Question

Below is selected financial data on Peter Parker Insect Control Company.

Net profit margin: 14.15%

COGS                                        $4,000,000

Addition to retained earnings: $435,400

Current ratio: 1.9

Price-earnings ratio: 12

Current liabilities: $480,000

Fixed asset turnover: 1.6

Gross margin: 22%

Equity multiplier: 1.95

Common shares: 125,000

Determine the following (show all calculations):

a. Fixed assets (2 points)- round to nearest $

b. Total assets (2 points)- round to nearest $  

c. Total liabilities (2 points)- round to nearest $

d. Return on equity (2 points)- use 2 decimals

e. Share price (2 points) - use 2 decimals

Answer 1

Answer a.

Gross margin = (Sales - Cost of goods sold) / Sales
0.22 = (Sales - $4,000,000) / Sales
0.22 * Sales = Sales - $4,000,000
0.78 * Sales = $4,000,000
Sales = $5,128,205

Fixed assets turnover = Sales / Fixed assets
1.60 = $5,128,205 / Fixed assets
Fixed assets = $3,205,128

Answer b.

Current ratio = Current assets / Current liabilities
1.90 = Current assets / $480,000
Current assets = $912,000

Total assets = Current assets + Fixed assets
Total assets = $912,000 + $3,205,128
Total assets = $4,117,128

Answer c.

Equity multiplier = Total assets / Total equity
1.95 = $4,117,128 / Total equity
Total equity = $2,111,348

Total assets = Total liabilities + Total equity
$4,117,128 = Total liabilities + $2,111,348
Total liabilities = $2,005,780

Answer d.

Net income = Sales * Net profit margin
Net income = $5,128,205 * 14.15%
Net income = $725,641

Return on equity = Net income / Total equity
Return on equity = $725,641 / $2,111,348
Return on equity = 0.3437 or 34.37%

Answer e.

Earnings per share = Net income / Common shares
Earnings per share = $725,641 / 125,000
Earnings per share = $5.805

Price-earnings ratio = Share price / Earnings per share
12 = Share price / $5.805
Share price = $69.66