Part 2 Fundamental Concepts in Financial Management Jamison examined monthly dat
ID: 2730234 • Letter: P
Question
Part 2 Fundamental Concepts in Financial Management Jamison examined monthly data for 2014 (not given in the case), and she detected an improving pattern during the year. Monthly sales were rising, costs were falling, and large losses in the early months had turned to a small profit by December. Thus, the annual data look somewhat worse than final monthly data. Also, it appears to be taking longer for the advertising program to get the message out, for the new sales offices to generate sales, and for the new manufacturing facilities to operate efficiently. In other words, the lags between spending money and deriving benefits were longer than D'Leon's managers had anticipated. For these reasons, Jamison and Campo see hope for the company-provided it can survive in the short run. lamison must prepare an analysis of where the company is now, what it must do to regain its financial health, and what actions should be taken. Your assignment is to help her answer the following questions. Provid e clear explanations, not yes or no answers are ratios useful? What are the five major categories of ratios? Why data. What can you say about the compa interest in the company's liquidity ratios? Explain your answer late D'Leon's 2015 current and quick ratios based on the projected balance sheet and income statement at can you say about the company's liquidity positions in 2013, in 2014, and as projected for 2015? We often think of ratios as being useful (1) to managers to help run the business, (2) to bankers for credit analysis, and (3) to stockholders for stock valuation. Would these different types of analysts have an equal b. Calcul c. Calculate the 2015 inventory turnover, d ays sales outstanding (DSO), fived asets turnover, and total assets does D'Leon's utilization of assets stack up against other firms in the industry? d. Calculate the 2015 debt-to-capital and times-interest-earned ratios. apital and times-interest-earned ratios. How does D'Leon compare with the industry with respect to financial leverage? What can you conclude from these ratios? Calculate the 2015 operating margin, profit margin, basic earning power (BEP), return on assets (R return on equity (ROE), and return on invested capital (ROIC). What can you say about these ratios? f. Calculate the 2015 price/earnings ratio and market/book ratio. Do these ratios indicate that investors are s Use the DuPont equation to provide a summary and overview of D'Leon's fina h. Use the following simplified 2015 balance sheet to show, in general terms, how an improvement in the DSO expected to have a high or low opinion of the company? nt equation to provide a summary and overview of D'Leon's financial condition as p rojected for 2015. What are the firm's major strengths and weaknesses? would tend to affect the stock price. For example, if the company could improve its collection procedures and thereby lower its DSO from 45.6 days to the 32-day industry average without affecting sales, how would that change "ripple through" the financial statements (shown in thousands below) and influence the stock price? $ 878 1,802 Accounts receivable Other current assets Net fixed assets Total assets Current liabilities Debt Equity Liabilities plus equity S 845 700 1,952 $3,497 $3,497 i. Does it appear that inventories could be adjusted? If so, how should that adjustment affect D'Leon's profitability and stock price?Explanation / Answer
a) Ratios are useful because of following reasons:-
1) Ratios are helpful to management in planning, forecasting, decision-making, controlling etc.
2) Ratios provides knowledge of business trend.
3) Ratios provides knowledge of Comparative results
4) Ratios are helpful in establishing the ideal stanadrds of various financial and accounting aspects of business.
5) Ratios are helpful in effective control over costs and the working result of firm.
6) Ratios analysis helps in making inter-firm and intra-firm comparison.
Five major categories of ratios are:-
1) Liqudity ratios. 2) Financial leverage ratios (Debt ratios) 3) Turnover ratios 4) Profitability ratios and 5) Market value ratios.
b) Year 2015
Current ratio = Current assets / Current liabilities
= 2680112 / 1144800
= 2.34
Quick ratio = Current assets - Inventory / Current liabilities
= 2680112 - 1716480 / 1144800
= 963632 / 1144800
= 0.84
c) Total asset turnover ratio = Sales / Average total assets
Average total asset = 3497152 + 2866592 / 2 = 6363744 / 2 = $ 3181872
Total asset turnover ratio for year 2015 = 7035600 / 3181872 = 2.21 Times
Inventory turnover ratio for year 2015 = Cost of goods sold / Average inventory
Average inventory = 1716480 + 1287360 / 2 = 3003840 /2 = $ 1501920
Inventory turnover ratio (Year 2015) = 5875992 / 1501920 = 3.91 Times
Daily Sales oustanding (Year 2015) = Accounts receivable / Sales per day
Sales per day = 7035600 / 365 = $ 19275.62
Daily Sales oustanding (Year 2015) =Daily Sales oustanding (Year 2015) = 878000 / 19275.62 = $ 45.55
d) Times interest earned ratio (Year 2015) = EBIT / Interest = 492648 / 70008 = 7.04 (approx)
Debt to captal ratio = Debt / Debt + equity = 400000 / 400000 + 1952352 = 400000 / 2352352 = 0.17
e) Year 2015
Operating margin ratio = Operating margin / Sales * 100 = 492648 / 7035600 * 100 = 7 %
Net profit margin ratio = Net profit / Sales * 100 = 253584 / 7035600 = 3.60 %
Return on total assets = Net income / total assets * 100 = 253584 / 3497152 * 100 = 7.25 %
Return on equity = Net income / Total equity * 100 = 253584 / 1952352 * 100 = 12.99 %
Return on invested capital = Net income / Total capital = 253584 / 2352352 * 100 = 10.78 %
Total capital = Debt + Equity = 400000 + 1952352 = $ 2352352