Question

Clorox and General Mills 2020 Ratios and DuPont Analysis.

Company	Clorox	General Mills
Profit Margin	13.97%	12.37%
Days Sales Outstanding	35.19	33.44
Inventory Turnover	14.80	12.36
Fixed Assets Turnover	6.09	4.92
Total Assets Turnover	1.08	0.57
Return on Equity (@ Market Value)	3.56%	5.74%

1.

Which of the following statements about equity multiplier (EM) is INCORRECT?

a.Clorox’s EM indicates that it has more financial leverage than General Mills

b.Adding debt can increase a company’s ROE but will also increase its risk

c.General Mills has a higher proportion of debt than Clorox

d.General Mills’ EM is 0.81

e.The higher a company’s equity multiplier is, the more debt the company has relative to its equity

2.Referring to the DuPont analysis you completed, which of the following statements is INCORRECT?

a.TATO can be increased by increasing fixed assets turnover (FATO) and inventory turnover

b.General Mills has lower return on assets (ROA) than Clorox

c.General Mills has a better ROE than Clorox

d.General Mills’ DuPont analysis indicates that is better than Clorox on every ratio: ROE, PM, TATO and EM

e.Clorox has a slightly higher DSO than General Mills and could lower this by collecting its receivables faster.

3.Which of the following statements about cash flows is INCORRECT?

a.An increase in liabilities will increase cash flow

b.If positive, Free Cash Flow represents the amount of cash that could be withdrawn from a firm without harming its ability to operate and to produce future cash flows

c.The Statement of Cash Flows includes dividends and other financing activities, whereas Free Cash Flow does not

d.The cash flow from “Plant, Property and Equipment” on the Statement of Cash Flows is the same value as CapEx in the free cash flow calculation

e.An increase in CapEx will increase free cash flow

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

a.Accrue taxes payable

b.Decrease DSO, without affecting sales

c.Issue common stock

d.Decrease long-term debt

e.Increase inventory turnover, without affecting sales

5.If you were an investor in a firm, which of the following would you view NEGATIVELY? In all cases, assume that other things are held constant.

a.The firm’s Profit Margin is 10.5%, whereas the industry average is 10.0%

b.The company’s Times Interest Earned (TIE) is 2x, whereas the industry average is 4x

c.The firm’s DSO (days sales outstanding) is 40 days, whereas the industry average is 45 days

d.The firm’s Return on Equity is 13.0%, whereas the industry average is 12.0%

e.The firm’s FATO is 2.5x, whereas the industry average is 2.0x

6.If a business sells merchandise on credit, what is the impact on current assets and current ratio at the time the sale occurs if the sale is profitable? Assume that the current ratio is 2.0 before the sale.

a.Current assets increase and current ratio increases

b.Current assets increase and current ratio stays the same

c.Current assets increase and current ratio decreases

d.Current assets stay the same and current ratio decreases

e.Current assets stay the same and current ratio stays the same

Answer 1

1. Return on equity=net profit margin*total asset turnover ratio*equity multiplier

General Mills, Equity multiplier=5.74%/(12.37%*0.57)=0.81

Clorox, equity multiplier=3.56%/(13.97%*1.08)=0.23

Option a is incorrect

General Mills have more financial leverage than clorox

2. Option d is incorrect

General Mills profit margin and total asset turnover ratio are worse than clorox

3. Option e is incorrect

An increase in the capex will decrease the cashflow.

4. Option d

Decreasing the long term debt means, you are payment the repayment obligation which means the cash outflow. This cash outflow decreases cash in the cashflow statement

5. Option b is correct

Times interest earned should be positive if it is higher than industry average. But here it is lower than industry average, hence it is negative

6. Option a is correct

Both current assets and current ratio will increase

Accounts receivables are reported at selling price where as suppliers at cost in current liabilities. Hence both current assets and current ratio will increase