Problems

Chapter 3 Problems 1. dental Delights has two divisions. Division A has a profit of $200,000 on gross revenue of $4,000,000. Division B is single able to make $30,000 on sales of $480,000. Based on the profit margins ( feeds on sales), which division is superior(p)? 3-1. Solution Dental Delights Division ADivision B pic Division B is superior 3. Bass Chemical, Inc. , is considering expanding into a modernistic product line. Assets to support this expansion will cost $1,200,000. Bass estimates that it can generate $2 cardinal in annual sales, with a 5 percent profit margin. What would authorise income and supply on assets (investment) be for the year? -3. SolutionBass Chemical, Inc. pic 4. Franklin Mint and Candy Shop can open a stark naked store that will do an annual sales volume of $750,000. It will turn oer its assets 2. 5 generation per year. The profit margin on sales will be 6 percent. What would net income and return on assets (investment) be for the year? 3-4. Solu tion Franklin Mint and Candy Shop pic 8. Sharpe Razor Company has append assets of $2,500,000 and menstruum assets of $1,000,000. It turns over its rooted(p) assets 5 times a year and has $700,000 of debt. Its return on sales is 3 percent. What is Sharpes return on stockholders faithfulness? -8. Solution Sharpe Razor Company full assets$2,500,000 current assets 1,000,000 Fixed assets$1,500,000 pic total assets$2,500,000 debt 700,000 Stockholders beauteousness$1,800,000 pic pic 11. bill point Company has the following ratios compared to its pains for 2009. Acme Transportation Industry Return on assets 9% 6% Return on equity 12% 24% Explain why the return-on-equity ratio is so much less favorable than the return-on-assets ratio compared to the industry. No poetry are necessary a one-sentence answer is all that is required. 3-11. Solution Acme Transportation Company Acme Transportation has a lower debt/total assets ratio than the industry. For those who did a calculat ion, Acmes debt to assets were 25% vs 75% for the industry. 14. Jerry strain and Grain Stores has $4,000,000 in yearly sales. The star sign earns 3. 5 percent on all(prenominal) dollar bill of sales and turns over its assets 2. 5 times per year. It has $100,000 in current liabilities and $300,000 in long-term liabilities. . What is its return on stockholders equity? b. If the asset base remains the same as computed in part a, but total asset turnover goes up to 3, what will be the new return on stockholders equity? impress that the profit margin stays the same as do current and long-term liabilities. 3-14. Solution Jerry Rice and Grain Stores a. pic pic pic 3-14. (Continued) b. The new level of sales will be pic pic pic 25. Calloway Products has the following data. Industry information is besides shown. Industry Data on exonerate year meshwork Income score AssetsIncome/ centre Assets 2006$360,000$3,000,00011% 007380,0003,400,0008 2008380,0003,800,0005 Industry Data on YearDe btTotal AssetsDebt/Total Assets 2006$1,600,000$3,000,00052% 20071,750,0003,400,00040 20081,900,0003,800,00031 As an industry analyst comparing the firm to the industry, are you likely to praise or criticize the firm in terms of a. Net income/Total assets? b. Debt/Total assets? 3-25. Solution Calloway Products a. Net income/total assets Year Calloway proportionality Industry Ratio 2006 12. % 11. 0% 2007 11. 18% 8. 0% 2008 10. 0% 5. 0% Although the telephoner has shown a declining return on assets since 2006, it has performed much founder than the industry. Praise may be more appropriate than criticism. 3-25. (Continued) b. Debt/total assets Year Calloway Ratio Industry Ratio 2006 53. 33% 52. 0% 2007 51. 47% 40. 0% 2008 50. 0% 31. 0% mend the companys debt ratio is improving, it is not improving nearly as rapidly as the industry ratio. Criticism may be more appropriate than praise. 26. Jodie Foster Care Homes, Inc. , shows the following data YearNet IncomeTotal AssetsSto ckholders candorTotal Debt 2005$118,000$1,900,000$ 700,000$1,200,000 2006131,0001,950,000950,0001,000,000 2007148,0002,010,0001,100,000910,000 2008175,7002,050,0001,420,000630,000 a. estimate the ratio of net income to total assets for each year and comment on the trend. b. estimate the ratio of net income to stockholders equity and comment on the trend.Explain why there may be a difference in the trends between parts a and b. 3-26. Solution Jodie Foster Care Homes, Inc. a. pic 2005 $118,000/$1,900,000 = 6. 21% 2006 $131,000/$1,950,000 = 6. 72% 2007 $148,000/$2,010,000 = 7. 36% 2008 $175,700/$2,050,000 = 8. 57% Comment There is a strong upward movement in return on assets over the four year period. 3-26. (Continued) b. pic 2005 $118,000/$700,000= 16. 86% 2006 $131,000/$950,000= 13. 79% 2007 $148,000/$1,100,000= 13. 45% 2008 $175,700/$1,420,000= 12. 37% Comment The return on stockholders equity ratio is going down each year.The difference in trends between a and b is collectable to the larger portion of assets that are financed by stockholders equity as opposed to debt. Optional This can be confirmed by computing total debt to total assets for each year. pic 200563. 2% 200651. 3% 200745. 3% 200830. 7% 31. The Griggs peck has credit sales of $1,200,000. Given the following ratios, fill in the balance sheet below. Total assets turnover 2. 4 times funds to total assets 2. 