Question

Quantitative Problem: Rosnan Industries' 2018 and 2017 balance sheets and income statements are shown below.

Balance Sheets:
	2018	2017
Assets
Cash and equivalents	$100	$85
Accounts receivable	275	300
Inventories	375	350
Total current assets	$750	$735
Net plant and equipment	2,000	1,490
Total assets	$2,750	$2,225
Liabilities and Equity
Accounts payable	$150	$85
Accruals	75	50
Notes payable	150	175
Total current liabilities	$375	$310
Long-term debt	450	290
Total liabilities	$825	$600
Common stock	1,225	1,225
Retained earnings	700	400
Total common equity	$1,925	$1,625
Total liabilities and equity	$2,750	$2,225

Income Statements:
	2018	2017
Sales	$2,000	$1,500
Operating costs excluding depreciation	1,250	1,000
EBITDA	$750	$500
Depreciation and amortization	100	75
EBIT	$650	$425
Interest	62	45
EBT	$588	$380
Taxes (40%)	235	152
Net income	$353	$228
Dividends paid	$53	$48
Addition to retained earnings	$300	$180
Shares outstanding	100	100
Price	$25.00	$22.50
WACC	10.00%

What is the firm’s 2018 current ratio? Do not round intermediate calculations. Round your answer to two decimal places.

If the industry average debt-to-assets ratio is 30%, then Rosnan’s creditors have a -Select-smallerbiggerCorrect 1 of Item 3 cushion than indicated by the industry average.

What is the firm’s 2018 net profit margin? Do not round intermediate calculations. Round your answer to four decimal places.

%

If the industry average profit margin is 12%, then Rosnan’s lower than average debt-to-assets ratio might be one reason for its high profit margin.
-Select-TrueFalseCorrect 1 of Item 4

What is the firm’s 2018 price/earnings ratio? Do not round intermediate calculations. Round your answer to two decimal places.

Using the DuPont equation, what is the firm’s 2018 ROE? Do not round intermediate calculations. Round your answer to two decimal places.

%

Answer 1

1: current ratio = Current assets/Current liabilities

= 750/375

= 2.00

2: Higher

Debt to assets ratio

= (Average debt)/Average Total assets

= ((825+600)/2)/ ((2750+2225)/2)

=28.64%

There are greater assets to supplement the debt for Rosnan’s creditors.

3: Net Profit margin= Net Income / Sales

= 353/2000

= 17.6500%

4: True

Lesser debts will have lesser interest burden and so profits will be higher.

5: Price/Earnings ratio = Price/EPS

= Price/ (Net Income/Shares)

= 25/ (353/100)

= 7.08

6: As per Du Pont equation

ROE= PM*TAT * EM

PM = Net Income/Sales = 17.65% (as per part 3)

TAT = Sales/Total assets = 2000/2750 = 0.727272

EM.= Total assets/Equity= 2750/1925 = 1.428571429

ROE= 17.65%*0.727272727*1.428571429 = 18.34%