cash + receivables)
=(77,500 + 335,000) / 330,000
=1.25
c)DSO= AR/ average sales per day
= 336k/ ( 1,607,500)
=0 / 365)
=76.29 days
4)Inventory turnover= sales / inventory
=1,607,500/ 241,500
=6.66
5) Total assets turnover= sales / total assets
=1,607,500 / 947,500
=1.7
6) Profit margin = Net income / sales
=27,300 / 1,607,500
=1.7%
7) ROA= Net income / total assets
=27,300 / 947,500
=2.88%
8)ROE= Net income / common equity
=27,300 / 361,000
=7.56%
9)ROIC= EBIT/ (interest - bearing debt +equity)
=EBIT/ ( notes payable + long term debt + equity)
=70,000 / (84,000 + 256,500 + 361,000)
=10%
10)TIE= EBIT / Interest expense
=70,000 / 24,500
=2.86
11)debt to capital Ratio = total debt / total capital
(Interest - bearing debt) / ( total debt + equity)
(Interest - bearing debt) / ( notes payable + long term debt + equity)
=(84,000 + 256,500) / (84,000 + 256,500 + 361,000)
=48.53%
12)M/B ratio = Market value of firm(debt+equity)/ Book value of firm(debt+equity)
= (330000 + 256500 + 12*36100)/(330000 + 256000 + 361000)
= 1.076

13) P/E= Price per share/ Earning per share

 = 12/ 0.75623

= 15.8681

14) EV/ EBITDA= (Market value of debt + market value of equity - cash and investments )/
EBITDA

= (330000 + 256500 + 12*36100 - 77500)/ 70000

=13.46

B.)
Barry
ROE = profit margin * total assets turnover * equity multiplier
= NI/S * Sales/TA * TA/Common equity
=($27,300/$1,607,500) * ($1,607,500/$947,500) * ($947,500/$361,000)
=2.698% * 1.697 * 2.625
= 7.563 %

Industry average:
ROE = Profit margin * total assets turnover * equity multiplier
= 1.2% * 3 * 2.5
= 9%

C.

Ratio Barry Industry Average

Current 1.98 2.0X average

Quick 1.25 1.3X Good

Days sales 76.29 days 35 days Bad

outstanding

Inventory turnover 6.66 6.7X Average

Total assets turnover 1.7 3.0X good

 Profit margin 1.7% 1.2% good

ROA 2.88% 3.6% Good

ROE 7.56% 9.0% Good

ROIC 10% 7.5% Average

TIE 2.86 3.0X Average

Debt/Total capital 48.53% 47.0% Average

D.
If the sales, AR are doubled, It will just affect sales and AR on the ratio formula.