HW2solutions

HW2solutions - Chapter 3 Evaluation of Financial...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 3 Evaluation of Financial Performance 3-1 Home Work 2 Solutions 1. b. Cost of sales = (1 - 0.35)($1,600,000) = $1,040,000 Inventory Turnover = 6 = Cost of Sales/Average Inventory 6 = $1,040,000/Average Inventory Average Inventory = $173,333 2. b. Return on stockholders' equity = 0.05 x 2.0 x 2.5 = 0.25 or 25% 4. Return on stockholders' equity = 18% = (EAT/Sales) x 1.0 x 2.0 EAT/ Sales = 9.0% 7. Reduction in accounts receivable = $5 million (20 days x $0.25 million per day) New total assets after stock repurchase = $95 million New common equity after stock repurchase = $35 million Debt ratio: Old = 60% New = 63% ($60/$95) Return on assets: Old = 5% ($5/$100) New = 5.26% ($5/$95) Return on common equity: Old = 12.5% ($5/$40) New = 14.29% ($5/$35) 8. c. Current ratio = ($3.0 - $0.5)/($1.5 - $0.5) = 2.5x Quick ratio = ($3.0 - $1.0 - $0.5)/($1.5 - $0.5) = 1.5x Both the current and the quick ratios rise. d. Current ratio = ($3.0 + $1.0)/$1.5 = 2.67x
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Chapter 3 Evaluation of Financial Performance 3-2 Quick ratio = ($3.0 - $1.0 + $1.0)/$1.5 = 2.0x Both the current and the quick ratios rise. e. These examples illustrate how easy it is for a firm to manipulate its current and quick ratios, if necessary. Consequently, conclusions based on an analysis of these ratios should be viewed with caution. 10. a. Jackson's current ratio is 1.88x compared to the industry average of 2.5 times. Jackson's quick ratio is 0.66x compared to an industry average of 1.1x. Jackson has net working capital of $750,000. Jackson's liquidity is considerably below that of the industry average. Based on a comparison of the firm's current ratio to that of the industry and the firm's quick ratio to that of the industry, there
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 04/26/2011 for the course FIN 5219 taught by Professor Nadia during the Spring '08 term at Texas Tech.

Page1 / 6

HW2solutions - Chapter 3 Evaluation of Financial...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online