AGEC $424$
Answer key for Chapter 3 Assignment
Problem numbers are from the 4th edition.
8.
Calculate all of the ratios discussed in the chapter for the Axtel Company of the
preceding Problem. Assume Axtel had leasing costs of $7,267 in 2001, and had 1,268,000 shares
of stock outstanding that were valued at $28.75 per share at year end.
SOLUTION:
Current Ratio
Curr Assets / Curr Liabilities
= $11,678 / $2,110 = 5.5
Quick Ratio
[Curr Assets  Inv] / Curr Liabs = ($11,678  $3,220) / $2,110
= 4.0
Average Collection Period (ACP)
[Accts Rec / Sales]  360
= [($5,583 / $36,227)  360]
= 55.5 days
Inventory Turnover
COGS / Inventory
= $19,925 / $3,220 = 6.2
OR
Sales / Inventory
= $36,227 / $3,220 = 11.3
Fixed Asset Turnover
Sales / Fixed Assets
= $36,227 / $11,047 = 3.3
Total Asset Turnover
Sales / Total Assets = $36,227 / $22,725 = 1.6
Debt Ratio
[Long Term Debt + Curr Liab] / Total Assets
= ($6,002 + $2,110) / $22,725
= 35.7%
Debt to Equity Ratio
Long Term Debt : Equity
= $6,002 : $14,613
= .41:1
Times Interest Earned (TIE)
1
EBIT / Interest = $5,434 / $713 = 7.6
Cash Coverage
[EBIT + Deprec] / Interest = ($5,434 + $1,166) / $713 = 9.3
Fixed Charge Coverage
[EBIT + Lease Pmts] / [Interest + Lease Pmts]
= ($5,434 + $7,267) / ($713 + $7,267)
= 1.6
Return on Sales
Net Income / Sales = $3,116 / $36,227 = 8.6%
Return on Assets
Net Income / Total Assets = $3,116 / $22,725 = 13.7%
Return on Equity
Net Income / Equity = $3,116 / $14,613 = 21.3%
Price Earnings Ratio (P/E)
First calculate the Earnings per Share (EPS)
EPS
= Net Income / # shares outstanding
= $3,116 / 1.268 million
= $2.46
Then
P/E
= Stock Price / EPS = $28.75 / $2.46 = 11.7
Market to Book Value Ratio
First calculate the Book Value per Share
BV per Shr = Equity / # shares outstanding
= $14,613 / 1.268 million
= $11.52
Then
Mkt to Bk Value
10.
= Stock Price / BV per shr
= $28.75 / $11.52
= 2.5
Linden Corp. has a 10% market share in its industry. Below are income statements ($M)
for Linden and for the industry.
Linden
Industry
Sales
$6,000
$64,000
Cost of Goods Sold
3,200
33,650
Gross Margin
2,800
30,350
2
a.
Expenses:
Sales and Marketing
Engineering
Finance and Administration
Total Expenses
430
225
650
1,305
3,850
2,650
4,560
11,060
EBIT
Interest Expense
EBT
Tax
Net Income
1,495
230
1,265
500
765
19,290
4,500
14,790
5,620
9,170
Develop common sized income statements for Linden and the industry as a whole.
SOLUTION:
a.
Sales
Cost of Goods Sold
Gross Margin
Expenses:
Sales and Marketing
Engineering
Finance and Administration
Total Expenses
EBIT
Interest Expense
EBT
Tax
Net Income
15.
Linden
$6,000
3,200
2,800
%
100.0
53.3
46.7
Industry
$64,000
33,650
30,350
%
100.0
52.6
47.4
430
225
650
1,305
7.2
3.8
10.8
21.8
3,850
2,650
4,560
11,060
6.0
4.1
7.1
17.2
1,495
230
1,265
500
765
24.9
3.8
21.1
8.3
12.8
19,290
4,500
14,790
5,620
9,170
30.1
7.0
23.1
8.8
14.3
Sweet Tooth Cookies, Inc. has the following ratios
ROE
= 15%
T/A turnover = 1.2
ROS
= 10%
What percentage of its assets are financed by equity?
SOLUTION: Write the extended Du Pont Equation expressing the equity multiplier as total
assets divided by equity substitute and rewrite.
ROE  ROS  Total Asset Turnover 
Total Assets
Equity
.15  .10  1.2 
Total Assets
Equity
3
Equity = .8 Total Assets
Hence assets are 80% financed by equity.
16.
The Paragon Company has sales of $2,000 with a cost ratio of 60%, current ratio of 1.5,
inventory turnover ratio (based on cost) of 3.0, and average collection period (ACP) of 45 days.
Complete the following current section of the firm's balance sheet.
