Chapter 3_Solutions_14thEdition.doc - Chapter3...

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Chapter 3Evaluation of Financial PerformanceCHAPTER 3EVALUATION OF FINANCIALPERFORMANCESOLUTIONS TO PROBLEMS:1.a. 50 days = Accounts Receivable/($1,600,000/365 days)50 days = Accounts Receivable/$4,383.56Accounts Receivable = $219,178b.Cost of sales = (1 - 0.35)($1,600,000) = $1,040,000Inventory Turnover = 6 = Cost of Sales/Average Inventory6 = $1,040,000/Average InventoryAverage Inventory = $173,3332.a.Return on stockholders' equity = 0.03 x ($20,000,000)/$10,000,000) x ($10,000,000/$4,000,000)= 0.15 or 15%b.Return on stockholders' equity = 0.05 x 2.0 x 2.5 = 0.25 or 25%3.Credit sales = 0.8($40 million) = $32 millionAverage daily credit sales = $32 million/365 days/yr. = $87,671.23Average accounts receivable = 45 x $87,671.23 = $3,945,2054.Return on stockholders' equity = 18% = (EAT/Sales) x 1.0 x 2.0EAT/ Sales = 9.0%3-1Internal
Chapter 3Evaluation of Financial Performance5.a.FirmABCDTotal Asset Turnover1.33x1.33x1.00x1.04xNet Profit Margin0.150.050.150.12Equity Multiplier1.50x1.50x1.07x2.40xReturn on Equity0.300.100.160.30b.Firm A appears to have few problems in comparison with the other firms. Firm B has a very weak profit margin, indicating the need for correctiveaction to control costs or to change the firm's pricing strategy.Firm C has a low asset turnover, suggesting the existence of excessiveinvestments in fixed assets and/or short-term assets. The low equity multiplier suggests that the firm has not made as much use of debt as the competing firms. This low turnover and low equity multiplier have combinedto give Firm C a lower than average return on equity.Firm D has a lower than average asset turnover and an average profit margin. The high return on equity has doubtlessly been earned by assuminga very risky (debt-heavy) capital structure. This heavy use of debt exposes the firm to substantial financial risk.More detail about the determinants of the net profit margin and the 3-2Internal
Chapter 3Evaluation of Financial Performancetotal asset turnover ratio would be valuable. This information could be in the form of a Dupont chart. Also, it would be useful to know if all firms use similar financial reporting methods.6.Forecasted Balance SheetCash$104,000Accounts receivable1,096,000 Total current liabilities $1,200,000Inventory 1,200,000Long term debt2,800,000Total current assets $2,400,000Total debt$4,000,000Net fixed assets7,600,000Stockholders' equity6,000,000Total assets$10,000,000Total liabilities and $10,000,000stockholders’ equitya. Profit margin on sales = 0.05 = $1,000,000/SalesSales = $20,000,000b.Total asset turnover = 2 = $20,000,000/Total assetsTotal assets = $10,000,000c.Total debt to total assets = 0.4 = Total debt/$10,000,000Total debt = $4,000,000d.Current liabilities to stockholders’ equity = 0.2 = Current

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Term
Spring
Professor
Nathan
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