a)
To determine: Required ratios.
a)
Explanation of Solution
Calculation of current ratio:
Hence, current ratio is 2.5
Calculation of Acid-test ratio:
Hence, acid-test ratio is 1.38
Calculation of times interest earned:
Hence, times interest earned is 8.33
Calculation of inventory turnover:
Hence, inventory turnover 3.11
Calculation of total assets turnover:
Hence, total assets turnover is 1.36
Calculation of operating profit margin:
Hence, operating profit margin is 11.1%
Calculation of days in receivables:
Hence, collection period is 48.67 days
Calculation of operating return on assets:
Hence, operating return on assets is 15.15%
Calculation of debt ratio:
Hence, debt ratio is 36.4%
Calculation of return on equity:
Hence, return on equity is 16.57%
Calculation of fixed assets turnover:
Hence, fixed assets turnover is 3.46
b)
1)
To discuss: Liquidity of the firm.
b)
1)
Explanation of Solution
Company A, is certainly less liquid than industry’s average company. Both the current ratio and the acid test ratio are lower, suggesting that Company A has less liquid assets than the market in comparison to the maturing commitments of the company (current liabilities).
In fact, both the receivable accounts and the inventory move more slowly through the working capital process than is true for the industry’s typical company.
b)
2)
To discuss: Whether company managers are generating attractive operating profits on its assets.
b)
2)
Explanation of Solution
In terms of generating returns on the company’s assets, management performs better than the industry 15.2% operating
Company A 11.1% against the industry 8%, thus, the company keeps its costs and expenses lower per sales dollar. On the other hand, as shown by the lower total asset turnover, Company A is less effective in controlling its assets.
b)
3)
To discuss: Ways should the firm financing its assets.
b)
3)
Explanation of Solution
The company uses significantly more leverage than the industry’s average company, indicating a little more financial risk to Company A, but higher equity returns than normal.
Two factors affect the interest rate obtained ratio,
- 1) The operating profit level and,
- 2) The debt level.
Company A has a higher return on assets which raises the interest rate earned, but requires more debt, resulting in higher interest costs and a lower interest rate earned ratio.
Company A’s case, the net results is a higher rate of interest earned, that is, the higher operating return on assets increases the time interest earned more than the higher amount of debt decreases it.
b)
4)
To discuss: Whether managers generating the good returns on equity.
b)
4)
Explanation of Solution
Company A delivers higher equity returns than the industry, resulting from 1) a higher operating return on assets, and 2) a higher amount of debt financing.
Want to see more full solutions like this?
Chapter 4 Solutions
Foundations Of Finance
- Analyze and compare Bank of America and Wells Fargo Bank of America Corporation (BAC) and Wells Fargo Company (WFC) are two large financial services companies. The following data (in millions) were taken from a recent years financial statements for both companies: a. Compute the earnings per share for both companies. Round to the nearest cent. a. Which company appears to be more profitable on an earnings-per-share basis? b. Which company would you expect to have the larger quoted market price?arrow_forwardProfitability ratios help in the analysis of the combined impact of liquidity ratios, asset management ratios, and debt management ratios on the operating performance of a firm. Your boss has asked you to calculate the profitability ratios of Diusitech Inc. and make comments on its second-year performance as compared with its first-year performance. The following shows Diusitech Inc.'s income statement for the last two years. The company had assets of $8,225 million in the first year and $13,157 million in the second year. Common equity was equal to $4,375 million in the first year, and the company distributed 100% of its earnings out as dividends during the first and the second years. In addition, the firm did not issue new stock during either year. Diusitech Inc. Income Statement For the Year Ending on December 31 (Millions of dollars) Year 2 Year 1 4,445 1,120 222 1,342 3,103 310 2,793 698 2,095 Net Sales Operating costs except depreciation and amortization Depreciation and…arrow_forwardCarson Electronics’ management has long viewed BGT Electronics as an industry leader and uses this firm as a model firm for analyzing its own performance. The balance sheet and income statements for the two firms are as follows: Calculate the following ratios for both Carson and BGT: a) Debt ratio: b) Average collection period: c) Fixed asset turnover: d) Return on equity:arrow_forward
