Chapter 3
Problems
COOGAN DEVELOPMENT CO., INC.
2003 Income Statement
Sales
Cost of Goods Sold
Depreciation
Earnings before interest and taxes
Interest paid
Taxable income
Taxes (34%)
Net Income
Retained Earnings
Dividends
$ 25,000
16,000
3,000
6,000
2,000
4,000
1,360
2,640
100%
64
12
24
8
16
5.4
10.6
$1,584
1,056
COOGAN DEVELOPMENT CO., INC
Balance Sheets as of December 31, 2002 and 2003
2002
2003
Assets
Current Assets
Cash
A/R
Inventory
Total
Fixed Assets
Net plant and equipment
Total assets
Liabilities and Owners’ Equity
Current Liabilities
A/P
N/P
Total
Long-term debt
Owner’s equity
CS
14,000
R/E
10,000
Total
Total liabilities and equity
$ 4,000
9,000
5,000
18,000
$ 3,000
11,000
4,500
18,500
6%
22
9
37
30,000
48,000
31,500
50,000
63
100
$ 3,000
6,000
9,000
15,000
$ 2,500
6,416
8,916
13,000
5%
12.8
17.8
26
28,084
50,000
33
23.2
56.2
100
16,500
11,584
24,000
48,000
1- Compute the measures of short-term solvency (current ratio, quick ratio, and cash
ratio) using the 2003 financial statement data. (2.07, 1.57, 0.34)
2- Compute the measures of long-term solvency (total debt ratio, debt/equity ratio,
equity multiplier, times interest earned, and cash coverage ratio) using the 2003
financial statement data (43.83%, 78.04%, 1.78, 3.00 times, 4.50 times)
3- Compute the asset management measures (inventory turnover, days sales in
inventory, receivables turnover, days sales outstanding, fixed asset turnover, and
total asset turnover) using the 2003 financial statement data (3.56 times, 103 days,
2.27 times, 161 days, 0.79 times, 0.50 times)
4- Compute the profitability measures (profit margin, ROA, and ROE) using the
2003 balance sheet and income statement data. (10.56%, 5.28%, 9.4%)
5- Use the DuPont identity to compute return on equity (ROE) and return on assets
(ROA) for Coogan Development (ROA = 0.1056 x 0.5 = 5.28%, ROE = 0.1056%
x 1.78 = 9.4%)
6- Suppose that Coogan Development has 1,000 shares of common stock
outstanding, and that the market price per share is $40. Compute EPS, the P-E
ratio, and the market-to-book ratio. ($2.64, 15.15, 1.42 times)
7- Suppose the firm decides to reduce its total debt ratio to 20% from 43.38% by
selling new common stock and using the proceeds to repay principal on some
outstanding long-term debt. Compute each of the following: debt/equity ratio,
equity multiplier, and return on equity. Also, how much equity financing will
Coogan have to obtain in order to accomplish this reduction in the total debt ratio?
(0.25, 1.25, 6.6%, $11,916)
8- Suppose Coogan Development increases its total debt ratio to 80% by borrowing
additional long-term funds and using the proceeds to buy some of its outstanding
common stock. Compute the following: debt/equity ratio, equity multiplier, and
return on equity. (4.0, 5.0, 26.4%)
9- Suppose the firm decides to reduce its average collection period (ACP) to 120
days from 161 days. How much of its currently outstanding accounts receivable
must be collected to accomplish this? If collected fund are held as cash, how
would this affect the firm’s current and quick ratios? If the collected funds were
used to repay notes payable, how would this affect the current and quick ratios?
($2,780.23, no change, no change, 2.56, 1.83)