assignment 2
1)Liquidity management Bauman? Company’s total current?
assets, total current? liabilities, and inventory for each of the past 4 years?
follow:
Item
2012 2013 2014 2015
Total current assets
$17,130 $21,740 $22,770 $26,050
Total current liabilities 8,780 12,790 12,690 17,230
??Inventory ??5,360 ????7,310 ????7,130???7,170
a. Calculate the? firm’s current and quick ratios for each
year. Compare the resulting time series for these measures of liquidity.
b. Comment on the? firm’s liquidity over the? 2012-2015
period.
c. If you were told that Bauman? Company’s inventory
turnover for each year in the? 2012-2015 period and the industry averages were
as? follows, would this information support or conflict with your evaluation in
part ?(b?).?? ?Why?
|
Item |
2012 |
2013 |
2014 |
2015 |
|
??Bauman Company |
6.3 |
6.8 |
7.0 |
6.4 |
|
??Industry Average |
11.4 |
12.0 |
11.6 |
11.8 |
a. Calculate the? firm’s current and quick ratios for each
year.
Bauman? Company’s current ratio for year 2012 is ____. ?
(Round to two decimal? places.)
Bauman? Company’s current ratio for year 2013 is _____. ?
(Round to two decimal? places.)
Bauman? Company’s current ratio for year 2014 is ________. ?
(Round to two decimal? places.)
Bauman? Company’s current ratio for year 2015 is ______. ?
(Round to two decimal? places.)
Bauman? Company’s quick ratio for year 2012 is _____. ?
(Round to two decimal? places.)
Bauman? Company’s quick ratio for year 2013 is _____. ?
(Round to two decimal? places.)
Bauman? Company’s quick ratio for year 2014 is ______. ?
(Round to two decimal? places.)
Bauman? Company’s quick ratio for year 2015 is _____. ?
(Round to two decimal? places.)
b. Comment on the? firm’s liquidity over the? 2012-2015
period.???(Select the best answer? below.)
A. The pattern indicates that Bauman? Company’s ability to
satisfy its? short-term obligations has improved over the years.
B. The pattern indicates a deteriorating liquidity position.
C. The pattern exhibits a reasonably stable trend.
D. The pattern indicates that Bauman? Company’s speed to
convert various accounts into sales or cash has improved over the years.
c. Based on Bauman? Company’s inventory turnover for each
year in the? 2012-2015 period and the industry? averages, does this information
support or conflict with your evaluation in part b.?? ?Why????(Select all the
answers that? apply.)
A. Slow inventory turnover may indicate obsolete inventory.
B. The low inventory turnover suggests that liquidity is
even worse than the declining liquidity measures indicate.
C. Rapid inventory turnover may indicate obsolete inventory.
D. The low inventory turnover suggests that liquidity is not
as bad as the declining liquidity measures indicate.
2) Inventory management?Wilkins Manufacturing has sales of $3.6
million and a gross profit margin of 37 %. Its ?end-of-quarter inventories?
are:
|
Quarter |
Inventory |
|
1 |
$ 394,000 |
|
2 |
??? 805,000 |
|
3 |
??? 1,198,000 |
|
4 |
??? 193,000 |
a. Find the average quarterly inventory and use it to
calculate the? firm’s inventory turnover and the average age of inventory. ?
(Assume a? 365-day year.)
b. Assuming that the company is in an industry with an
average inventory turnover of 1.9?, how would you evaluate the activity of?
Wilkins’ inventory?
a. The average quarterly inventory $________. ? (Round to
the nearest? dollar.)
Inventory turnover ratio is _______. ? (Round to two
decimal? places.)
The average age of inventory is ________ days. ? (Round to
one decimal? place.)
b. Assuming that the company is in an industry with an
average inventory turnover of 1.9?, how would you evaluate the activity of?
Wilkins’ inventory????(Select all the answers that? apply.)
A. The Wilkins Manufacturing inventory turnover ratio
significantly exceeds the industry.
