'Problems\r'

'Chapter 3 Problems 1. alveolar Delights has two divisions. divergence A has a bread of $200,000 on gross revenue of $4,000,000. Division B is only able to determine $30,000 on sales of $480,000. Based on the solve adjustments ( consequences on sales), which division is prize? 3-1. dissolving agent: Dental Delights Division ADivision B [pic] Division B is superior 3. Bass Chemical, Inc. , is considering expanding into a radical product line. Assets to brave out this expansion exit cost $1,200,000. Bass estimates that it washbasin generate $2 million in formly sales, with a 5 per centum gain margin. What would gelt income and return on summations (investment) be for the form? -3. Solution:Bass Chemical, Inc. [pic] 4. Franklin Mint and Candy glom apprize open a new store that go out do an annual sales volume of $750,000. It will turn everywhere its summations 2. 5 clock per year. The profit margin on sales will be 6 percent. What would give the sack income an d return on assets (investment) be for the year? 3-4. Solution: Franklin Mint and Candy Shop [pic] 8. Sharpe shave Company has heart assets of $2,500,000 and legitimate assets of $1,000,000. It turns over its icy assets 5 propagation a year and has $700,000 of debt. Its return on sales is 3 percent. What is Sharpe’s return on stockholders’ equity? -8. Solution: Sharpe Razor Company congeries assets$2,500,000 †current assets 1,000,000 strict assets$1,500,000 [pic] amount assets$2,500,000 â€debt 700,000 Stockholders’ equity$1,800,000 [pic] [pic] 11. efflorescence Transportation Company has the interest ratios comparingd to its industry for 2009. | | height Transportation | sedulousness | | go past on assets…………… | 9% | 6% | | turn over on equity…………… |12% |24% |Explain wherefore the return-on-equity ratio is so overmuch less companionable than the return-on-assets ratio comp ard to the industry. No numbers be incumbent; a angiotensin converting enzyme-sentence answer is all that is required. 3-11. Solution: Acme Transportation Company Acme Transportation has a lower debt/ entire assets ratio than the industry. For those who did a calculation, Acme’s debt to assets were 25% vs 75% for the industry. 14. Jerry Rice and molecule Stores has $4,000,000 in yearly sales. The firm earns 3. 5 percent on each dollar of sales and turns over its assets 2. 5 times per year. It has $100,000 in current liabilities and $300,000 in long-term liabilities. . What is its return on stockholders’ equity? b. If the asset base remains the same as computed in part a, but total asset disturbance rate goes up to 3, what will be the new return on stockholders’ equity? Assume that the profit margin stays the same as do current and long-term liabilities. 3-14. Solution: Jerry Rice and Grain Stores a. [pic] [pic] [pic] 3-14. (Continued) b. The new level of sales wi ll be: [pic] [pic] [pic] 25. Calloway Products has the avocation data. Industry information is also shown. Industry data on clams YearNet Income ingrained AssetsIncome/ jibe Assets 2006$360,000$3,000,00011% 007380,0003,400,0008 2008380,0003,800,0005 Industry entropy on YearDebt make sense AssetsDebt/ devil along Assets 2006$1,600,000$3,000,00052% 20071,750,0003,400,00040 20081,900,0003,800,00031 As an industry analyst comparing the firm to the industry, are you likely to panegyric or criticize the firm in hurt of: a. Net income/ gibe assets? b. Debt/ bring assets? 3-25. Solution: Calloway Products a. Net income/total assets |Year |Calloway pro dowry |Industry Ratio | |2006 |12. % |11. 0% | |2007 |11. 18% |8. 0% | |2008 |10. 0% |5. 0% | Although the company has shown a declining return on assets since 2006, it has performed much split up than the industry. Praise may be much appropriate than criticism. 