Cash
Accts Rec
Inventory
Current Assets
$
$
Accts Payable $
Accruals
Current Liabs
60
$ 750
SOLUTION: First, get the current asset total from the current ratio and the current liabilities
total.
Current Assets / Current Liabilities = Current Ratio
Current Assets / $750 = 1.5
Current Assets = $1,125.
Next compute the COGS from the Cost Ratio given.
COGS = Revenue  Cost Ratio
= 2,000  .60
= $1,200
Use that and the Inventory Turnover Ratio to calculate Inventory.
Inventory Turnover = COGS / Inventory
3.0 = $1,200 / Inventory
Inventory = $400
Next use the ACP to calculate Accounts Receivable.
A/R
ACP 
 360
Sales
45 
A/R
 360
$2,000
A/R = $250
Then add and subtract to fill in the blanks as follows.
Cash
Accts Rec
Inventory
Current Assets
17.
$ 475
$ 250
$ 400
$1,125
Accts Payable $690
Accruals
$ 60
Current Liabs
$750
You are given the following selected financial information for The Blatz Corporation.
4
Income Statement
COGS
$750
Net Income $160
Ratios
ROS
Current Ratio
Inventory Turnover
ACP
Debt Ratio
Balance Sheet
Cash
$250
Net Fixed
Assets
$850
10%
2.3
6.0
45 days
49.12% [the key treats this as long term debt to equity]
Calculate accounts receivable, inventory, current assets, current liabilities, long-term debt, equity,
ROA, and ROE.
SOLUTION:
ROS = Net Income / Sales
.10 = $160 / Sales
Sales = $1,600
Inventory Turnover = COGS / Inventory
6.0 = $750 / Inventory
Inventory = $125
ACP = [Accts Rec / Sales]  360
45 = [Accts Rec / $1,600]  360
Accts Rec = $200
Current Assets = Cash + Accts Rec + Inventory
= $250 + $200 + $125
= $575
Total Assets = Current Assets + Net Fixed Assets
= $575 + $850
= $1,425
Current Assets / Current Liabilities = Current Ratio
$575 / Current Liabilities = 2.3
Current Liabilities = $250
Debt Ratio = [TL/TA] = [Curr Liabs + Long Term Debt] / Total Assets
.4912 = [$250 + LT Debt] / $1,425
LT Debt = $450
Equity = Total Assets  Current Liabilities  LT Debt
Equity = $1,425  $250  $450
= $725
5
ROA = Net Income / Total Assets
= $160 / $1,425
= 11.2%
ROE = Net Income / Equity
= $160 / $725
= 22.1%
18.
Companies often use ratios as a basis for planning. The technique is to assume the
business being planned will achieve targeted levels of certain ratios and then calculate the
financial statement amounts that will result in those ratios. The process always starts with a
dollar assumption about sales revenue. Forecast the balance sheet for Lambert Co., using the
following projected information ($000). Round all projections to the nearest thousand dollars.
Sales
Cash
Accruals
Gross Margin
ACP
Inventory Turns(based
on COGS)
Total Asset Turnover
Current Ratio
Debt: Equity
$10,000
$500
$50
45%
42 days
7.0
1.25
2.0
1:3
ASSETS
Cash
A/R
Inventory
C/A
Net F/A
_______
_______
_______
_______
_______
LIABILITIES
A/P
_______
Accruals
_______
C/L
_______
Debt
Equity
_______
Total Assets
_______
Total L&E
_______
SOLUTION:
A gross margin of 45% implies a cost ratio of 55% which leads to a cost of $5,500 if
revenue is $10,000. Then
Inventory Turnover = COGS / Inventory
7.0 = $5,500 / Inventory
Inventory = $786
ACP = [Accts Rec / Sales]  360
42 = [Accts Rec / $10,000]  360
Accts Rec = $1,167
Current Assets / Current Liabilities = Current Ratio
$2,453 / Current Liabilities = 2.0
Current Liabilities = $1,227
6
Total Asset Turnover = Sales / Total Assets
1.25 = $10,000 / Total Assets
Total Assets = $8,000
Capital = Total Assets - Current Liabilities. [“Capital” here is long term debt plus equity]
= $8,000  $1,227
= $6,773
Then Debt: Equity = 1: 3 implies long term debt plus equity is one quarter debt, hence
LT Debt = $6,773 / 4 = $1,693
Then fill in the projected Balance Sheet as follows.
ASSETS
LIABILITIES
Cash
$ 500
A/P
$1,177
A/R
$1,167
Accruals
$__ 50
Inventory
_$ 786
$1,227
Current Assets $2,453
Debt
$1,693
Net F/A
_$5,547
Equity
$5,080
Total Assets
$8,000
Total L&E
$8,000
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