B. A low inventory turnover ratio may represent low
inventory levels resulting in stockouts.
C. A high inventory turnover ratio may represent low
inventory levels resulting in stockouts.
D. A high inventory turnover ratio may represent efficient
inventory management.
3) Debt analysis?Springfield Bank is evaluating Creek?
Enterprises, which has requested a $3,950,000 ?loan, to assess the? firm’s
financial leverage and financial risk. On the basis of the debt ratios for?
Creek, along with the industry averages and? Creek’s recent financial?
statements, evaluate and recommend appropriate action on the loan request.
|
Industry averages |
||||||
|
Debt ratio |
0.480.48 |
|||||
|
Times interest earned ratio |
7.357.35 |
|||||
|
Creek Enterprises Income Statement for the Year Ended |
||||||
|
Sales revenue |
$ 29,985,000 |
|||||
|
?Less: Cost of goods sold |
21,031,000 |
|||||
|
Gross profits |
$ 8,954,000 |
|||||
|
?Less: Operating expenses |
||||||
|
Selling expense |
$ 3,046,000 |
|||||
|
General and administrative expenses |
1,815,000 |
|||||
|
Lease expense |
168,000 |
|||||
|
Depreciation expense |
988,000 |
|||||
|
Total operating expense |
6,017,000 |
|||||
|
Operating profits |
$ 2,937,000 |
|||||
|
?Less: Interest expense |
959,000 |
|||||
|
Net profits before taxes |
$ 1,978,000 |
|||||
|
?Less: Taxes ?(rate equals 40 %rate=40%?) |
791,200 |
|||||
|
Net profits after taxes |
$ 1,186,800 |
|||||
|
?Less: Preferred stock dividends |
97,500 |
|||||
|
Earnings available for common stockholders |
$1,089,300 |
|||||
|
Creek Enterprises Balance Sheet |
||||
|
Assets |
Liabilities and? Stockholders’ |
|||
|
Current assets |
Current liabilities |
|||
|
Cash |
$970,000 |
Accounts payable |
$ 7,983,000 |
|
|
Marketable securities |
3,017,000 |
Notes payable |
8,024,000 |
|
|
Accounts receivable |
11,983,000 |
Accruals |
460,000 |
|
|
Inventories |
7,483,000 |
Total current liabilities |
$ 16,467,000 |
|
|
Total current assets |
$23,453,000 |
?Long-term debt? (includes |
||
|
financial? leases)** |
$19,851,000 |
|||
|
Gross fixed assets? (at cost)* |
?Stockholders’ equity |
|||
|
Land and buildings |
$ 10,988,000 |
Preferred stock ?(26,000 |
||
|
? shares, $3.75 ?dividend) |
$ 2,474,000 |
|||
|
Machinery and equipment |
20,472,000 |
Common stock ?(1.08 million |
||
|
Furniture and fixtures |
7,977,000 |
???shares at $4.75 ?par) |
5,130,000 |
|
|
Gross fixed assets |
$39,437,000 |
?Paid-in capital in excess of |
||
|
???par value |
3,959,000 |
|||
|
?Less: Accumulated depreciation |
13,015,000 |
Retained earnings |
1,994,000 |
|
|
Net fixed assets |
$26,422,000 |
Total? stockholders’ equity |
$13,557,000 |
|
|
Total liabilities and |
||||
|
Total assets |
?$49,875,000 |
??? stockholders’ equity |
$49,875,000 |
|
|
?*The firm has a? 4-year financial lease requiring $ 168,000. Three years of the lease have yet to run. |
||||
|
?**Required annual principal payments are $815,000. |
Creek? Enterprises’s debt ratio is ______. ? (Round to two
decimal? places.)
Creek? Enterprises’s times interest earned ratio is
______. ?(Round to two decimal? places.)
Creek? Enterprises’s fixed-payment coverage ratio is
_____. ?(Round to two decimal? places.)
Complete the following summary of ratios and compare Creek?
