Question

Problem 7-13
Comprehensive Ratio Analysis

Data for Lozano Chip Company and its industry averages follow.

Lozano Chip Company: Balance Sheet as of December 31, 2015 (Thousands of Dollars)

Cash	$  294,000		Accounts payable	$603,900
Receivables	1,558,000		Notes payable	333,900
Inventories	1,171,000		Other current liabilities	537,000
Total current assets	$3,023,000		Total current liabilities	$1,474,800
Net fixed assets	1,303,000		Long-term debt	1,133,800
			Common equity	1,717,400
Total assets	$4,326,000		Total liabilities and equity	$4,326,000

Lozano Chip Company: Income Statement for Year Ended December 31, 2015 (Thousands of Dollars)

Sales	$8,047,000
Cost of goods sold	6,355,000
Selling, general, and administrative expenses	811,000
Earnings before interest and taxes (EBIT)	$    881,000
Interest expense	98,500
Earnings before taxes (EBT)	$    782,500
Federal and state income taxes (40%)	313,000
Net income	$    469,500

1. Calculate the indicated ratios for Lozano. Round your answers to two decimal places. Do not round intermediate calculations.

   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.

2. Construct the extended DuPont equation for both Lozano and the industry. Round your answers to two decimal places. Do not round intermediate calculations.

   For the firm, ROE is	_____%
   For the industry, ROE is	_______%

Answer all the blanks ____ and plz show steps

Answer 1

Days Sales Outstanding = 365/Receivables Turnover Ratio

Receivable Turnover Ratio = Sales/Account receivable

ROE from DuPont analysis is written as

We need all the 3 terms in the brackets to find the ROE. However we do not have the 3rd term for the industry. But, we are given Total Liabilities/Total Assets. Using this ratio along with the Balance sheet equation of Assets = Liabilities + Equity,

we arrive at Total Assets/Total Equity.