# Ch3 homework answer - Chapter 3 Q&P 16 a The current ratio...

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16. a. The current ratio is calculated as: Current ratio = Current assets / Current liabilities Current ratio 2005 = \$175,462 / \$230,723 Current ratio 2005 = .76 times Current ratio 2006 = \$190,547 / \$240,911 Current ratio 2006 = .79 times b. The quick ratio is calculated as: Quick ratio = (Current assets – Inventory) / Current liabilities Quick ratio 2005 = (\$175,462 – 109,831) / \$230,723 Quick ratio 2005 = .28 times Quick ratio 2006 = (\$190,547 – 119,834) / \$240,911 Quick ratio 2006 = .29 c. The cash ratio is calculated as: Cash ratio = Cash / Current liabilities Cash ratio 2005 = \$19,250 / \$230,723 Cash ratio 2005 = .08 Cash ratio 2006 = \$21,386 / \$240,911 Cash ratio 2006 = .09 d. The debt-equity ratio is calculated as: Debt-equity ratio = Total debt / Total equity Debt-equity ratio = (Current liabilities + Long-term debt) / Total equity Debt-equity ratio 2005 = (\$230,723 + 200,000) / \$357,751 Debt-equity ratio 2005 = 1.20 Debt-equity ratio 2006 = (\$240,911 + 250,000) / \$402,319 Debt-equity ratio 2006 = 1.22 And the equity multiplier is: Equity multiplier = 1 + Debt-equity ratio Equity multiplier 2005 = 1 + 1.20 Equity multiplier 2005 = 2.20 Equity multiplier 2006 = 1 + 1.22 1

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Equity multiplier 2006 = 2.22 e. The total debt ratio is calculated as: Total debt ratio = Total debt / Total assets Total debt ratio = (Current liabilities + Long-tern debt) / Total assets Total debt ratio 2005 = (\$230,723 + 200,000) / \$788,294 Total debt ratio 2005 = .55 Total debt ratio 2005 = (\$240,911 + 250,000) / \$893,230 Total debt ratio 2005 = .55 17. Using the DuPont identity to calculate ROE, we get: ROE = (Profit margin)(Total asset turnover)(Equity multiplier) ROE = (Net income / Sales)(Sales / Total assets)(Total asset / Total equity) ROE = (\$148,320 / \$1,728,347)(\$1,728,347 / \$893,320)(\$893,320 / \$402,319) ROE = .3687 or 36.87% 18. One equation to calculate ROA is: ROA = (Profit margin)(Total asset turnover) We can solve this equation to find total asset turnover as: .10 = .07(Total asset turnover) Total asset turnover = 1.43 times Now, solve the ROE equation to find the equity multiplier which is: ROE = (ROA)(Equity multiplier) .18 = .10(Equity multiplier) Equity multiplier = 1.80 times 20. To calculate the internal growth rate, we need to find the ROA and the plowback ratio. The ROA for the company is: ROA = Net income / Total assets ROA = \$14,209 / \$72,500 ROA = .1960 or 19.60% And the plowback ratio is: b = 1 – .40 b = .60 Now, we can use the internal growth rate equation to find: Internal growth rate = [(ROA)(b)] / [1 – (ROA)(b)] 2
Internal growth rate = [.1960(.60)] / [1 – .1960(.60)] Internal growth rate = .1333 or 13.33% 21. To calculate the sustainable growth rate, we need to find the ROE and the plowback ratio. The ROE for the company is: ROE = Net income / Equity ROE = \$14,209 / \$44,300 ROE = .3207 or 32.07% Using the sustainable growth rate, we calculated in the precious problem, we find the sustainable growth rate is:

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## This note was uploaded on 04/30/2008 for the course BCOR 2200 taught by Professor Tomnelson during the Fall '08 term at Colorado.

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Ch3 homework answer - Chapter 3 Q&P 16 a The current ratio...

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