Enterprises’s ratios vs. the industry? average:???(Round to two decimal?
places.)
|
Creek |
Industry |
|
|
Debt ratio |
0.48 |
|
|
Times interest earned ratio |
7.35 |
|
|
?Fixed-payment coverage ratio |
1.84 |
Do you agree or disagree with the decision? below?
Because Creek Enterprises has a much higher degree of
indebtedness and much lower ability to service debt than the average firm in
the? industry, the loan should be rejected.??
4) The relationship between financial leverage and
profitability Pelican? Paper, Inc., and Timberland? Forest, Inc., are rivals in
the manufacture of craft papers. Some
financial statement values for each company follow Use them in a ratio analysis that compares
the? firms’ financial leverage and profitability.
Item
Pelican? Paper, Inc.
Timberland? Forest, Inc.
Total assets
$10,200,000
$10,200,000
Total equity? (all common)
8,900,000
4,700,000
Total debt
1,300,000
5,500,000
Annual interest
130,000
550,000
Total sales
23,000,000
23,000,000
EBIT
5,750,000
5,750,000
Earnings available for
common stockholders
3,394,800
3,174,000
a. Calculate the following debt and coverage ratios for the
two companies. Discuss their financial risk and ability to cover the costs in
relation to each other.
?(1) Debt ratio
?(2) Times interest earned ratio
b. Calculate the following profitability ratios for the two
companies. Discuss their profitability relative to each other.
?(1) Operating profit margin
?(2) Net profit margin
?(3) Return on total assets
?(4) Return on common equity
c. In what way has the larger debt of Timberland Forest made
it more profitable than Pelican? Paper? What are the risks that? Timberland’s
investors undertake when they choose to purchase its stock instead of?
Pelican’s?
a. The debt ratio for Pelican is ______?%. ? (Round to one
decimal? place.)
The debt ratio for Timberland is ______. ? (Round to one
decimal? place.)
The times interest earned ratio for Pelican is ______. ?
(Round to one decimal? place.)
The times interest earned ratio for Timberland is ______. ?
(Round to one decimal? place.)
Discuss their financial risk and ability to cover the costs
in relation to each other. ? (Select all the answers that? apply.)
A. Timberland has a much higher degree of financial leverage
than does Pelican. As a? result, Timberland’s earnings will be more? volatile,
causing the common stock owners to face greater risk.
B. ?Timberland’s earnings will be more volatile. This
additional risk is supported by the significantly lower times interest earned
ratio of Timberland. Pelican can face a very large reduction in net income and
still be able to cover its interest expense.
C. ?Pelican’s earnings will be more volatile. This
additional risk is supported by the significantly lower times interest earned ratio
of Pelican. Timberland can face a very large reduction in net income and still
be able to cover its interest expense.
D. Pelican has a much higher degree of financial leverage
than does Timberland. As a? result, Pelican’s earnings will be more? volatile,
causing the common stock owners to face greater risk.
b. The operating profit margin for Pelican is _______. ?
(Round to one decimal? place.)
The operating profit margin for Timberland is ______. ?
(Round to one decimal? place.)
The net profit margin for Pelican is _______. ? (Round to
two decimal? places.)
The net profit margin for Timberland is _______. ? (Round to
two decimal? places)
The return on total assets for Pelican is _______? (Round to
one decimal? place.)
The return on total assets for Timberland is ________ ?
(Round to one decimal? place.)
The return on common equity for Pelican is _____ ? (Round to
one decimal? place.)
The return on common equity for Timberland is ______ ?
(Round to one decimal? place.)
Discuss their profitability relative to each
other.???(Select all the answers that? apply.)
A. The return on equity for Timberland is higher than that
of Pelican.
B. Pelican is more profitable than Timberland as shown by
the higher net profit margin and return on assets.
C. Timberland is more profitable than Pelican as shown by
the higher net profit margin and return on assets.
D. The return on equity for Pelican is higher than that of
Timberland.
c. In what way has the larger debt of Timberland Forest made
it more profitable than Pelican? Paper? What are the risks that? Timberland’s
investors undertake when they choose to purchase its stock instead of?
