Question

Other things held constant, which of the following alternatives would increase a company's cash flow for the current year?

a.	Increase the days' sales outstanding (DSO) without reducing sales
b.	Purchase new equipment
c.	Decrease the accounts payable balance
d.	Increase the inventory turnover ratio without affecting sales
e.	Decrease the accrued wages balance

____    2.   You observe that a firm's ROE is above the industry average, but its profit margin and debt ratio are both below the industry average. Which of the following statements is CORRECT?

a.	Its inventory turnover must be below the industry average
b.	Its total assets turnover must be above the industry average
c.	Its total assets turnover must be below the industry average
d.	Its total assets turnover must equal the industry average
e.	Its return on assets must equal the industry average

____    3.   If the CFO of a firm was sharing the firm’s quarterly financial results, which of the following situations would likely be viewed negatively by investors? In all cases, assume that other things are held constant.

a.	The firm’s profit margin decreased slightly, but ROE was up 10%
b.	The company’s current ratio is 2.5 while the average for competitors is 2.0
c.	The firm’s DSO is 36, whereas the average for competitors is 32
d.	The firm’s inventory turnover is 10, whereas the average for competitors is 8
e.	The division's TIE is 8.0x, whereas the average for competitors is 6.0

____    4.   Use the Naches Sporting Goods’ 2017 financial statements to answer:  

a.   Calculate the following financial ratios required for the DuPont equation below.  

	ROE =	PM     x	TA Turnover   x Equity Multiplier
Formula
Calculation
Result
Industry Average	24%	7.5%	1.6	2.0

b. How do Naches Sporting Goods’ financial ratios compare to that of companies in its industry? If Naches management wants to improve its financial performance next year, where should Naches management focus their attention to improve ROE next year based on the DuPont analysis above? Discuss PM, TATO and EM. DSO, INVTO, and FATO all contribute to TATO. When you discuss TATO, be sure to also discuss these ratios as part of your TATO recommendations.

Naches Sporting Goods
Balance Sheets
(in millions of dollars)
	2017	2016
Assets
Cash and cash equivalents	$              721	$      623
Accounts receivable	728	602
Inventories	266	245
Total current assets	$           1,715	$   1,470
Net fixed assets	469	385
Total assets	$           2,184	$   1,855
Liabilities and equity
Accounts payable	$              217	$      161
Accruals	196	154
Notes payable	77	105
Total current liabilities	$              490	$      420
Long-term debt	532	532
Total liabilities	$           1,022	$      952
Common stock	700	630
Retained Earnings	462	273
Total common equity	$           1,162	$      903
Total liabilities and equity	$           2,184	$   1,855
Income Statement
(in millions of dollars)
	2017
Sales	$3,192
Costs+Exp excl. depr & amort	2,548
EBITDA	$644
Depreciation and amortization	49
EBIT	$595
Interest expense	56
EBT	$539
Taxes (40%)	216
Net Income	$323

Asset Management Ratios	Naches	Industry
Inventory Turnover	12.0	12.0
Fixed Assets Turnover	6.8	6.0
Days Sales Outstanding	83.2	45.0

Answer 1