DLEON - A WHY ARE RATIOS USEFUL RATIOS WHAT ARE THE FIVE...

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A. WHY ARE RATIOS USEFUL? WHAT ARE THE FIVE MAJOR CATEGORIES OF RATIOS? ANSWER: RATIOS ARE USED BY MANAGERS TO HELP IMPROVE THE FIRM’S PERFORMANCE, BY LENDERS TO HELP EVALUATE THE FIRM’S LIKELIHOOD OF REPAYING DEBTS, AND BY STOCKHOLDERS TO HELP FORECAST FUTURE EARNINGS AND DIVIDENDS. THE FIVE MAJOR CATEGORIES OF RATIOS ARE: LIQUIDITY, ASSET MANAGEMENT, DEBT MANAGEMENT, PROFITABILITY, AND MARKET VALUE. B. CALCULATE D’LEON’S 2003 CURRENT RATIO BASED ON THE PROJECTED BALANCE SHEET AND INCOME STATEMENT DATA. WHAT CAN YOU SAY ABOUT THE COMPANY’S LIQUIDITY POSITION IN 2001, 2002, AND AS PROJECTED FOR 2003? WE OFTEN THINK OF RATIOS AS BEING USEFUL (1) TO MANAGERS TO HELP RUN THE BUSINESS, (2) TO BANKERS FOR CREDIT ANALYSIS, AND (3) TO STOCKHOLDERS FOR STOCK VALUATION. WOULD THESE DIFFERENT TYPES OF ANALYSTS HAVE AN EQUAL INTEREST IN THIS LIQUIDITY RATIO? ANSWER: CURRENT RATIO 03 = CURRENT ASSETS/CURRENT LIABILITIES = $2,680,112/$1,144,800 = 2.34 × . THE COMPANY’S CURRENT RATIO IS IDENTICAL TO ITS 2001 CURRENT RATIO, AND IT HAS IMPROVED FROM ITS 2002 LEVEL. HOWEVER, THE CURRENT RATIO IS WELL BELOW THE INDUSTRY AVERAGE.
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C. CALCULATE THE 2003 INVENTORY TURNOVER, DAYS SALES OUTSTANDING (DSO), FIXED ASSETS TURNOVER, AND TOTAL ASSETS TURNOVER. HOW DOES D’LEON’S UTILIZATION OF ASSETS STACK UP AGAINST OTHER FIRMS IN ITS INDUSTRY? ANSWER: INVENTORY TURNOVER 03 = SALES/INVENTORY = $7,035,600/$1,716,480 = 4.10 × DSO 03 = RECEIVABLES/ (SALES/365) = $878,000/ ($7,035,600/365) = 45.55 DAYS FIXED ASSETS TURNOVER 03 = SALES/NET FIXED ASSETS = $7,035,600/$817,040 = 8.61 × TOTAL ASSETS TURNOVER 03 = SALES/TOTAL ASSETS = $7,035,600/$3,497,152 = 2.01 × THE FIRM’S INVENTORY TURNOVER AND TOTAL ASSETS TURNOVER RATIOS HAVE BEEN STEADILY DECLINING, WHILE ITS DAYS SALES OUTSTANDING HAS BEEN STEADILY INCREASING (WHICH IS BAD). HOWEVER, THE FIRM’S 2003 TOTAL ASSETS TURNOVER RATIO IS ONLY SLIGHTLY BELOW THE 2002 LEVEL. THE FIRM’S FIXED ASSETS TURNOVER RATIO IS BELOW ITS 2001 LEVEL; HOWEVER, IT IS ABOVE THE 2002 LEVEL. THE FIRM’S INVENTORY TURNOVER AND TOTAL ASSETS TURNOVER IS BELOW THE INDUSTRY AVERAGE. THE FIRM’S DAYS SALES OUTSTANDING IS ABOVE THE INDUSTRY AVERAGE (WHICH IS BAD); HOWEVER, THE FIRM’S FIXED ASSETS TURNOVER IS ABOVE THE INDUSTRY AVERAGE. (THIS MIGHT BE DUE TO THE FACT THAT D’LEON IS AN OLDER FIRM THAN MOST OTHER FIRMS IN THE INDUSTRY, IN WHICH CASE, ITS FIXED ASSETS ARE OLDER AND THUS HAVE BEEN DEPRECIATED MORE, OR THAT D’LEON’S COST OF FIXED ASSETS WERE LOWER THAN MOST FIRMS IN THE INDUSTRY.)
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D. CALCULATE THE 2003 DEBT, TIMES-INTEREST-EARNED, AND EBITDA COVERAGE RATIOS. HOW DOES D’LEON COMPARE WITH THE INDUSTRY WITH RESPECT TO FINANCIAL LEVERAGE? WHAT CAN YOU CONCLUDE
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DLEON - A WHY ARE RATIOS USEFUL RATIOS WHAT ARE THE FIVE...

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