Chapter3 solution

# Chapter3 solution - 1 Using the formula for NWC we get NWC...

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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%

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To find ROE, we need to find total equity. 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: 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

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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 Changes in cash = sources – uses = \$375 – 190 + 210 – 105 = \$290 Cash increased by \$290 10. Payables turnover = COGS / Accounts payable Payables turnover = \$28,384 / \$6,105 = 4.65 times Days’ sales in payables = 365 days / Payables turnover Days’ sales in payables = 365 / 4.65 = 78.51 days The company left its bills to suppliers outstanding for 78.51 days on average. A large value for this ratio could imply that either (1) the company is having liquidity problems, making it
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Chapter3 solution - 1 Using the formula for NWC we get NWC...

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