Question

Quantitative Problem: Rosnan Industries' 2019 and 2018 balance sheets and income statements are shown below.

Balance Sheets:
	2019			2018
Cash and equivalents	$	60		$	45
Accounts receivable		275			300
Inventories		375			350
Total current assets	$	710		$	695
Net plant and equipment		2,000			1,490
Total assets	$	2,710		$	2,185
Accounts payable	$	150		$	85
Accruals		75			50
Notes payable		110			135
Total current liabilities	$	335		$	270
Long-term debt		450			290
Common stock		1,225			1,225
Retained earnings		700			400
Total liabilities and equity	$	2,710		$	2,185

Income Statements:
	2019			2018
Sales	$	1,885		$	1,425
Operating costs excluding depreciation		1,250			1,000
EBITDA	$	635		$	425
Depreciation and amortization		100			75
EBIT	$	535		$	350
Interest		63			46
EBT	$	472		$	304
Taxes (25%)		118			76
Net income	$	354		$	228
Dividends paid	$	54		$	48
Addition to retained earnings	$	300		$	180
Shares outstanding		100			100
Price	$	25.00		$	22.50
WACC		10.00	%

1. What is the firm's 2019 current ratio? Round your answer to two decimal places.

1a. The 2019 current ratio indicates that Rosnan has -Select- insufficient,sufficient current assets to meet its current obligations as they come due.

2. What is the firm's 2019 total assets turnover ratio? Round your answer to four decimal places.

2a. Given the 2019 current and total assets turnover ratios calculated above, if Rosnan's 2019 quick ratio is 1.0 then an analyst might conclude that Rosnan's fixed assets are managed -Select-efficiently,inefficiently.

3. What is the firm's 2019 debt-to-capital ratio? Round your answer to two decimal places.

%

3a. If the industry average debt-to-capital ratio is 30%, then Rosnan's creditors have a -Select-smaller,bigger cushion than indicated by the industry average.

4. What is the firm's 2019 profit margin? Round your answer to two decimal places.

%

4a. If the industry average profit margin is 12%, then Rosnan's lower than average debt-to-capital ratio might be one reason for its high profit margin. -Select-True,False

5. What is the firm's 2019 price/earnings ratio? Round your answer to two decimal places.

6. Using the DuPont equation, what is the firm's 2019 ROE? Round your answer to two decimal places.

Answer 1

1]

Current Ratio = Current Assets / Current Liabilities

Current Ratio = 710 / 335 = 2.12

1a]

sufficient.

A current ratio more than 2 indicates that short term liquidity is adequate

2]

Total Asset Turnover = Sales / Total Assets

Total Asset Turnover = 1,885 / 2,710 = 0.6956 times

2a]

quick ratio = (Current Assets - inventory) / Current Liabilities

Inefficiently - This is because the total asset turnover is less than 1.

3]

debt-to-capital ratio = (Total current liabilities + Long-term debt) / Total Assets

debt-to-capital ratio = (335 + 450) / 2,710

debt-to-capital ratio = 28.97%

3a]

bigger cushion than indicated by the industry average

(because the proportion of debt in the capital strucutre is lower)

4]

Profit Margin = Net income / Sales

Profit Margin = 354 / 1,885 = 18.78%

4a]

True.

Lower debt results in lower interest expense, which could possibly the reason for higher net income

5]

PE ratio = share price / EPS

EPS = net income / shares outstanding

PE ratio = $25 / (354 / 100)

PE ratio = 7.06