ch3_QNP - CHAPTER 3 WORKING WITH FINANCIAL STATEMENTS...

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CHAPTER 3 WORKING WITH FINANCIAL STATEMENTS Solutions to Questions and Problems NOTE: All end of chapter problems were solved using a spreadsheet. Many problems require multiple steps. Due to space and readability constraints, when these intermediate steps are included in this solutions manual, rounding may appear to have occurred. However, the final answer for each problem is found without rounding during any step in the problem. Basic 1. Using the formula for NWC, we get: NWC = CA – CL CA = CL + NWC = $3,720 + 1,370 = $5,090 So, the current ratio is: Current ratio = CA / CL = $5,090/$3,720 = 1.37 times And the quick ratio is: Quick ratio = (CA – Inventory) / CL = ($5,090 – 1,950) / $3,720 = 0.84 times 2. We need to find net income first. So: Profit margin = Net income / Sales Net income = Sales(Profit margin) Net income = ($29,000,000)(0.08) = $2,320,000 ROA = Net income / TA = $2,320,000 / $17,500,000 = .1326 or 13.26% To find ROE, we need to find total equity. TL & OE = TD + TE TE = TL & OE – TD TE = $17,500,000 – 6,300,000 = $11,200,000 ROE = Net income / TE = 2,320,000 / $11,200,000 = .2071 or 20.71% 3. Receivables turnover = Sales / Receivables Receivables turnover = $3,943,709 / $431,287 = 9.14 times Days’ sales in receivables = 365 days / Receivables turnover = 365 / 9.14 = 39.92 days The average collection period for an outstanding accounts receivable balance was 39.92 days. 4. Inventory turnover = COGS / Inventory Inventory turnover = $4,105,612 / $407,534 = 10.07 times Days’ sales in inventory = 365 days / Inventory turnover = 365 / 10.07 = 36.23 days On average, a unit of inventory sat on the shelf 36.23 days before it was sold. 5. Total debt ratio = 0.63 = TD / TA Substituting total debt plus total equity for total assets, we get:
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0.63 = TD / (TD + TE) Solving this equation yields: 0.63(TE) = 0.37(TD) Debt/equity ratio = TD / TE = 0.63 / 0.37 = 1.70 Equity multiplier = 1 + D/E = 2.70 6. Net income = Addition to RE + Dividends = $430,000 + 175,000 = $605,000 Earnings per share = NI / Shares = $605,000 / 210,000 = $2.88 per share Dividends per share = Dividends / Shares = $175,000 / 210,000 = $0.83 per share Book value per share = TE / Shares = $5,300,000 / 210,000 = $25.24 per share Market-to-book ratio = Share price / BVPS = $63 / $25.24 = 2.50 times P/E ratio = Share price / EPS = $63 / $2.88 = 21.87 times Sales per share = Sales / Shares = $4,500,000 / 210,000 = $21.43 P/S ratio = Share price / Sales per share = $63 / $21.43 = 2.94 times 7. ROE = (PM)(TAT)(EM) ROE = (.055)(1.15)(2.80) = .1771 or 17.71% 8. This question gives all of the necessary ratios for the DuPont Identity except the equity multiplier, so, using the DuPont Identity: ROE = (PM)(TAT)(EM) ROE = .1827 = (.068)(1.95)(EM) EM = .1827 / (.068)(1.95) = 1.38 D/E = EM – 1 = 1.38 – 1 = 0.38 9. Decrease in inventory is a source of cash Decrease in accounts payable is a use of cash Increase in notes payable is a source of cash Increase in accounts receivable is a use of cash
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This note was uploaded on 06/16/2011 for the course FIN 521 taught by Professor Varney during the Spring '11 term at Andrew Jackson.

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ch3_QNP - CHAPTER 3 WORKING WITH FINANCIAL STATEMENTS...

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