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Hmwrk Problems #2

# Hmwrk Problems #2 - Homework#2 Evaluating a Firms Financial...

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Homework #2 Evaluating a Firm’s Financial Performance, Financial Forecasting, Budgeting, Planning and Measuring Cash Flow 4-1. (Ratio Analysis) The Mitchem Marble Company has a target current ratio of 2.0 but has experienced some difficulties financing its expanding sales in the past few months. At present the firm has a current ratio of 2.5 with current assets of \$2.5 million. If Mitchem expands its receivables and inventories using its short-term line of credit, how much additional short-term funding can it borrow before its current ratio standard is reached? 4-3. (Analyzing Operating Income Return on Investment) The R. M. Smithers Corporation earned a operating profit margin of 10 percent based on sales of \$10 million and total assets of \$5 million last year. a. What was Smithers’ total asset turnover ratio? b. During the coming year, the company president has set a goal of attaining a total asset turnover of 3.5. How much must firm sales rise, other things being the same, for the goal to be achieved? (State your answer in both dollars and percentage increase in sales.) c. What was Smithers’ operating income return on investment last year? Assuming the firm’s operating profit margin remains the same, what will the operating income return on investment be next year if the total asset turnover goals is achieved? 4-5. (Ratio Analysis) Using Pamplin Inc.’s financial statements shown on the following pages: a. Compute the following ratios for both 2002 and 2003. INDUSTRY NORMS 2003 Current ratio 5.00 Acid-test (quick) ratio 3.00 Inventory turnover 2.20 Average collection period 90.00 Debt ratio 0.33 Times interest earned 7.00 Total asset turnover 0.75 Fixed asset turnover 1.00 Operating profit margin 20% Return on common equity 9% b. How liquid is the firm?

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c. Is management generating adequate operating profit on the firm’s assets? d. How is the firm financing its assets? e. Are the common stockholders receiving a good return on their investment? Pamplin Inc. Balance Sheet At 12/31/02 and 12/31/03 Assets 2002 2003 Cash \$200 \$150 Accounts Receivable 450 425 Inventory 550 625 Current Assets \$1200 \$1200 Plant and Equipment \$2200 2600 Less: accumulated depreciation (1000 ) (1000) Net Plant and equipment \$1200 \$1400 Total Assets \$2400 \$2600 Liabilities and Owners’ Equity 2002 2003 Accounts Payable \$200 \$150 Notes Payable – current (9%) 0 150 Current liabilities \$200 \$300 Bonds (8.33% interest) \$600 \$600 Owners’ Equity Common stock \$300 300 Paid-in capital 600 600 Retained earnings 700 800 Total owners’ Equity \$1600 \$1700 Total liabilities and owners’ equity \$2400 \$2600 Pamplin Inc. Income Statement For Years Ending 12/31/02 and 12/31/03 2002 2003 Sales \$1200 \$1450 Cost of goods sold 700 850 Gross profit \$500 \$600 Operating expenses 30 40
Depreciation 220 250 200 \$240 Operating income \$250 \$360 Interest expense \$50 \$64 Net income before taxes \$200 \$296 Taxes (40%) 80 118 Net income \$120 \$178 4-7. (Cash Flow Statement) (a) Prepare a cash flow statement for the Waterhouse Co. for the year 2003. (b) What were the firm’s primary sources and uses of cash?

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