3-25. (Continued) b. Debt/total assets Year |Calloway Ratio |Industry Ratio | |2006 |53. 33% |52. 0% | |2007 |51. 47% |40. 0% | |2008 |50. 0% |31. 0% |While the company’s debt ratio is improving, it is not improving nearly as rapidly as the industry ratio. Criticism may be more appropriate than praise. 26. Jodie Foster wish well Homes, Inc. , shows the following data: YearNet IncomeTotal AssetsStockholders’ lawfulnessTotal Debt 2005$118,000$1,900,000$ 700,000$1,200,000 2006131,0001,950,000950,0001,000,000 2007148,0002,010,0001,100,000910,000 2008175,7002,050,0001,420,000630,000 a. Compute the ratio of net income to total assets for each year and stimulation on the trend. b. Compute the ratio of net income to stockholders’ equity and comment on the trend.Explain why there may be a difference in the trends amid move a and b. 3-26. Solution: Jodie Foster Care Homes, Inc. a. [pic] 2005 $118,000/$1,900,000 = 6. 21% 2006 $131,000/$1,950,000 = 6. 72% 2007 $148,000/$2,010,000 = 7. 36% 2008 $175,700/$2,050,000 = 8. 57% observe: in that location is a strong upward movement in return on assets over the four year period. 3-26. (Continued) b. [pic] 2005 $118,000/$700,000= 16. 86% 2006 $131,000/$950,000= 13. 79% 2007 $148,000/$1,100,000= 13. 45% 2008 $175,700/$1,420,000= 12. 37% Comment: The return on stockholders’ equity ratio is tone ending down each year.The difference in trends between a and b is due to the big portion of assets that are financed by stockholders’ equity as irrelevant to debt. Optional: This can be confirmed by computing total debt to total assets for each year. [pic] 200563. 2% 200651. 3% 200745. 3% 200830. 7% 31. The Griggs mountain has ac assign sales of $1,200,000. Given the following ratios, fill in the balance sheet below. Total assets turnover 2. 4 times property to total assets 2. 0% Accounts due turnover 8. 0 times Inventory turnover10. 0 times catamenia ratio 2. 0 times Debt to total assets61. 0% GRIGGS CORPORATIONBalance Sheet 2008 AssetsLiabilities and Stockho lders’ Equity Cash _____ menstruation debt_____ Accounts due_____ long-run debt_____ Inventory_____ Total debt_____ Total current assets _____Equity_____ placed assets _____ Total assets _____ Total debt and stockholders’ equity_____ 3-31. Solution: Griggs weed Sales/total assets= 2. 4 times Total assets= $1,200,000/2. 4 Total assets= $500,000 Cash= 2% of total assets Cash= 2% ? $500,000 Cash= $10,000 Sales/accounts receivable= 8 times Accounts receivable= $1,200,000/8 Accounts receivable= $150,000 Sales/ catalogue= 10 timesInventory= $1,200,000/10 Inventory= $120,000 3-31. (Continued) Fixed assets= Total assets †current assets Current asset= $10,000 + $150,000 + $120,000 = $280,000 Fixed assets= $500,000 †$280,000 = $220,000 Current assets/current debt= 2 Current debt= Current assets/2 Current debt= $280,000/2 Current debt= $140,000 Total debt/total assets= 61% Total debt= . 61 ? $500,000 Total debt= $305,000 Long-term debt= Total debt †current debt Long-term debt= $305,000 †140,000 Long-term debt= $165,000 Equity= Total assets †total debt Equity= $500,000 †$305,000 Equity= $195,000 Griggs Corporation Balance Sheet 2008 Cash |$ 10,000 |Current debt |$140,000 | |A/R |150,000 |Long-term debt | 165,000 | |Inventory |$120,000 |Total debt |$305,000 | |Total current assets |280,000 | | | |Fixed assets | 220,000 |Equity | 195,000 | |Total assets |$500,000 |Total debt and |$500,000 | | | |stockholders’ | | | | |equity | | 35. Given the following financial statements for Jones Corporation and Smith Corporation: a. To which company would you, as credit manager for a supplier, approve the extension of (short-term) backup credit? why? Compute all ratios in the lead answering. b. In which one would you buy stock? Why? JONES CORPORATION | |Current Assets |Liabilities | |Cash |$ 20,000 |Accounts