Question

a.) Star Inc. has Year 1 revenues of $80 million, net income of $9 million, assets of $65 million, and equity of $40 million, as well as Year 2 revenues of $87 million, net income of $22 million, assets of $70 million, and equity of $50 million. Calculate Star’s return on equity (ROE) for each year based on the DuPont method and compare it with a direct ROE measure. Next, explain why the firm’s ROE changed between Year 1 and Year 2.

b.). Nextime Ltd. has operating profits (EBIT) of $87 million, a tax rate of 35%, net working capital of $129 million, and fixed assets of $285 million. Calculate Nextime’s return on invested capital, or ROIC. Then, describe three methods by which a firm can increase its ROIC.

c.) Fixem Co. has revenue of $125 million, property and equipment of $42 million, and accumulated depreciation and amortization of $6 million. Estimate the fixed asset turnover ratio.

d.) Wally Wholesale has revenue of $487,000, end-of-year receivables of $112,000, account payables of $70,000, and inventory of $91,000. Assume purchases equal cost of sales of $372,000. Estimate Wally Wholesale’s age of inventory, age of receivables, and age of payables.

e.). Quick-E Inc.’s current assets consist of cash of $5 million, account receivables of $27 million, inventory of $37 million, and it has current liabilities of $48 million. Calculate Quick-E’s current ratio and quick ratio. 7. Deb Co. has interest-bearing debt of $122 million, non–interest-bearing debt of $33 million, and equity of $76 million. Calculate Deb Co.’s debt-to-assets, debt-to-equity, and long-term debt-to-capital ratios. 8. IOU Inc. has EBIT of $58,000, depreciation and amortization of $12,000, interest expenses of $21,000, principal repayments of $17,000, and a tax rate of 35%. Calculate IOU Inc.’s interest coverage ratio and debt service coverage ratio.

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Answer 1

a). ROE = Net Income / Equity
Year 1 = $9,000,000 / $40,000,000 = 0.225 or 22.5%
Year 2 = $22,000,000 / $50,000,000 = 0.44 or 44%

b). Return on Invested capital = Net Income / Total Capital
= $87,000,000 * (1- 0.35) / ($129,000,000 + $285,000,000)
= $56,550,000 / $414,000,000
= 0.1366 or 13.66%

c). Fixed Assets turnover ratio = Turnover / Fixed Assets
= $125 milllion / $42 million
= 2.97
OR
Fixed Assets turnover ratio = $125 million / ($42 - $6 ) million
= 3.47

d). Age of inventory = Inventory / Cost of Sales * 365 days
=91,000 / 372,000 = 0.24 * 365 days = 89.3 days

Age of receivables = Receivables / Cost of sales
=112,000 / 372,000 = 0.3 * 365 days = 109.9 days

Age of payables = Account Payables / Cost of Sales
= 70,000 / 372,000 = 0.188 * 365 days = 68.7 days

e). Current Ratio = Current Assets / Current Liabilities
= ($5 + $27 + $37) million / $48 million
= 1.4375 times
Quick Ratio = Quick Assets / CL
= ($5 + $27) million / $48 million
= 0.66 times