Question

Data for Lozano Chip Company and its industry averages follow.

Lozano Chip Company: Balance Sheet as of December 31, 2018 (Thousands of Dollars)

Cash   $ 235,000      Accounts payable   $ 601,866
Receivables   1,575,000      Notes payable   326,634
Inventories   1,125,000      Other current liabilities   535,000
Total current assets   $2,935,000      Total current liabilities   $1,463,500
Net fixed assets   1,335,000      Long-term debt   1,068,750
          Common equity   1,737,750
Total assets   $4,270,000      Total liabilities and equity   $4,270,000
Lozano Chip Company: Income Statement for Year Ended December 31, 2018 (Thousands of Dollars)

Sales   $7,500,000
Cost of goods sold   6,375,000
Selling, general, and administrative expenses   820,000
Earnings before interest and taxes (EBIT)   $ 305,000
Interest expense   111,631
Earnings before taxes (EBT)   $ 193,369
Federal and state income taxes (40%)   77,348
Net income   $ 116,021
Calculate the indicated ratios for Lozano. Do not round intermediate calculations. Round your answers to two decimal places.
Ratio   Lozano   Industry Average
Current assets/Current liabilities  
2.0  
Days sales outstanding*  
days   35.0   days
COGS/Inventory  
6.7  
Sales/Fixed assets  
12.1  
Sales/Total assets  
3.0  
Net income/Sales  
%   1.2%  
Net income/Total assets  
%   3.6%  
Net income/Common equity  
%   9.0%  
Total debt/Total assets  
%   30.0%  
Total liabilities/Total assets  
%   60.0%  
*Calculation is based on a 365-day year.

Use the extended DuPont equation to calculate ROE for both Lozano and the industry. Do not round intermediate calculations. Round your answers to two decimal places.
For the firm, ROE is
%.

For the industry, ROE is
%.

Outline Lozano's strengths and weaknesses as revealed by your analysis.

The firm's days sales outstanding is more than twice as long as the industry average, indicating that the firm should
-Select-
credit or enforce a
-Select-
stringent collection policy.

The total assets turnover ratio is well
-Select-
the industry average so sales should be
-Select-
, assets
-Select-
, or both.

While the company's profit margin is
-Select-
than the industry average, its other profitability ratios are
-Select-
compared to the industry - net income should be
-Select-
given the amount of equity and assets.

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Answer 1

a)

Ratios formula Lozano Industry
Current Ratio
Current Assets/ Current Liabilities

=$2,935,000/1,459,500

2.01 2
Day sales outstanding
365×Account receivable / sales

= 365 × $1,575,000 / $7,500,000

76.65days 35days
Inventory Turnover Ratio
COGS/ Inventory

= $6,375,000/7,500,000

0.85x 6.7
Fixed Assets Turnover
Sales/ Fixed Assets

= 7,500,000/$1,345,000

5.5 12.1
Total Assets Turnover
Sales/ Total Assets

= $7,500,000/$4,280,000

1.75 3.0
Net income margin
Net Income/ Sales ×100

= $116,021/$7,500,000 × 100

1.5% 1.2%
Return on Total Assets
net Income/ Total Assets

= $116,021/$4,280,000 ×100

2.7% 3.6%
Return on common equity
Net Income/ Common Equity ×100

= $116021/$1,751,750 × 100

6.6% 9.0%
Long term Debt Ratio
Total Debt/ Total Assets × 100

= 1,068,750/$4,280,000 × 100

24.9% 30%
Debt Ratio
Total Liabilities / Total Assets × 100

= ($1,459,500+$1,068,750)/$4,280,00 × 100

=$2,528,250/$4,280,000× 100

59.07% 60%
b) ROE DU Pont equation

Financial leverage(Lozano) = Total Assets / equity

= 1/(1-total liabilities / total Assets)

= 1/(1-(0.59))

=1/(1-0.59)= 1/0.41= 2.439 or 2.44

Financial leverage (Industry)

= 1/(1-total liabilities / total Assets)

=1/(1-60%) = 1/(1-0.60) = 1/0.40 = 2.5

ROE = NET INCOME MARGIN × TOTAL ASSETS TURNOVER × FINANCIAL LEVERAGE.

ROE Net Income/ sales Sales/ Total Assets financial leverage result
Lozano firm 1.5% 1.75 2.44 6.4%
Industry 1.2% 3 2.5 9.0%
for the firm ,ROE is 6.4%

for the Industry, ROE is 9.0%

C)

Select option is not mention

So kindly provide separate option for all the blanks.