Problem 1: Suppose you have the following Balance Sheet Data Assets 2016 2017 Li
ID: 2812686 • Letter: P
Question
Problem 1: Suppose you have the following Balance Sheet Data
Assets
2016
2017
Liabilities
2016
2017
Current Assets
Current Liabilities
Cash
14
10
Accounts Payable
50
45
Accounts receivable
60
22
ST Debt and Notes Payable
40
37
inventories
50
70
Total Current Assets
124
102
Total Current Liabilities
90
82
Long Term Assets
Long Term Liabilities
Net PPE
250
290
Long Term Debt
130
160
Total Long Term assets
250
290
Total Long Term Liabilities
130
160
Total Liabilities
220
242
Stockholders Equity
Common Stock
10
10
Paid In Surplus (Capital)
110
110
Retained Earnings
34
30
Total Shareholders Equity
154
150
Total Assets
374
392
Total Liabilities and Shareholders Equity
374
392
What can we say is going on with this company by looking at the balance sheet? (Make sure to look at the dates to know which column is the most recent period!)
Analyze the changes in each of the balance sheet tems and comment on what is occuring.
Solution:
Cash
Accounts Receivable
Inventories
PPE
Accounts Payable
ST Debt & Notes Payable
LT Debt
Common Stock and Paid in Capital
Retained Earnings
calculate liquidity ratios for 2017:
2016
2017
Comment on Ratios
Current Ratio
1.38
Quick Ratio
0.82
Cash Ratio
0.16
calculate some leverage ratios for 2017:
Comment on Ratios
2016
2017
Book Debt to Equity
1.10
Book Debt to Capital
0.52
Equity Multiplier
2.43
Problem 2 - Use of Ratios to Make Other Calculations
You have a company that currently has a market capitalization of $4.6 billion
It has a market to book ratio of 3 and a book debt to equity ratio of 6.
If cash is $1.1 billion, what is the company's enterprise value?
Solution:
Discussion of the Dupont Formula
The Dupont Formula is a way of disaggregating the components of ROE
ROE = Net Margin X Asset Turnover X Equity Multiplier
We know by definition, ROE = Net Income / Book Equity
Dupont shows us:
ROE =
Net Income /
Times
Sales/
Times
Assets/
Sales
Assets
Equity
We also know by definition, ROA = Net Income / Assets
Dupont shows us:
ROA =
Net Income/
Times
Sales/
Sales
Assets
Problem 3: Consider the following information -
Suppose we use the data from Kroger and Whole Foods:
KR - TTM
WFM - TTM
Net Profit Margin
1.34%
2.44%
Total Asset Turnover
3.36
2.46
Equity Multiplier
5.83
1.91
Calculate Kroger and Whole Foods ROE and ROA from the data given.
We know that ROE = net income / book equity and ROA = net income / total assets; while none of those components are given, we have ratios that can solve the problem!
Question? What would WFM's total asset turnover need to be for it to have the same ROE as Kroger?
Problem 1: Suppose you have the following Balance Sheet Data
Assets
2016
2017
Liabilities
2016
2017
Current Assets
Current Liabilities
Cash
14
10
Accounts Payable
50
45
Accounts receivable
60
22
ST Debt and Notes Payable
40
37
inventories
50
70
Total Current Assets
124
102
Total Current Liabilities
90
82
Long Term Assets
Long Term Liabilities
Net PPE
250
290
Long Term Debt
130
160
Total Long Term assets
250
290
Total Long Term Liabilities
130
160
Total Liabilities
220
242
Stockholders Equity
Common Stock
10
10
Paid In Surplus (Capital)
110
110
Retained Earnings
34
30
Total Shareholders Equity
154
150
Total Assets
374
392
Total Liabilities and Shareholders Equity
374
392
Explanation / Answer
As per chegg policy I have answered first 4 question. For rest of question please raise separate request. Assets 2016 2017 Liabilities 2016 2017 Current Assets Current Liabilities Cash 14 10 Accounts Payable 50 45 Accounts receivable 60 22 ST Debt and Notes Payable 40 37 inventories 50 70 Total Current Assets 124 102 Total Current Liabilities 90 82 Long Term Assets Long Term Liabilities Net PPE 250 290 Long Term Debt 130 160 Total Long Term assets 250 290 Total Long Term Liabilities 130 160 Total Liabilities 220 242 Stockholders Equity Common Stock 10 10 Paid In Surplus (Capital) 110 110 Retained Earnings 34 30 Total Shareholders Equity 154 150 Total Assets 374 392 Total Liabilities and Shareholders Equity 374 392 Answer 1) We have seen lower profit in FY 17 compared to FY 16 this can be due to, increase in debt resulting into higher interest, increase in PPE resulting into higher depreciation and hence, lower earning. We have seen reduction in current asset as well as current liability but increase in long term asset as well as long term liabilities. It seems company is in expansion plan for which it is increasing its debt as well as asset. Cash : Cash has reduced from 14 to 10, which is driven by redemption of sort term debt and notes payable, investment in PPE, higher payment to creditor, partially offset by higher collection from account receivable and cash from long term debt. Account receivable : Cash collection has increased from last year and hence redution in account receivable balance (reduction of AR from 60 to 22). This can be due to lower payment term or discount may be offered for cash sales. Inventory : Firm seems to be expanding its business and making investment hence its required to hold inventory in hand to meet market demand. Inventory has increased from 50 to 70 YOY. PPE : Additional investment of 40 has been made compared to last year - As a result of expansion plan. Accounts payable : reduced from 50 to 45 YOY, this means lower credit term may have been offered from vendor. ST Debt & Notes Payable : Redemption of debt has happened in 2017 by 3. LT Debt : has increased by 30 compared to last year- result of expansion plan Common Stock and Paid in Capital : No change and is flat year on year Retained Earnings : reduced from 34 to 30 from 2016 to 2017. This is due to higher interest on debt and higher depreciation. calculate liquidity ratios for 2017: 2016 2017 Comment : Current Ratio 1.38 1.24 Current ratio has reduced YOY, due to redemption of debt and lower creditor. Quick Ratio 0.82 0.39 Quick ratio has reduced YOY, due to higher investment in inventory. Cash Ratio 0.16 0.12 Cash ratio : has reduced YOY, due to investment in PPE and other expansion plan. Overall liquidity has reduced YOY based on all ratios Current ratio = Current asset / Current liabilities quick ratio = (Current asset-inventory) / Current liabilities Cash ratio = Cash / Current liabilities calculate some leverage ratios for 2017: Comment on Ratios 2016 2017 Book Debt to Equity 1.1 1.3 Financial leverage has incresed as more debt used comapred to equity Book Debt to Capital 0.52 0.57 Financial leverage has incresed as more debt used comapred to equity Equity Multiplier 2.43 2.61 As more of asset is finance through debt asset to equity ratio is higher in 2017 Book Debt to Equity = (Long term debt+ st debt and note )/Total share holder's equity Book Debt to capital = (Long term debt+ st debt and note )/(Total share holder's equity+long term debt + st debt and notes) Equity Multiplier = Total asset / Total share holder's equity Problem 2 - Use of Ratios to Make Other Calculations market capitalization 4.6 Billion market to book ratio 3 book debt to equity ratio 6 Cash and cash equivalent 1.1 billion Total book valule of equity = Market capitalization/ Market to book ratio =4.6/3 1.53 Billion Debt/ equity = 6 Debt = 6* equity book value = =6*1.53 9.18 Billion Enterprise value = Market capitalization+ Value of debt - cash and cash equivalents =1.53+9.18-1.1 9.61 billion