Question

Quantitative Problem: Rosnan Industries' 2014 and 2013 balance sheets and income statements are shown below.

Balance Sheets:
	2014	2013
Cash and equivalents	$80	$65
Accounts receivable	275	300
Inventories	375	350
Total current assets	$730	$715
Net plant and equipment	2,000	1,490
Total assets	$2,730	$2,205
Accounts payable	$150	$85
Accruals	75	50
Notes payable	130	155
Total current liabilities	$355	$290
Long-term debt	450	290
Common stock	1,225	1,225
Retained earnings	700	400
Total liabilities and equity	$2,730	$2,205

Income Statements:
	2014	2013
Sales	$2,000	$1,500
Operating costs excluding depreciation	1,250	1,000
EBITDA	$750	$500
Depreciation and amortization	100	75
EBIT	$650	$425
Interest	62	45
EBT	$588	$380
Taxes (40%)	235	152
Net income	$353	$228
Dividends paid	$53	$48
Addition to retained earnings	$300	$180
Shares outstanding	100	100
Price	$25.00	$22.50
WACC	10.00%

What is the firm’s 2014 current ratio? Round your answer to two decimal places.

The 2014 current ratio indicates that Rosnan has -Select-insufficientsufficientCorrect 1 of Item 3 current assets to meet its current obligations as they come due.

What is the firm’s 2014 total assets turnover ratio? Round your answer to four decimal places.

Given the 2014 current and total assets turnover ratios calculated above, if Rosnan’s 2014 quick ratio is 1.0 then an analyst might conclude that Rosnan’s fixed assets are managed -Select-efficientlyinefficientlyCorrect 1 of Item 4.

What is the firm’s 2014 debt-to-capital ratio? Round your answer to two decimal places.
%

If the industry average debt-to-capital ratio is 30%, then Rosnan’s creditors have a -Select-smallerbiggerCorrect 1 of Item 5 cushion than indicated by the industry average.

What is the firm’s 2014 profit margin? Round your answer to two decimal places.
%

If the industry average profit margin is 12%, then Rosnan’s lower than average debt-to-capital ratio might be one reason for its high profit margin.
-Select-TrueFalseCorrect 1 of Item 6

What is the firm’s 2014 price/earnings ratio? Round your answer to two decimal places.

Using the DuPont equation, what is the firm’s 2014 ROE? Round your answer to two decimal places.
%

Answer 1

1. 2014 current ratio = Total Current Assets / Total Current Liabilities = $ 730 / $ 355 = 2.06 : 1

The 2014 current ratio indicates that Rosnan sufficient current assets to meet its current obligations as they come due.

2. 2014 total asset turnover = Sales / Average Total Assets = 2,000 / 2,468 = 0.8104

Given the 2014 current and total assets turnover ratios calculated above, if Rosnan’s 2014 quick ratio is 1.0 then an analyst might conclude that Rosnan’s fixed assets are managed inefficiently.

3. 2014 debt to capital ratio = Total Liabilities / Total Assets = $ 805 / $ 2,730 = 29.49 %

If the industry average debt-to-capital ratio is 30%, then Rosnan’s creditors smaller cushion than indicated by the industry average.

4. 2014 profit margin = Net Income / Sales = $ 353 / $ 2,000 = 17.65 %

If the industry average profit margin is 12%, then Rosnan’s lower than average debt-to-capital ratio might be one reason for its high profit margin : True

5. 2014 price earnings ratio = Price / EPS = $ 25 / $ 3.53 = 7.08

6. 2014 ROE = Profit Margin x Total Asset Turnover x Equity Multiplier = 0.1765 x 0.8104 x 1.42 = 0.2031 or 20.31 %