Question

SALES $25,000 COSTS OF GOODS $16,000 DEPRECIATION $3,000 EARNINGS BEFORE INTEREST AND TAXES $6,000 INTEREST PAID $2,000 TAXABLE INCOME $4,000 TAXES (34%) $1,360 NET INCOME $2,640 (ADDITION TO) RETAINED EARNINGS $1,584 DIVIDENDS $1,056

CURRENT ASSET	2002	2003	CURRENT LIABILITIES	2002	2003
CASH	$4,000	$3,000	ACCOUNTS PAYABLE	$3,000	$2,500
ACCOUNTS RECEIVABLE	$9,000	$11,000	NOTES PAYABLE	$6,000	$6,416
INVESNTORY	$5,000	$4,500	LONG TERM DEBT	$15,000	$13,000
			OWNERS EQUITY
FIXED ASSETS			COMMON STOCK	$14,000	$16,500
NET FIXED ASSET(PLANT AND EQUIPMENT)	$30,000	$31,500	RETAINED EARNINGS	$10,000	$11,584

1. Compute the short-term solvency ratios: current ratio, quick ratio

2. Compute the long-term solvency ratios: total-debt-to-total-invested-capital ratio, total-debt-to-total-equity ratio, equity multiplier.1. Compute the short-term solvency ratios: current ratio, quick ratio

3. Compute the turnover ratios: inventory turnover, days sales outstanding, total asset turnover

4. Compute the profitability measures: operating margin, profit margin, return on assets, return on equity

5. The stock price is $40 per share and there are 1000 shares outstanding, compute market value measures: P/E ratio, market/book ratio

6. Use the Du Pont Identity to compute the return on equity.

7. Suppose the firm decides to reduce its total debt ratio to 0.2 by selling new common stock and using the proceeds to repay principal on some outstanding long-term debt. How much equity financing will Coogan have to raise?

Answer 1

Answer to Part 1.

Current Ratio = Current Assets / Current Liabilities
Current Assets = $3,000 + $11,000 + $4,500 = $18,500
Current Liabilities = $2,500 + $6,416 = $8,916

Current Ratio = 18,500 / 8,916
Current Ratio = 2.07: 1

Quick Ratio = (Current Assets – Inventory) / Current Liabilities
Quick Ratio = (18,500 – 4,500) / 8,916
Quick Ratio = 14,000 / 8,916
Quick Ratio = 1.57: 1

Answer to Part 2.

Total Debt to Total Invested Capital Ratio = Total Debt / Total Invested Capital
Total Debt = $6,416 + $13,000 = $19,416
Total Invested Capital = Total Debt + Total Shareholders’ Equity
Total Invested Capital = $19,416 + ($16,500 + $11,584)
Total Invested Capital = $47,500

Total Debt to Total Invested Capital Ratio = 19,416 / 47,500
Total Debt to Total Invested Capital Ratio = 0.41 times

Total Debt to Total Equity Ratio = Total Debt / Total Stockholders’ Equity
Total Equity = $16,500 + $11,584 = $28,084
Total Debt to Total Equity Ratio = 19,416 / 28,084
Total Debt to Total Equity Ratio = 0.69 times

Equity Multiplier = Total Assets / Total Stockholders’ Equity
Total Assets = $3,000 + $11,000 + $4,500 + $31,500 = $50,000
Equity Multiplier = 50,000 / 28,084
Equity Multiplier = 1.78

Answer to Part 3.

Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory
Average Inventory = (5,000 + 4,500) / 2
Average Inventory = $4,750

Inventory Turnover Ratio = 16,000 / 4,750
Inventory Turnover Ratio = 3.37 times

Days Sales Outstanding = 365 / Net Sales * Average Accounts Receivable
Average Accounts Receivable = (9,000 + 11,000)
Average Accounts Receivable = $10,000

Days Sales Outstanding = 365 / 25,000 * 10,000
Days Sales Outstanding = 146 days

Total Assets Turnover = Net Sales / Average Total Assets
Total Assets, 2002 = $4,000 + $9,000 + $5,000 + $30,000 = $48,000
Total Assets, 2003 = $3,000 + $11,000 + $4,500 + $31,500 = $50,000
Average Total Assets = (48,000 + 50,000) / 2
Average Total Assets = $49,000

Total Assets Turnover = 25,000 / 49,000
Total Assets Turnover = 0.51 times

Answer to Part 4.

Operating Margin = EBIT / Sales * 100
Operating Margin = 6,000 / 25,000 * 100
Operating Margin = 24%

Profit Margin = Net Income / Sales * 100
Profit Margin = 2,640 / 25,000 * 100
Profit Margin = 10.56%

Return on Assets = Net Income / Average Total Assets * 100
Return on Assets = 2,640 / 49,000 * 100
Return on Assets = 5.39%

Return on Equity = Net Income / Average Stockholders Equity * 100
Total Stockholders’ Equity, 2002 = $14,000 + $10,000 = $24,000
Total Stockholders’ Equity, 2003 = $16,500 + $11,584 = $28,084

Average Stockholders Equity = (24,000 + 28,084) / 2
Average Stockholders Equity = $26,042

Return on Equity = 2,640 / 26,042 * 100
Return on Equity = 10.14%