- Suppose you are trying to decide whether to invest in a company that generates a high expected ROE, and you want to conduct further analysis on the company’s performance. If you wanted to conduct a comparative analysis for the current year, you would: Compare the firm’s financial ratios for the current year with its ratios in previous years Compare the firm’s financial ratios with other firms in the industry for the current year You decide also to conduct a qualitative analysis based on the factors summarized by the American Association of Individual Investors (AAII). According to your understanding, a company with one key product is considered to be risky than companies with a wide range of products. The American Association of Individual Investors (AAII) has identified several qualitative factors that should also be considered when evaluating a company’s likely future financial performance. Consider the scenario and indicate how you would expect the…arrow_forwardYou are provided with the Income Statement and the Balance Sheet of HTS software, Inc. for 2011. Required: (b) Analyze the current financial position for the company from a time series and cross section viewpoint. (c) Break your analysis into an evaluation of the firm’s liquidity, activity, debt, profitability and market ratios. Historical and Industry Average Ratios HTS Software , Inc. Ratio 2010 2011 Industry2011 Current Ratio 2.6 — 2.7 Quick Ratio 1.8 — 1.75 Inventory Turnover 4.5 — 4.7 Average Collection Period 40days — 42 days Total Asset Turnover 1.2 — 1 Debt Ratio 20% — 21% Times Interest Earned 9 — 8.9 Gross Profit Margin 43% — 44% Operating Profit Margin 30% — 32% Net Profit Margin 20% — 21% Return on total assets 12% — 13% Return on Equity Price/Earnings Ratio 15% 7.3 — — 16% 8 Balance SheetHTS Software, Inc.December 31,…arrow_forwardProfitability ratios help in the analysis of the combined impact of liquidity ratios, asset management ratios, and debt management ratios on the operating performance of a firm. Your boss has asked you to calculate the profitability ratios of Diusitech Inc. and make comments on its second-year performance as compared with its first-year performance. The following shows Diusitech Inc.’s income statement for the last two years. The company had assets of $10,575 million in the first year and $16,916 million in the second year. Common equity was equal to $5,625 million in the first year, and the company distributed 100% of its earnings out as dividends during the first and the second years. In addition, the firm did not issue new stock during either year. Diusitech Inc. Income Statement For the Year Ending on December 31 (Millions of dollars) Year 2 Year 1 Net Sales 5,715 4,500 Operating costs except depreciation and amortization 1,365 1,268 Depreciation and…arrow_forward
- Profitability ratios help in the analysis of the combined impact of liquidity ratios, asset management ratios, and debt management ratios on the operating performance of a firm. Your boss has asked you to calculate the profitability ratios of Spandust Industries Inc. and make comments on its second-year performance as compared with its first-year performance. The following shows Spandust Industries Inc.’s income statement for the last two years. The company had assets of $7,050 million in the first year and $11,278 million in the second year. Common equity was equal to $3,750 million in the first year, and the company distributed 100% of its earnings out as dividends during the first and the second years. In addition, the firm did not issue new stock during either year. Spandust Industries Inc. Income Statement For the Year Ending on December 31 (Millions of dollars) Year 2 Year 1 Net Sales 3,810 3,000 Operating costs except depreciation and amortization 1,855 1,723…arrow_forwardHere you will find some income statements and balance sheets for Sears Holdings (SHLD) and Taget Corp (TGT). Assume that you are a financial manager at Sear and want to compare your firm’s situation with that of Target. Calculate represenatative ratios for liquidity, asset management efficiency, financial leverage (capital structure), and profitability for both Sears and Target. How would you summarize the financial performance of Sears