KP_Ch4HWSolnsl

KP_Ch4HWSolnsl - Created by: Babu G. Baradwaj For: Kidwell...

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Created by : Babu G. Baradwaj Instructor Manual Created on: May 11, 2009 Chapter 4 Fundamental of Corporate Finance Revised IM # 02 Chapter 4 VIII. Questions and Problems Basic 4.1 Liquidity ratios : Explain why the quick ratio or acid-test ratio is a better measure of a firm’s liquidity than the current ratio? Solution: The quick ratio is a better or more conservative measure of liquidity than the current ratio. The difference in the measurement of the two is that for the quick ratio we exclude the inventory in accounting of the short term assets. Thus the quick ratio is measured as: s liabilitie Curreent Inventory - assets Current ratio Quick = This measure includes only the most liquid of the current assets and hence gives a better measure of liquidity. 4.2. Liquidity ratio : Flying Penguins Corp. has total current assets of $11,845,175, current liabilities of $5,311,020, and a quick ratio of 0.89. What is its level of inventory? Solution: Current assets = $11,845,175 Current liabilities = $5,311,020 Quick ratio = 0.89 $7,118,367 = - = - = - = = ) 020 , 311 , 5 $ 89 . 0 ( 175 , 845 , 11 $ 175 , 845 , 11 $ 020 , 311 , 5 89 . 0 020 , 311 , 5 $ 175 , 845 , 11 $ 89 . 0 s liabilitie Current Inventory - assets Current ratio Quick Inventory Inventory Inventory 1
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Created by : Babu G. Baradwaj Instructor Manual Created on: May 11, 2009 Chapter 4 Fundamental of Corporate Finance Revised IM # 02 4.3 Efficiency ratio: If Newton Manufacturers have an accounts receivable turnover of 4.8 times, and net sales of $7,812,379, what is its level of receivables? Solution: Accounts receivable turnover = 4.8x Net sales = $7,812,379 $1,627,579 = = = = 8 . 4 379 , 812 , 7 s receivable Accounts s receivable Accounts 379 , 812 , 7 x 8 . 4 s receivable Accounts sales Net turnover s receivable Accounts 4.4 Efficiency ratio: Bummel and Strand Corp. has a gross profit margin of 33.7 percent, sales of $47,112,365, and inventories of $14,595,435. What is its inventory turnover ratio? Solution: Gross profit margin = 33.7% Sales = $ 47,112,365 Inventory = $14,595,435 498 , 235 , 31 ) 365 , 112 , 47 337 . 0 ( 365 , 112 , 47 $ sold goods of Cost 365 , 112 , 47 COGS 365 , 112 , 47 $ 337 . 0 Sales Net sold goods of Cost - sales Net rgin Profit Ma Gross = - = - = = 2.14x = = = = 435 , 595 , 14 498 , 235 , 31 Ratio turnover Inventory Inventory sold goods of Cost ? atio Turnover R Inventory 4.5 Efficiency ratio : Sorenson Inc. has sales of $3,112,489, a gross profit margin of 23.1 percent, and inventory of $833,145. What are the company’s inventory turnover ratio and days’ sales in inventory? 2
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Created by : Babu G. Baradwaj Instructor Manual Created on: May 11, 2009 Chapter 4 Fundamental of Corporate Finance Revised IM # 02 Solution: Sales = $3,112,489 Gross profit margin = 23.1% Inventory= $833,145 days 127.1 2.873x = = = = = = = - = - = = 873 . 2 365 ratio turnover Inventory 365 inventory in sales s ' Day 145 , 833 $ 504 , 393 , 2
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KP_Ch4HWSolnsl - Created by: Babu G. Baradwaj For: Kidwell...

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