Question

Exercise 7 The balance sheet and income statement shown below are for Pettijohn Inc. Note that the firm has no amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over. Balance Sheet (Millions of $) Assets 2012 Cash and securities $ 1,554.0 Accounts receivable 9,660.0 Inventories 13,440.0 Total current assets $24,654.0 Net plant and equipment 17,346.0 Total assets $42,000.0 Liabilities and Equity Accounts payable $ 7,980.0 Notes payable 5,880.0 Accruals 4,620.0 Total current liabilities $18,480.0 Long-term bonds 10,920.0 Total debt $29,400.0 Common stock 3,360.0 Retained earnings 9,240.0 Total common equity $12,600.0 Total liabilities and equity $42,000.0 Income Statement (Millions of $) 2012 Net sales $58,800.0 Operating costs except depr'n $54,978.0 Depreciation $ 1,029.0 Earnings bef int and taxes (EBIT) $ 2,793.0 Less interest 1,050.0 Earnings before taxes (EBT) $ 1,743.0 Taxes $ 610.1 Net income $ 1,133.0 Other data: Shares outstanding (millions) 175.00 Common dividends $ 509.83 Int rate on notes payable & L-T bonds 6.25% Federal plus state income tax rate 35% Year-end stock price $77.69 Required: a. What is the firm's current ratio? b. What is the firm's quick ratio? c. What are the firm’s days sales outstanding? Assume a 360-day year for this calculation. d. What is the firm's total assets turnover? e. What is the firm's inventory turnover ratio? f. What is the firm's ROA? g. What is the firm's ROE? h. What is the firm's net profit margin? i. Analyze the company performance.

Answer 1

a. The firm's current ratio=	i. Analysis the company performance
Current assets/Current Liabilities
ie.24654/18480=
1.33	Well below the normal/ideal number for this ratio of 2--suggesting low capacity to meet current obligations, if the need arises.
b.The firm's quick ratio
(Current assets-Inventory)/Current Liabilities
ie.(24654-13440)/18480=
0.61	Well below the normal/ideal number for this ratio of 1--again,suggesting very low capacity(even with liquid cash & receivables) to meet current obligations, if the need arises.
c.Firm’s days sales outstanding-assuinge a 360-day year :
360/Accounts receivables turnover
ie. 360/(Net credit sales/Accounts receivables)
ie. 360/(58800/9660)
59	Sales are o/s for a period of 60 days, on an average.
days
d. The firm's total assets turnover=
TATO=Sales/Total assets
ie.58800/42000=
1.4	$ 1 of assets employed, generate $ 1.4 in sales
times
e. Firm's inventory turnover ratio=
COGS/Inventory
ie.54978/13440=
4.09
times in a year	Inventory is converted to sales 4 times in a year , ie. It takes roughly 360/4.09= 88 days for inventory to be converted to sales.
f. The firm's ROA=
Net Income/Total assets
1133/42000=
2.70%	$ 100 of assets employed, generate $ 2.70 in net income
g.The firm's ROE
Net Income/Total equity
1133/12600=
8.99%	$ 100 of equity (owners'funds) employed, generate $ 8.99 in net income
h.Firm's net profit margin=
Net Income/Sales
1133/58800=
1.93%	The firm is able to net $ 1.93 as income ,after meeting all expenses, for a sale of $ 100.
Overall:::	Liquidity needs to be improved.
	This can be done by quicker sales & quicker collection of receivables.