Pelican’s????(Select the best answer? below.)
A. Since Timberland has a higher relative amount of? debt,
the? stockholders’ equity is proportionally reduced resulting in the higher
return on equity than that obtained by Pelican. The higher ROE brings with it
higher levels of financial risk for Timberland equity holders.
B. Even though Pelican is more profitable? (higher net
profit? margin), Timberland has a higher ROE than Pelican due to the additional
financial leverage risk.
C. The lower profits of Timberland are due to the fact that
interest expense is deducted from EBIT. Timberland has $550,000 of interest
expense to? Pelican’s $130,000. Even after the tax shield from the interest tax
deduction? Timberland’s profits are less than? Pelican’s by $220,800.
D. All of the above.
5) DuPont system of analysis
Use the following ratio information LOADING… for Johnson International and the industry
averages for? Johnson’s line of business? to:
Johnson 2013 2014 2015
Financial leverage multiplier 1.75 1.75 1.85
Net profit margin 0.063 0.062 0.053
Total asset turnover 2.07 2.14 2.30
Industry Averages
Financial leverage multiplier 1.61 1.63 1.58
Net profit margin 0.052 0.045 0.039
Total asset turnover 2.04 2.12 2.14
a. Construct the DuPont system of analysis for both Johnson
and the industry.
b. Evaluate Johnson? (and the? industry) over the? 3-year
period.
c. Indicate in which areas Johnson requires further
analysis.? Why?
a. Construct the DuPont system of analysis for both Johnson
and the industry.
The ROA for Johnson in 2013 is __________ ?(Round to two decimal? places.)
The ROE for Johnson in 2013 is _______ ?(Round to two decimal? places.)
The ROA for Johnson in 2014 is ________ ?(Round to two decimal? places.)
The ROE for Johnson in 2014 is __________ ?(Round to two decimal? places.)
The ROA for Johnson in 2015 is _______ ?(Round to two decimal? places.)
The ROE for Johnson in 2015 is ________ ?(Round to two decimal? places.)
The ROA for the industry in 2013 is _________ ?(Round to two decimal? places.)
The ROE for the industry in 2013 is _______ ?(Round to two decimal? places.)
The ROA for the industry in 2014 is _______ ?(Round to two decimal? places.)
The ROE for the industry in 2014 is _________ ?(Round to two decimal? places.)
The ROA for the industry in 2015 is ________ ?(Round to two
decimal? places.)
The ROE for the industry in 2015 is ______ ?(Round to two decimal? places.)
b. Evaluate Johnson? (and the? industry) over the? 3-year
period. ? (Select the best answer? below.)
A. ?Leverage: Only Johnson shows an increase in leverage
from 2014 to? 2015, while the industry has had less stability.
B. ?Profitability: Industry net profit margins are?
decreasing; Johnson’s net profit margins have fallen less.
C. ?Efficiency: Both? industry’s and? Johnson’s asset
turnover have increased.
D. All of the above.
c. Indicate in which areas Johnson requires further
analysis.? Why????(Select the best answer? below.)
A. Areas which require further analysis are profitability
and debt.
B. A? common-size
income statement could be useful in determining the cause of the falling net
profit margin.
C. Since the total asset turnover is increasing and is
superior to that of the? industry, Johnson is generating an appropriate sales
level for the given level of assets.
