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 $ 209,000,000 Cost of goods sold 193,000,000 Administrative expenses 30,000,000 Operating income $ -14,000,000 Interest expense 14,000,000 Taxes 300,000 Net income $ -28,300,000 Red Brick Balance Sheet as of 12/31/20X2 Assets Liabilities and Stockholders’ Equity Cash $ 700,000 Accounts payable $ 31,000,000 Accounts receivable 38,000,000 * Notes payable 5,000,000 Inventory 83,600,000 † Long-term debt 44,000,000 Plant and equipment 132,000,000 Stockholders’ equity 174,300,000 $ 254,300,000 $ 254,300,000 *60% of sales are on credit. † Previous year’s inventory was $72,300,000. Company’s Ratios Industry (Previous Year) Average Current ratio 3.5:1 2.2:1 Quick ratio 1.0:1 0.8:1 Inventory turnover 3.8x 4.7x Average collection period 68 days 54 days Debt ratio (debt/total assets) 31% 35% Times-interest-earned -1.0 3.6 Return on equity -20.4% 13.9% Return on assets -13.3% 10.3% Operating profit margin -5.2% 14.9% Net profit margin -10.4% 8.7% 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 thanlower thanequal toItem 2 the industry average and -Select-higher thanlower thanequal toItem 3 the ratio in the previous year. Quick ratio of ________ times is -Select- higher thanlower thanequal toItem 5 the industry average and -Select-  higher thanlower thanequal toItem 6 the ratio in the previous year. Inventory turnover ratio of_______ is -Select- higher thanlower thanequal toItem 8 the industry average and -Select-higher thanlower thanequal toItem 9 the ratio in the previous year. Average collection period of _______ days is -Select- higher thanlower thanequal toItem 11 the industry average and -Select- higher thanlower thanequal toItem 12 the ratio in the previous year. Debt ratio of   % is -Select-higher thanlower thanequal toItem 14 the industry average and -Select-higher thanlower thanequal toItem 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 thanlower thanequal toItem 20 the industry average and -Select-higher thanlower thanequal toItem 21 the ratio in the previous year. Return on assets ratio of _______ % is -Select-higher thanlower thanequal toItem 23 the industry average and -Select-higher thanlower thanequal toItem 24 the ratio in the previous year. Operating profit margin ratio of ______ % is -Select-higher thanlower thanequal toItem 26 the industry average and -Select-higher thanlower thanequal toItem 27 the ratio in the previous year. Net profit margin ratio of ________ % is -Select-higher thanlower thanequal toItem 29 the industry average and -Select-higher thanlower thanequal toItem 30 the ratio in the previous year.

Answer 1

a) Current Ratio = Current Assets / Current Liabilities  

Current Assets = Cash + Account Receivable + Inventory =($700,000+$38,000,000+$83,600,000) = $122,300,000

Current Liabilities = Account Payable + Note Payable = ($31,000,000+$5,000,000)= $36,000,000

Current ratio = $122,300,000/$36,000,000 = 3.39:1

Current ratio of __3.39:1_______ times is lower than the industry average and lower than the ratio in the previous year.

b) Quick Ratio = (Current Assets - Inventory) / Current Liabilities = $700,000+$38,000,000 / $36,000,000 = 1.075:1

Quick ratio of __1.07:1______ times is higher than the industry average and higher than the ratio in the previous year

c) Inventory Turnover Ratio = Cost of Good Sold / Average Inventory =$193,000,000/{($72,300,000+$83,600,000)/2}

Inventory turnover Ratio = $193,000,000/$77,950,000 = 2.48x

Inventory turnover ratio of______2.48x_ is lower than industry average and lower than the ratio in the previous year.

d) Average collection period = 365* Account Receivable/(Credit Sales)

Credit sale = 60% 0f Sales = 60% *$209,000,000 =$125,400,000

Average Collection Period = 365 * $38,000,000/ $125,400,000 = 110days

Average collection period of _____110__ days is lower than the industry average and lower than the ratio in the previous year.

e) Debt Ratio = Total Debt / Total Assets = ($31,000,000+$5,000,000+$44,000,000)/ $254,300,000

Debt Ratio = $80,000,000/$254,300,000 *100 = 31.45%

Debt ratio of 31.45  % is lower than the industry average and higher than the ratio in the previous year.

f) Time Interest earned Ratio = EBIT / Interest Expense = (14,000,000)/14,000,000 = (1.0)

Times-interest-earned ratio of __-1.0____ is lower than the industry average and equal to the ratio in the previous year.

g) Return on Equity = Net income / Shareholders' Fund = (28,300,000)/$174,300,000 = (0.1623) or -16.23%

Return on equity ratio of ___-16.23__ % is lower than the industry average and higher than the ratio in the previous year.

h) Return on Assets = Net Income /Total Assets = ($28,300,000)/ $254,300,000 *100 = (11.12%)

Return on assets ratio of ___-11.12%____ % is lower than the industry average and Higher than the ratio in the previous year.

i) Operating Profit Margin = Operating income/ Net sales = ($14,000,000)/$209,000,000 * 100 = (6.69)%

Operating profit margin ratio of __-6.69%____is lower than the industry average and lower than the ratio in the previous year

j) Net Profit Margin ratio = Net Income / sales *100 = ($28,300,000)/$209,000,000*100 = (13.5%)

Net profit margin ratio of ____-13.5____ % is lower than the industry average and lower than the ratio in the previous year.