Question

Quantitative Problem: Rosnan Industries' 2014 and 2013 balance sheets and income statements are shown below.

Balance Sheets:
	2014	2013
Cash and equivalents	$70	$55
Accounts receivable	275	300
Inventories	375	350
Total current assets	$720	$705
Net plant and equipment	2,000	1,490
Total assets	$2,720	$2,195
Accounts payable	$150	$85
Accruals	75	50
Notes payable	120	145
Total current liabilities	$345	$280
Long-term debt	450	290
Common stock	1,225	1,225
Retained earnings	700	400
Total liabilities and equity	$2,720	$2,195

Income Statements:
	2014	2013
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 2014 current ratio? Round your answer to two decimal places.

The 2014 current ratio indicates that Rosnan has sufficient/insufficient current assets to meet its current obligations as they come due.

What is the firm’s 2014 total assets turnover ratio? Round your answer to four decimal places.

Given the 2014 current and total assets turnover ratios calculated above, if Rosnan’s 2014 quick ratio is 1.0 then an analyst might conclude that Rosnan’s fixed assets are managed -Select-efficiently/inefficiently

What is the firm’s 2014 debt-to-capital ratio? Round your answer to two decimal places.
%

If the industry average debt-to-capital ratio is 30%, then Rosnan’s creditors have a -Select-smaller/bigger cushion than indicated by the industry average.

What is the firm’s 2014 profit margin? Round your answer to two decimal places.
%

If the industry average profit margin is 12%, then Rosnan’s lower than average debt-to-capital ratio might be one reason for its high profit margin.
-Select-True/FalseCorrect

What is the firm’s 2014 price/earnings ratio? Round your answer to two decimal places.

Using the DuPont equation, what is the firm’s 2014 ROE? Round your answer to two decimal places.
%

Answer 1

current ratio = current assets/current liabilities ; for 2014 current ratio = 720/345 = 2.09 ; which is > 1

The 2014 current ratio indicates that Rosnan has sufficient current assets to meet its current obligations as they come due.

total assets turnover ratio = Sales / Average Total Assets

Average Total Assets for 2014 = (assets at 2014 beginning + assets at 2014 end)/2 = (2720+2195)/2 = 2457.5

total assets turnover rati0 for 2014 = 2000/2457.5 = 0.8138

given quick ratio and curenr ration are greater than or equal to 1, asset turnover ratio is brought down by fixed assets of the company. thus fixed assets are not maintained efficiently.

debt-to-capital ratio = total debt / total capital = (345 +450 )/2720 = 29.22%

If the industry average debt-to-capital ratio is 30%, then Rosnan’s creditors have a bigger cushion than indicated by the industry average.

profit margin = Net Income / Net Sales (revenue) = 353/2000 = 17.65%

If the industry average profit margin is 12%, then Rosnan’s lower than average debt-to-capital ratio might be one reason for its high profit margin, because of low interest expense

2014 price/earnings ratio = price per share/Earning per share

earning per share - net income/total shares = 353/100 = 3.53

price/earnings ratio = 25/3.53 = 7.08

DuPont analysis ROE = Profit Margin x Asset Turnover Ratio x Equity Multiplier.

Equity Multiplier = total assets / total equity = 2720/(1225+700) = 1.42

ROE = 0.1765 * 0.8138 * 1.42 = 0.20