Chapter 3: Solutions to Questions and ProblemsNOTE: 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.Basic1.Using the formula for NWC, we get: NWC = CA – CLCA = CL + NWC = $3,720 + 1,370 = $5,090So, the current ratio is:Current ratio = CA / CL = $5,090/$3,720 = 1.37 timesAnd the quick ratio is:Quick ratio = (CA – Inventory) / CL = ($5,090 – 1,950) / $3,720 = 0.84 times2.We need to find net income first. So:Profit margin = Net income / SalesNet income = Sales(Profit margin)Net income = ($29,000,000)(0.08) = $2,320,000ROA = 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 + TETE = TL & OE – TDTE = $17,500,000 – 6,300,000 = $11,200,000ROE = 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 timesDays’ sales in receivables = 365 days / Receivables turnover = 365 / 9.14 = 39.92 daysThe 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 timesDays’ sales in inventory = 365 days / Inventory turnover = 365 / 10.07 = 36.23 daysOn 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 = 2.706.Net income = Addition to RE + Dividends = $430,000 + 175,000 = $605,000Earnings per share= NI / Shares = $605,000 / 210,000 = $2.88 per shareDividends per share= Dividends / Shares = $175,000 / 210,000 = $0.83 per shareBook value per share= TE / Shares = $5,300,000 / 210,000 = $25.24 per shareMarket-to-book ratio = Share price / BVPS = $63 / $25.24 = 2.50 timesP/E ratio = Share price / EPS = $63 / $2.88 = 21.87 timesSales per share= Sales / Shares= $4,500,000 / 210,000 = $21.43P/S ratio = Share price / Sales per share= $63 / $21.43 = 2.94 times7.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) = 1.38D/E = EM – 1 = 1.38 – 1 = 0.389.Decrease in inventory is a source of cashDecrease in accounts payable is a use of cashIncrease in notes payable is a source of cashIncrease in accounts receivable is a use of cashChanges in cash = sources – uses = $375 – 190 + 210 – 105 = $290Cash increased by $29010.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 daysThe 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 difficult to pay off its short-term obligations, or (2) that the company has successfully negotiated lenient credit terms from its suppliers.

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- Summer '11
- RajneeshSharma
- Ratio, Net Income, Financial Ratio, TA