Question

eBook Problem 9-19 Joseph Berio is a loan officer with the First Bank of Tennessee. Red Brick, Inc., a major producer of masonry products, has applied for a short-term loan. Red Brick supplies building material throughout the southern states, with brick plants located in Tennessee, Alabama, Georgia, and Indiana. The firm’s income statement and balance sheet are given below. The third table presents both a ratio analysis of Red Brick’s previous year’s financial statements and the industry averages of the ratios. Red Brick Income Statement (for the period ending December 12/31/20X1) Sales $ 198,000,000 Cost of goods sold 146,000,000 Administrative expenses 32,000,000 Operating income $ 20,000,000 Interest expense 12,000,000 Taxes 700,000 Net income $ 7,300,000 Red Brick Balance Sheet as of 12/31/20X2 Assets Liabilities and Stockholders’ Equity Cash $ 400,000 Accounts payable $ 40,000,000 Accounts receivable 38,000,000 * Notes payable 14,000,000 Inventory 75,900,000 † Long-term debt 50,000,000 Plant and equipment 134,000,000 Stockholders’ equity 144,300,000 $ 248,300,000 $ 248,300,000 *60% of sales are on credit. † Previous year’s inventory was $55,800,000. Company’s Ratios Industry (Previous Year) Average Current ratio 1.9:1 2.0:1 Quick ratio 0.7:1 0.8:1 Inventory turnover 4.9x 4.6x Average collection period 72 days 47 days Debt ratio (debt/total assets) 32% 41% Times-interest-earned 1.7 3.6 Return on equity 5.3% 13.9% Return on assets 3.1% 10.0% Operating profit margin 7.8% 15.0% Net profit margin 2.8% 9.0% To help decide whether to grant the loan, compute the following ratios and compare the results with the company's previous year ratios and industry averages. Assume there are 365 days in a year. Do not round intermediate calculations. Round your answers to two decimal places. Current ratio of  times is -Select-higher than lower than equal to Item 2 the industry average and -Select-higher than lower than equal to Item 3 the ratio in the previous year. Quick ratio of  times is -Select-higher than lower than equal to Item 5 the industry average and -Select-higher than lower than equal to Item 6 the ratio in the previous year. Inventory turnover ratio of  is -Select-higher than lower than equal to Item 8 the industry average and -Select-higher than lower than equal to Item 9 the ratio in the previous year. Average collection period of  days is -Select-higher than lower than equal to Item 11 the industry average and -Select-higher than lower than equal to Item 12 the ratio in the previous year. Debt ratio of   % is -Select-higher than lower than equal to Item 14 the industry average and -Select-higher than lower than equal to Item 15 the ratio in the previous year. Times-interest-earned ratio of  is -Select-higher than lower than equal to Item 17 the industry average and -Select-higher than lower than equal to Item 18 the ratio in the previous year. Return on equity ratio of   % is -Select-higher than lower than equal to Item 20 the industry average and -Select-higher than lower than equal to Item 21 the ratio in the previous year. Return on assets ratio of   % is -Select-higher than lower than equal to Item 23 the industry average and -Select-higher than lower than equal to Item 24 the ratio in the previous year. Operating profit margin ratio of   % is -Select-higher than lower than equal to Item 26 the industry average and -Select-higher than lower than equal to Item 27 the ratio in the previous year. Net profit margin ratio of   % is -Select-higher than lower than equal to Item 29 the industry average and -Select-higher than lower than equal to Item 30 the ratio in the previous year.

Answer 1

Solution :

• Current Ratio = Current Assets ( Cash + AR + inventories ) / Current Liabilities ( AP a+ NP ) = 114,300,000 / 54,000,000 = 2.1 which is higher than the Industrial average and also higher than the previous year ratio of 1.9.
• Quick Ratio = Current Asset - Inventories / Current Liabilitied = 38400,000 / 54,000,000 = 0.71 which is lowe than the industrial average of 0.8 and higher than the previous year's ratio of 0.7.
• Inventory Turn\over ratio = COGS / Average Inventory = 146,000,000 / 65650000 ( Opening inventory +closing inventory / 2 ) = 2.2 timew which lower than the industrial average of 4.6 times and also lower than previous year's average of 4.9 times.
• Average Collection period = Accounts Recievables / Annual Credit sales / 365 days = 38,000,000/ 118,000,000 ( 60 % of sales is credit) / 365 = 117 days which is higher than the industrial average of 47 days and also higher than the previous year's 72 days.
• Debt Ratio = Total Debt / Total Assets = 14,000,000 + 50,000,000 / 248,300,000 = 26 % which is lower than the industrial average of 41% and also lower than the previous year's 32%.
• Times Interest earned = EBIT or operating profit / Interest Expenses = 20,000,000 / 12,000,000 = 1.67 which is lower than the industrial average of 3.6 and also lower then previous year's 1.7.
• Return of Equity = Net Income / Common Equity = 7300,000 / 144,300,000 = 5% which is much lower than the industrial average of 13.9 % and also lower than the previous year return of 5.3 %.
• Return on Asset = Net Income / Total Assets = 7300,000/ 248,300,000 = 2.9 % which is lower than the industrial average of 10 % and also lower than the previous year's 3.1 %.
• Operating Profit Margin = EBIT / Sales = 20,000,000 / 198,000,000 = 10.10% which is lower the industrial average of 15% but higher than the previous year's margin 7.8 %.
• Net profit Margin = Net Income / Sales = 7300,000 / 198,000,000 = 3.6 %w which is lower than the industrial average of 9% but higher than previous year's margin of 2.8 %.