CHAPTER 2 PROBLEMS/CORPORATE FINANCE P2-1 The following data apply to A.L. Kaise
ID: 2519924 • Letter: C
Question
CHAPTER 2 PROBLEMS/CORPORATE FINANCE
P2-1 The following data apply to A.L. Kaiser & Company ($ million):
Cash and equivalents………………………………………………………………………………………………….$100.00
Fixed assets…………………………………………………………………………………………………………………$283.50
Sales$..............................................................................................................................1,000.00
Net income………………………………………………………………………………………………………………….$50.00
Quick ratio…………………………………………………………………………………………………...................2.0x
Current ratio………………………………………………………………………………………………………………..3.0x
DSO ……………………………………………………………………………………………………………………………40.0 days
ROE……………………………………………………………………………………………………………………………..12.0%
Kaiser has no preferred stock—only common equity, current liabilities, and long-term debt.
Find Kaiser’s (1) accounts receivable (A/R), (2) current liabilities, (3) current assets, (4) total assets, (5) ROA, (6) common equity, and (7) long-term debt.
P2-2 Data for Unilate Textiles’ 2015 financial statements are given in Tables 2.1 and 2.2 in the chapter. Compute the 2015 values of the following ratios:
Ratio Unilate Industry 2015 Values
Current ratio……………………………………………………………………………………………………………………3.9x
Days sales outstanding…………………………………………………………………………………………………..33.5 days
Inventory turnover……………………………………………………………………………………………………………7.2x
Fixed assets turnover………………………………………………………………………………………………………..4.1x
Debt ratio…………………………………………………………………………………………………………………………43.0%
Net profit margin……………………………………………………………………………………………………………….4.6%
Return on assets………………………………………………………………………………………………………………..9.9%
b. Briefly comment on Unilate’s 2015 financial position. Can you see any obvious strengths or weaknesses?
c. Compare Unilate’s 2015 ratios with its 2016 ratios, which are presented in Table 2.6. Comment on whether you believe Unilate’s financial position improved or deteriorated during 2016.
P2-3 Industry Average Ratios
Current ratio…………………………………2.0x Fixed assets turnover………………………………………6.0x
Debt ratio……………………………………30.0% Total assets turnover……………………………………….3.0x
Times interest earned…………………..7.0x Profit margin on sales………………………………………3.0%
Inventory turnover………………………8.5x Return on total assets………………………………………9.0%
Day’s sales outstanding………………24.0 days return on common equity………………………………12.9%
Finnerty Furniture Company: Balance Sheet as of December 31 ($ million)
Cash$...............................................45 Accounts payables…………………………………………..$45
Marketable securities…………………..33 Notes payable…………………………………………………..45
Net receivables…………………………….66 other current liabilities……………………………………..21
Inventories………………………………….159 Total current liabilities………………………………….$111
Total current assets…………………..$303 Long-term debt………………………………………………24
Total liabilities………………………………………………$135
Gross fixed assets……………………….225 Common stock……………………………………………….114
Less depreciation……………………….6(78) Retained earnings………………………………………….201
Net fixed assets………………………….$147 Total stockholders’ equity……………………………..$315
Total assets………………………………..$450 Total liabilities and equity………………………………$450
Finnerty Furniture Company: Income Statement for Year Ended December 31 ($ million)
Net sales………………………………………………………………………………………………………………………..$795.0
Cost of goods sold………………………………………………………………………………………………………….(660.0)
Gross profit…………………………………………………………………………………………………………………….$135.0
Selling expenses………………………………………………………………………………………………………………(73.5)
Depreciation expense……………………………………………………………………………………………………. (12.0)
Earnings before interest and taxes (EBIT)…………………………………………………………………………$49.5
Interest expense……………………………………………………………………………………………………………….(4.5)
Earnings before taxes (EBT)…………………………………………………………………………………………….. $45.0
Taxes (40%)……………………………………………………………………………………………………………………….(18.0)
Net income…………………………………………………………………………………………………………………………$27.
a. Calculate all the ratios that appear for the industry for Finnerty Furniture Company and perform an analysis of the financial health of the company when compared to the overall industry.
Explanation / Answer
DSO = (Accounts Receivable/Total Sales) x 365
40 = (AR/1000) x 365
Accounts Receivable = $109.59
Quick Ration = (Cash & Cash Equivalents + Accounts Receivable)/Current Liabilities
2 = (100+109.59)/Current Liabilities
Current Liabilities = 104.795
Current Ratio = Current Assets/Current Liabilities
3 = Current Assets/104.795
Current Assets = $314.39
Total Assets = Fixed Assets + Current Assets = 283.50+314.39 = $597.89
Return on Assets = (Net Income/Total Assets) x 100 = 8.36%
Return on Equity = Net Income/Common Equity
.12 = 50/Common Equity
Common Equity = $416.67
Long term debt = Total assets - (Common Equity+Current Liabilites) = $76.425