Finance Chapter 3 HW – Flashcards

SDJ, Inc., has net working capital of $3,640, current liabilities of $5,430, and inventory of $4,290. What is the current ratio? Using the formula for NWC, we get: NWC = CA - CL CA = CL + NWC CA = $5,430 + 3,640 CA = $9,070 So, the current ratio is: Current ratio = CA / CL Current ratio = $9,070 / $5,430 Current ratio = 1.67 times And the quick ratio is: Quick ratio = (CA − Inventory) / CL Quick ratio = ($9,070 − 4,290) / $5,430 Quick ratio = .88 times

Shelton, Inc., has sales of $29 million, total assets of $27.1 million, and total debt of $9.3 million. Assume the profit margin is 11 percent. We need to find net income first. So: Profit margin = Net income / Sales Net income = Profit margin(Sales) Net income = .11($29,000,000) Net income = $3,190,000 ROA = Net income / TA ROA = $3,190,000 / $27,100,000 ROA = .1177, or 11.77% To find ROE, we need to find total equity. Since TL & OE equals TA: TA = TD + TE TE = TA − TD TE = $27,100,000 − 9,300,000 TE = $17,800,000 ROE = Net income / TE ROE = $3,190,000 / $17,800,000 ROE = .1792, or 17.92%

Y3K, Inc., has sales of $6,219, total assets of $2,835, and a debt-equity ratio of 1.50. If its return on equity is 10 percent, what is its net income? This is a multistep problem involving several ratios. The ratios given are all part of the DuPont Identity. The only DuPont Identity ratio not given is the profit margin. If we know the profit margin, we can find the net income since sales are given. So, we begin with the DuPont Identity: ROE = .10 = (PM)(TAT)(EM) = (PM)(S / TA)(1 + D/E) Solving the DuPont Identity for profit margin, we get: PM = [(ROE)(TA)] / [(1 + D/E)(S)] PM = [(.10)($2,835)] / [(1 + 1.50)($6,219)] PM = .0182 Now that we have the profit margin, we can use this number and the given sales figure to solve for net income: PM = .0182 = NI / S NI = .0182($6,219) NI = $113.40

If Roten Rooters, Inc., has an equity multiplier of 1.52, total asset turnover of 1.20, and a profit margin of 6.2 percent, what is its ROE? ROE = (PM)(TAT)(EM) ROE = (.062)(1.20)(1.52) ROE = .1131, or 11.31%

Receivables turnover = Sales / Receivables Receivables turnover = $4,902,040 / $342,800 Receivables turnover = 14.30 times Days' sales in receivables = 365 days / Receivables turnover Days' sales in receivables = 365 / 14.30 Days' sales in receivables = 25.52 days On average, the company's customers paid off their accounts in 25.52 days

The Green Corporation has ending inventory of $482,750, and cost of goods sold for the year just ended was $4,209,580 Inventory turnover = COGS / Inventory Inventory turnover = $4,209,580 / $482,750 Inventory turnover = 8.72 times Days' sales in inventory = 365 days / Inventory turnover Days' sales in inventory = 365 / 8.72 Days' sales in inventory = 41.86 days On average, a unit of inventory sat on the shelf 41.86 days before it was sold

Levine, Inc., has a total debt ratio of .36. What is its debt-equity ratio? Total debt ratio = .36 = TD / TA Substituting total debt plus total equity for total assets, we get: .36 = TD / (TD + TE) Solving this equation yields: .36(TE) = .64(TD) Debt-equity ratio = TD / TE Debt-equity ratio = .36 / .64 Debt-equity ratio = .56 Equity multiplier = 1 + D/E Equity multiplier = 1.56

Makers Corp. had additions to retained earnings for the year just ended of $248,000. The firm paid out $187,000 in cash dividends, and it has ending total equity of $4.92 million. The company currently has 150,000 shares of common stock outstanding Net income = Addition to RE + Dividends = $248,000 + 187,000 = $435,000 Earnings per share = NI / Shares = $435,000 / 150,000 = $2.90 per share Dividends per share = Dividends / Shares = $187,000 / 150,000 = $1.25 per share Book value per share = TE / Shares = $4,920,000 / 150,000 = $32.80 per share Market-to-book ratio = Share price / BVPS = $80 / $32.80 = 2.44 times P/E ratio = Share price / EPS = $80 / $2.90 = 27.59 times Sales per share = Sales / Shares = $4,740,000 / 150,000 = $31.60 P/S ratio = Share price / Sales per share = $80 / $31.60 = 2.53 times

Zombie Corp. has a profit margin of 4.7 percent, total asset turnover of 2.1, and ROE of 19.24 percent. What is this firm's debt-equity ratio? 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 = .1924 = (.047)(2.10)(EM) EM = .1924 / (.047)(2.10) EM = 1.95 D/E = EM - 1 D/E = 1.95 - 1 D/E = .95