D. All of the above.
?6) Cross-sectional ratio analysis?Use the financial
statements for Fox Manufacturing Company for the year ended December? 31, 2015,
along with the industry average ratios
?to:
a. Prepare and interpret a complete ratio analysis of the?
firm’s 2015 operations.
b. Summarize your findings and make recommendations
|
Fox Manufacturing Company Income |
|
|
for the Year Ended December? 31, |
|
|
Sales revenue |
$595,000 |
|
?Less: Cost of goods sold |
464,000 |
|
Gross profits |
$ 131,000 |
|
?Less: Operating expenses |
|
|
General and administrative expenses |
$29,700 |
|
Depreciation expense |
30,500 |
|
Total operating expense |
60,200 |
|
Operating profits |
$70,800 |
|
?Less: Interest expense |
10,400 |
|
Net profits before taxes |
$60,400 |
|
?Less: Taxes |
27,100 |
|
Net profits after taxes? (earnings available for common? stockholders) |
$33,300 |
|
Earnings per share? (EPS) |
$1.59 |
|
Fox Manufacturing Company Balance |
|
|
December? 31, 2015 |
|
|
Assets |
|
|
Cash |
$15,500 |
|
Marketable securities |
6,900 |
|
Accounts receivable |
34,500 |
|
Inventories |
81,500 |
|
Total current assets |
$138,400 |
|
Net fixed assets |
270,000 |
|
Total assets |
$408,400 |
|
Liabilities and? Stockholders’ Equity |
|
|
Accounts payable |
$57,500 |
|
Notes payable |
13,400 |
|
Accruals |
5,300 |
|
Total current liabilities |
$76,200 |
|
?Long-term debt |
$149,100 |
|
Common stock equity? (20,000 shares ?outstanding) |
$110,100 |
|
Retained earnings |
73,000 |
|
Total? stockholders’ equity |
$ 183,100 |
|
Total liabilities and? stockholders’ equity |
$408,400 |
|
Ratio |
Industry? average, 2015 |
|
|
Current ratio |
2.39 |
|
|
Quick ratio |
0.91 |
|
|
Inventory? turnover* |
4.56 times |
|
|
Average collection? period* |
36.3 days |
|
|
Total asset turnover |
1.07 |
|
|
Debt ratio |
0.30 |
|
|
Times interest earned |
11.1 |
|
|
Gross profit margin |
0.183 |
|
|
Operating profit margin |
0.126 |
|
|
Net profit margin |
0.078 |
|
|
Return on total assets? (ROA) |
0.075 |
|
|
Return on common equity? (ROE) |
0.109 |
|
|
Earnings per share? (EPS) |
$2.63 |
|
|
?*Based on a? 365-day year and on? end-of-year figures. |
a. The current ratio is ______. ? (Round to two decimal?
places.)
Fox? Manufacturing’s current ratio is __________ average.? (Select from the? drop-down menu.)
The quick ratio is _______. ? (Round to two decimal? places.)
Fox? Manufacturing’s quick ratio is _________ average.?(Select from the?
drop-down menu.)
The inventory turnover is _______. ? (Round to two decimal?
places.)
Fox? Manufacturing’s inventory turnover is __________ average.?(Select from the? drop-down
menu.)
The average collection period is ______. ?(Round to one decimal? place.)
Fox? Manufacturing’s average collection period is __________
average.?(Select from the? drop-down menu.)
The total asset turnover is 1.46. ?(Round to two decimal? places.)
Fox? Manufacturing’s total asset turnover is _________
average.?(Select from the? drop-down menu.)
The debt ratio is 0.55.
?(Round to two decimal? places.)
Fox? Manufacturing’s debt ratio is __________
average.?(Select from the? drop-down menu.)
The times interest earned ratio is ________.
?(Round to one decimal? place.)
Fox? Manufacturing’s times interest earned ratio is _________average. ?(Select from the?
drop-down menu.)
The gross profit margin is _______. ?(Round to three decimal? places.)
Fox? Manufacturing’s gross profit margin is _______
average.?(Select from the? drop-down menu.)
The operating profit margin is _______ ?(Round to three decimal? places.)
Fox? Manufacturing’s operating profit margin is _________
average.?(Select from the? drop-down menu.)
The net profit margin is ________. ?(Round to three decimal? places.)
Fox? Manufacturing’s net profit margin is _______
average.?(Select from the? drop-down menu.)
The return on total assets? (ROA) is _______. ?(Round to three decimal? places.)
Fox? Manufacturing’s return on total assets? (ROA) is _______average.?(Select from the? drop-down
menu.)
The return on common equity? (ROE) is ______.
?(Round to three decimal? places.)
Fox? Manufacturing’s return on common equity? (ROE) is _________
average.?(Select from the? drop-down menu.)
Fox? Manufacturing’s earnings per share is ________
average. ?(Select from the? drop-down menu.)
b. Summarize your findings and make recommendations.?(Select
from the? drop-down menus.)
Fox Manufacturing Company needs improvement in its ________
ratios and possibly a reduction in its total __________ . The firm is more highly leveraged
than the average firm in its industry? and, therefore, has more financial risk.
The _______ of the firm is lower than average but is
enhanced by the use of debt in the capital? structure, resulting in a superior
ROE
7) Depreciation On March? 20, 2015, Norton Systems acquired
two new assets. Asset A was research equipment costing $ 22,000 and having a?
3-year recovery period. Asset B was duplicating equipment having an installed
cost of $ 48,000 and a? 5-year recovery period. Using the MACRS depreciation
percentages prepare a depreciation
schedule for each of these assets
|
Rounded Depreciation Percentages by Recovery Year Using MACRS for First Four Property Classes |
||||
|
Percentage by recovery? year* |
||||
|
Recovery year |
3 years |
5 years |
7 years |
10 years |
|
1 |
33?% |
20?% |
14?% |
10?% |
|
2 |
45?% |
32?% |
25?% |
18?% |
|
3 |
15?% |
19?% |
18?% |
14?% |
|
4 |
7?% |
12?% |
12?% |
12?% |
|
5 |
12?% |
9?% |
9?% |
|
|
6 |
5?% |
9?% |
8?% |
|
|
7 |
9?% |
7?% |
||
|
8 |
4?% |
6?% |
||
|
9 |
6?% |
|||
|
10 |
6?% |
|||
|
11 |
4?% |
|||
|
Totals |
100?% |
100?% |
100?% |
100?% |
|
?*These percentages have been rounded to the nearest whole percent to |
Recovery Year Depreciation
1 ?
$_____?(Round to the nearest? dollar.)
Recovery Year Depreciation
2
?$______?(Round to the nearest? dollar.)
Recovery Year Depreciation
3 ?
$_______?(Round to the nearest? dollar.)
Recovery Year Depreciation
4
?$______(Round to the nearest? dollar.)
Complete the depreciation schedule for asset B? below:
Recovery Year
Depreciation
1
?$______?(Round to the nearest? dollar.)
Recovery Year
Depreciation
2 ?$_______?(Round to the nearest? dollar.)
Recovery Year Depreciation
3 ?$
_______ ?(Round to the nearest? dollar.)
Recovery Year Depreciation
4
?$ ______?(Round to the nearest? dollar.)
Recovery Year Depreciation
5 ?$
____? (Round to the nearest? dollar.)
Recovery Year Depreciation
6 ? $
______ ?(Round to the nearest? dollar.)
8) Depreciation and accounting cash flow?A firm in the third
year of depreciating its only? asset, which originally cost $182,000 and has a?
5-year MACRS recovery period has gathered the following data relative to the
current? year’s operations:
|
Rounded Depreciation Percentages by Recovery Year Using MACRS for First Four Property Classes |
||||
|
Percentage by recovery? year* |
||||
|
Recovery year |
3 years |
5 years |
7 years |
10 years |
|
1 |
33?% |
20?% |
14?% |
10?% |
|
2 |
45?% |
32?% |
25?% |
18?% |
|
3 |
15?% |
19?% |
18?% |
14?% |
|
4 |
7?% |
12?% |
12?% |
12?% |
|
5 |
12?% |
9?% |
9?% |
|
|
6 |
5?% |
9?% |
8?% |
|
|
7 |
9?% |
7?% |
||
|
8 |
4?% |
6?% |
||
|
9 |
6?% |
|||
|
10 |
6?% |
|||
|
11 |
4?% |
|||
|
Totals |
100?% |
100?% |
Categories:
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