compared to target (its benchmark firm)? Include Sears and Targets current ratio, acid-test ratio, average collection period, accounts receivable turnover, inventory turnover, debt ratio, timed interest earned, total asset turnover, fixed asset turnover, gross profit margin, operating profit margin, net profit margin, operating return on assets, and return on equity.arrow_forward5. Profitability ratios Profitability ratios help in the analysis of the combined impact of liquidity ratios, asset management ratios, and debt management ratios on the operating performance of a firm. Your boss has asked you to calculate the profitability ratios of Diusitech Inc. and make comments on its second-year performance as compared with its first-year performance. The following shows Diusitech Inc.'s income statement for the last two years. The company had assets of $4,700 million in the first year and $7,518 million in the second year. Common equity was equal to $2,500 million in the first year, and the company distributed 100% of its earnings out as dividends during the first and the second years. In addition, the firm did not issue new stock during either year. Diusitech Inc. Income Statement For the Year Ending on December 31 (Millions of dollars) Year 2 Year 1 2,540 2,000 1,610 1,495 127 80 1,737 803 80 723 181 542 Net Sales Operating costs except depreciation and…arrow_forward
- You are provided with the Income Statement and the Balance Sheet of HTS software, Inc. for 2011. Required: (b) Analyze the current financial position for the company from a time series and cross section viewpoint. (c) Break your analysis into an evaluation of the firm’s liquidity, activity, debt, profitability and market ratios. Historical and Industry Average Ratios HTS Software , Inc. Ratio 2010 2011 Industry2011 Current Ratio 2.6 2.08 2.7 Quick Ratio 1.8 1.32 1.75 Inventory Turnover 4.5 6 4.7 Average Collection Period 40days 9.125 42 days Total Asset Turnover 1.2 1.69 1 Debt Ratio 20% 28.2% 21% Times Interest Earned 9 5.9% 8.9 Gross Profit Margin 43% 42.8% 44% Operating Profit Margin 30% 25.5% 32% Net Profit Margin 20% 17% 21% Return on total assets 12% 4.11% 13% Return on Equity Price/Earnings Ratio 15% 7.3 19% 4.4 16% 8…arrow_forwardProfitability ratios help in the analysis of the combined impact of liquidity ratios, asset management ratios, and debt management ratios on the operating performance of a firm. Your boss has asked you to calculate the profitability ratios of Dernham Inc. and make comments on its second-year performance as compared with its first-year performance. The following shows Dernham Inc. ’s income statement for the last two years. The company had assets of $3,525 million in the first year and $5,639 million in the second year. Common equity was equal to $1,875 million in the first year, and the company distributed 100% of its earnings out as dividends during the first and the second years. In addition, the firm did not issue new stock during either year. Dernham Inc. Income Statement For the Year Ending on December 31 (Millions of dollars) Year 2 Year 1 Net Sales 1,905 1,500 Operating costs except depreciation and amortization 1,855 1,723 Depreciation and amortization 95 60…arrow_forwardProfitability ratios help in the analysis of the combined impact of liquidity ratios, asset management ratios, and debt management ratios on the operating performance of a firm. Your boss has asked you to calculate the profitability ratios of Petroxy Oil Co. and make comments on its second-year performance as compared with its first-year performance. The following shows Petroxy Oll Co.'s Income statement for the last two years. The company had assets of $9,400 million in the first year and $15,037 million in the second year. Common equity was equal to $5,000 million in the first year, and the company distributed 100% of its earnings out as dividends during the first and the second years. In addition, the firm did not issue new stock during either year. Petroxy Oil Co. Income Statement For the Year Ending on December 31 (Millions of dollars) Year 2 Year 1 4,000 1,268 Net Sales Operating costs except depreciation and amortization Depreciation and amortization Total Operating Costs…arrow_forward
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENTFinancial And Managerial AccountingAccountingISBN:9781337902663Author:WARREN, Carl S.Publisher:Cengage Learning,
- Cornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage LearningIntermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning