Question

Ratio Analysis:

Balance Sheet (Millions of $)
Assets		Liabilities and Equity
Cash and securities	$  1,554.0	Accounts payable	$  7,980.0
Accounts receivable	9660.00	Notes payable	5880.00
Inventories	13,440.0	Accruals	4,620.0
Total current assets	24654.00	Total current liabilities	18480.00
Net plant and equipment	17,346.0	Long-term bonds	10,920.0
Total assets	42000.00	Total debt	29400.00
		Common stock	3360.00
		Retained earnings	9,240.0
		Total common equity	12600.00
		Total liabilities and equity	42000.00
Income Statement (Millions of $)		Other data:
Sales	58800.00	Shares outstanding (millions)	175.00
Operating costs except depr'n	54978.00	Common dividends	$   509.83
Depreciation	$  1,029.0	interest rate	0.06
(EBIT)	$  2,793.0	income tax rate	0.35
Less interest	1,050.0	stock price	77.69
Earnings before taxes (EBT)	$  1,743.0
Taxes	$     610.1
Net income	$  1,133.0

a1) Calculate the quick ratio.

a2) Suppose the average quick ratio in the industry is 1.0   Does this have a strong or weak liquidity position? Explain in a single concise sentence.

b1) Calculate the DSO.

b2) The average DSO in the industry is 70.    Is the firm in a better or worse position compared to the average firm? Explain in a single concise sentence.

c1) Calculate the liability-to-assets ratio.

c2) The average liabilities-to-assets ratio in the industry is 60%.       Is the firm more or less risky than the average firm?   Explain in a single concise sentence

d) Calculate the ROE

e) Calculate the P-E ratio

Answer 1

A-1) Quick Ratio= (Current Assets - Inventory / Current Liabilities)

=$24,654-13,440 / $18,480

= $11,214/$18,480 = 0.606

A-2) Yes, Company has weak liquidity ratio. A company that has a quick Ratio of less than 1 may not be able to fully pay off its Current Liabilities in short term,they might struggle with paying Debts.

B-1) DOS = Account Receivable ×365 / Sales

DOS = $9,660×365/$58,800

DOS = 59.96 days or 60days

B-2) Company has better position, as Company has a short Average Turn around in converting it's Receivable into Cash.

C-1) Liabilities -to- Assets = Total Liabilities/Total Assets × 100

= $29,400/$42,000 × 100

= 70%

C-2) Company own more liabilities than its does assets. It indicates that company is extremely leveraged and highly risky to invest in. It would see significant default risk if Interest Rate were to rise or economy were to undergo a recession.

D) ROE = Net Income / Shareholders equity × 100

= $1,133/$12,600 × 100

= 8.99%

E) P - E Ratio = Stock Price / EPS

EPS = Net Income / total Equity Shareholders

= $1,133(million)/175(million)

= $6.47

P-E Ratio = $77.69/$6.47 = $11.99