FIN 612 Managerial Finance
Week Three Assignment
Your assignment for this week is to complete the following questions and problems from Chapter 3.
Please submit your complete assignment in the course room by the due date.
Chapter 3 Questions
(3-3) Over the past year, M. D. Ryngaert & Co. has realized an increase in its current ratio and a
drop in its total assets turnover ratio. However, the company’s sales, quick ratio, and fixed
assets turnover ratio have remained constant. What explains these changes?
The above changes explain that company was not able to successfully manage their inventories. Due to the
increase in inventory both current assets and current ratio increased where as total assets turnover decreased. Since
inventory does not included on quick ratio and fixed assets turnover, these ratios remain constant. Company’s sales
have remained constant but inventory has increased. This situation shows that company is losing their money.
(3-5) How might (a) seasonal factors and (b) different growth rates distort a comparative ratio
analysis? Give some examples. How might these problems be alleviated?
Ratio analysis uses various financial figures for computation purpose; financial data used in computation is derived
from the historical financial data. The above two mentioned factors must be adjusted in the ratio analysis in order
to perform more appropriate comparison. Seasonal factors tend to inflate or deflate the figures and they must be
adjusted so that a normal ratio analysis can be performed.
(3-6) Why is it sometimes misleading to compare a company’s financial ratios with those of
other firms that operate in the same industry?
-Different stages of the business
-Size of the firms
-Diversified products and/or location
Chapter 3 Problems
(3-1) Greene Sisters has a DSO of 20 days. The company’s average daily sales are $20,000. What
is the level of its accounts receivable? Assume there are 365 days in a year.
Days Sales Outstanding (DSO) = Accounts Receivable (A/R) / Average Daily Sales
(3-2) Vigo Vacations has $200 million in total assets, $5 million in notes payable, and $25
million in long-term debt. What is the debt ratio?
Total Debt/Total Assets
(3-3) Winston Washers’s stock price is $75 per share. Winston has $10 billion in total assets. Its
balance sheet shows $1 billion in current liabilities, $3 billion in long-term debt, and
$6 billion in common equity. It has 800 million shares of common stock outstanding.
What is Winston’s market/book ratio?
winstons market cap = 75 * 800 million
Book Value = Assets - Liabilities
mkt/book ratio = $60b/$6b
(3-7) Ace Industries has current assets equal to $3 million. The company’s current ratio is 1.5,
and its quick ratio is 1.0. What is the firm’s level of current liabilities? What is the firm’s
level of inventories?
Current assets = 3 million/ current liabilities of 2 million = 1.5 current ratio. The quick ratio is current assets = 3
million - 1 million inventory / current liabilities of 2 million equal a quick ratio of 1.
(3-11) Complete the balance sheet and sales information in the table that follows for J. White
Industries using the following financial data:
Total assets turnover: 1.5
Gross profit margin on sales: (Sales – Cost of goods sold)/Sales = 25%
Total liabilities-to-assets ratio: 40%
Quick ratio: 0.80
Days sales outstanding (based on 365-day year): 36.5 days
Inventory turnover ratio: 3.75
Partial Income Statement Information
Sales
__600,000___
Cost of goods sold
___450,000____
Balance Sheet
Cash
28,000
Accounts payable
Accounts receivable
60,000
Long-term debt
Inventories
160,000
Common stock
Fixed assets
152,000
Retained earnings
Total assets
$400,000
Total liabilities and equity
110,000
50,000
140,000
100,000
(3-13) Data for Lozano Chip Company and its industry averages follow.
a. Calculate the indicated ratios for Lozano.
b. Construct the extended Du Pont equation for both Lozano and the industry.
c. Outline Lozano’s strengths and weaknesses as revealed by your analysis.
Lozano Chip Company: Balance Sheet as of December 31, 2013 (Thousands
of Dollars)
Cash
Receivables
Inventories
Total current assets
Net fixed assets
$ 225,000
1,575,000
1,125,000
$2,950,000
1,350,000
__________
Accounts payable
$ 601,866
Notes payable
326,634
Other current liabilities
525,000
Total current liabilities $1,453,500
Long-term debt
1,068,750
Common equity
1,752,750
Total assets
$4,275,000
Total liabilities and equity $4,275,000
Lozano Chip Company: Income Statement for Year Ended December 31, 2013
(Thousands of Dollars)
Sales
Cost of goods sold
Selling, general, and administrative expenses
Earnings before interest and taxes (EBIT)
Interest expense
Earnings before taxes (EBT)
Federal and state income taxes (40%)
Net income
Ratio
Current assets/Current liabilities
Days sales outstanding (365-day year)
COGS/Inventory
Sales/Fixed assets
Sales/Total assets
Net income/Sales
Net income/Total assets
Net income/Common equity
Total debt/Total assets
Total liabilities/Total assets
(b) ROE = PM x TATO x EM
$ 7,500,000
6,375,000
825,000
$ 300,000
111,631
$ 188,369
75,348
$ 113,022
Lozano
_____2.03__
____76.65____
___5.67_____
____5.55______
____1.75______
____1.5%______
___2.64%_______
_____6.44%_____
____34%______
_____59%_____
Industry Average
2.0
35.0 days
6.7
12.1
3.0
1.2%
3.6%
9.0%
30.0%
60.0%