payable |$100,000 | |Accounts receivable |80,000 |Bonds payable (long-term) |80,000 | |Inventory |50,000 | | | |Long-Ter m Assets |Stockholders’ Equity | |Fixed assets |$500,000 | jet stock |$150,000 | |Less: Accumulated | (150,000) |Paid-in gravid |70,000 | | derogation | |Retained earnings |100,000 | |*Net unflinching assets | 350,000 | | | |Total assets |$500,000 |Total liabilities and equity |$500,000 | Sales (on credit) |$1,250,000 | | exist of goods exchange | 750,000 | |Gross profit |500,000 | |†Selling and administrative outgo |257,000 | |Less: Depreciation expense | 50,000 | | direct profit |193,000 | |Interest expense | 8,000 | |Earnings in front taxes |185,000 | | task expense | 92,500 | |Net income |$ 92,500 | *Use net fixed assets in computing fixed asset turnover. †Includes $7,000 in lease payments. | | |SMITH CORPORATION | |Current Assets |Liabilities | |Cash |$ 35,000 |Accounts payable |$ 75,000 | Marketable securities |7,500 |Bonds payable (long-term) |210,000 | |Accounts receivable |70,000 | | | |Inventory |75,000 | | | |Long-Term Assets |Stockholdersâ⠂¬â„¢ Equity | |Fixed assets |$500,000 |Common stock |$ 75,000 | |Less: Accumulated |(250,000) |Paid-in capital |30,000 | |depreciation | |Retained earnings |47,500 | |*Net fixed assets | 250,000 | | | |Total assets |$437,500 | Total liabilities and equity |$437,500 | Sales (on credit) |$1,000,000 | |Cost of goods sold | 600,000 | |Gross profit |400,000 | |†Selling and administrative expense |224,000 | |Less: Depreciation expense | 50,000 | |Operating profit |126,000 | |Interest expense | 21,000 | |Earnings before taxes |105,000 | |Tax expense | 52,500 | |Net income |$ 52,500 | *Use net fixed assets in computing fixed asset turnover. †Includes $7,000 in lease payments. 3-35. Solution: Jones and Smith Comparison genius way of analyzing the situation for each company is to compare the respective ratios for each on, examining those ratios which would be almost all important(predicate) to a supplier or short-term lender and a stockholder. | |Jones Corp. |Smith Corp . | |Profit margin |7. 4% |5. 5% | |Return on assets (investments) |18. 5% |12. 00% | |Return on equity |28. 9% |34. 4% | | due turnover |15. 63x |14. 29x | |Average collection period |23. 04 geezerhood |25. 2 days | |Inventory turnover |25x |13. 3x | |Fixed asset turnover |3. 7x |4x | |Total asset turnover |2. 5x |2. 29x | |Current ratio |1. 5x |2. 5x | |Quick ratio |1. 0x |1. 5x | |Debt to total assets |36% |65. 1% | |Times interest get |24. 13x |6x | |Fixed invest coverage |13. 3x |4. 75x | |Fixed charge coverage calculation |(200/15) |(133/28) | a. Since suppliers and short-term lenders are most concerned with fluidity ratios, Smith Corporation would get the nod as having the best ratios in this category. single could argue, however, that Smith had benefited from having its debt primarily long term sooner than short term. Nevertheless, it appears to have better liquidity ratios. 3-35. (Continued) b. Stockholders are most concerned with profitability. In this category, Jones has much better ratios than Smith.Smith does have a higher(prenominal) return on equity than Jones, but this is due to its much larger use of debt. Its return on equity is higher than Jones’ because it has taken more financial risk. In monetary value of other ratios, Jones has its interest and fixed charges well cover and in general its long-term ratios and outlook are better than Smith’s. Jones has asset utilization ratios contact to or better than Smith and its lower liquidity ratios could reflect better short-term asset management, and that drumhead was covered in part a. Note: remember that to make actual financial decisions more than one year’s comparative data is usually required. Industry comparisons should also be made.\r\n'