0% Accounts receivable turnover 8. 0 times Inventory turnover10. 0 times real ratio 2. 0 times Debt to total assets61. 0% GRIGGS CORPORATIONBalance carpenters plane 2008 AssetsLiabilities and Stockholders paleness funds _____Current debt_____ Accounts receivable_____ long-run debt_____ Inventory_____ Total debt_____ Total current assets _____Equity_____ Fixed assets _____ Total assets _____ Total debt and stockholders equity_____ 3-31. Solution Griggs Corporation Sales/total assets= 2. 4 times Total assets= $1,200,000/2. 4 Total assets= $500,000 Cash= 2% of total assets Cash= 2% ? $500, 000 Cash= $10,000 Sales/accounts receivable= 8 times Accounts receivable= $1,200,000/8 Accounts receivable= $150,000 Sales/inventory= 10 timesInventory= $1,200,000/10 Inventory= $120,000 3-31. (Continued) Fixed assets= Total assets current assets Current asset= $10,000 + $150,000 + $120,000 = $280,000 Fixed assets= $500,000 $280,000 = $220,000 Current assets/current debt= 2 Current debt= Current assets/2 Current debt= $280,000/2 Current debt= $140,000 Total debt/total assets= 61% Total debt= . 61 ? $500,000 Total debt= $305,000 Long-term debt= Total debt current debt Long-term debt= $305,000 140,000 Long-term debt= $165,000 Equity= Total assets total debt Equity= $500,000 $305,000 Equity= $195,000 Griggs Corporation Balance Sheet 2008 Cash $ 10,000 Current debt $140,000 A/R 150,000 Long-term debt 165,000 Inventory $120,000 Total debt $305,000 Total current assets 280,000 Fixed assets 220,000 Equity 195,000 Total assets $500,000 Total debt and $500,000 stockholde rs equity 35. Given the following financial statements for Jones Corporation and Smith Corporation a. To which company would you, as credit manager for a supplier, approve the extension of ( short-run) trade credit? Why? Compute all ratios before answering. b. In which one would you buy stock? Why? JONES CORPORATION Current Assets Liabilities Cash $ 20,000 Accounts payable $100,000 Accounts receivable 80,000 Bonds payable (long-term) 80,000 Inventory 50,000 Long-Term Assets Stockholders Equity Fixed assets $500,000 Common stock $150,000 little Accumulated (150,000) Paid-in capital 70,000 depreciation Retained earnings 100,000 *Net furbish up assets 350,000 Total assets $500,000 Total liabilities and equity $500,000 Sales (on credit) $1,250,000 Cost of goods sold 750,000 Gross profit 500,000 sell and administrative expense 257,000 Less derogation expense 50,000 Operating profit 193,000 Interest expense 8,000 payment before taxes 185,000 T ax expense 92,500 Net income $ 92,500 *Use net fixed assets in computing fixed asset turnover. Includes $7,000 in lease payments. metalworker CORPORATION Current Assets Liabilities Cash $ 35,000 Accounts payable $ 75,000 Marketable securities 7,500 Bonds payable (long-term) 210,000 Accounts receivable 70,000 Inventory 75,000 Long-Term Assets Stockholders Equity Fixed assets $500,000 Common stock $ 75,000 Less Accumulated (250,000) Paid-in capital 30,000 depreciation Retained earnings 47,500 *Net fixed assets 250,000 Total assets $437,500 Total liabilities and equity $437,500 Sales (on credit) $1,000,000 Cost of goods sold 600,000 Gross profit 400,000 Selling and administrative expense 224,000 Less Depreciation expense 50,000 Operating profit 126,000 Interest expense 21,000 Earnings before taxes 105,000 Tax expense 52,500 Net income $ 52,500 *Use net fixed assets in computing fixed asset turnover. Includes $7,000 in lease payments. 3- 35. Solution Jones and Smith Comparison One way of analyzing the situation for each company is to compare the respective ratios for each on, examining those ratios which would be most important to a supplier or short-term lender and a stockholder. Jones Corp. Smith Corp. Profit margin 7. 4% 5. 5% Return on assets (investments) 18. 5% 12. 00% Return on equity 28. 9% 34. 4% Receivable turnover 15. 63x 14. 29x Average order of battle period 23. 04 days 25. 2 days Inventory turnover 25x 13. 3x Fixed asset turnover 3. 7x 4x Total asset turnover 2. 5x 2. 29x Current ratio 1. 5x 2. 5x Quick ratio 1. 0x 1. 5x Debt to total assets 36% 65. 1% measure interest earned 24. 13x 6x Fixed charge coverage 13. 3x 4. 75x Fixed charge coverage calculation (200/15) (133/28) a. Since suppliers and short-term lenders are most concerned with liquidity ratios, Smith Corporation would get the nod as having the ruff ratios in this category. One could argue, however, that Smith had benefite d from having its debt primarily long term rather than short term. Nevertheless, it appears to have better liquidity ratios. 3-35. (Continued) b. Stockholders are most concerned with profitability. In this category, Jones has much better ratios than Smith.Smith does have a high return on equity than Jones, but this is due to its much larger use of debt. Its return on equity is higher than Jones because it has taken more financial risk. In terms of other ratios, Jones has its interest and fixed charges well covered and in general its long-term ratios and outlook are better than Smiths. Jones has asset utilization ratios equal to or better than Smith and its lower liquidity ratios could reflect better short-term asset management, and that point was covered in part a. Note Remember that to make actual financial decisions more than one years comparative data is usually required. Industry comparisons should also be made.