Question

In: Finance

Comprehensive Ratio Analysis Data for Lozano Chip Company and its industry averages follow. Lozano Chip Company:...

Comprehensive Ratio Analysis

Data for Lozano Chip Company and its industry averages follow.

Lozano Chip Company: Balance Sheet as of December 31, 2018 (Thousands of Dollars)

Cash $   230,000 Accounts payable $   601,866
Receivables 1,575,000 Notes payable 326,634
Inventories 1,125,000 Other current liabilities 539,000
  Total current assets $2,930,000   Total current liabilities $1,467,500
Net fixed assets 1,350,000 Long-term debt 1,068,750
Common equity 1,743,750
Total assets $4,280,000 Total liabilities and equity $4,280,000

Lozano Chip Company: Income Statement for Year Ended December 31, 2018 (Thousands of Dollars)

Sales $7,500,000
Cost of goods sold 6,375,000
Selling, general, and administrative expenses 820,000
  Earnings before interest and taxes (EBIT) $   305,000
Interest expense 111,631
  Earnings before taxes (EBT) $   193,369
Federal and state income taxes (40%) 77,348
Net income $   116,021
  1. Calculate the indicated ratios for Lozano. Do not round intermediate calculations. Round your answers to two decimal places.
    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. Use the extended DuPont equation to calculate ROE for both Lozano and the industry. Do not round intermediate calculations. Round your answers to two decimal places.

    For the firm, ROE is   %.

    For the industry, ROE is   %.

Solutions

Expert Solution

Current ratio =current Assets /current liabilities

Current Assets=$2,930,000

Current Liabilities =$1,467,500

Current ratio =$2930000/1467500=2.0

Days Sales Outstanding =Average Receivable /Credit sales*365

Receivables =1,575,000

Sales =$7,500,000

Days Sales Outstanding=1575000/7500000*365=76.65 days

COGS/Inventory

COGS=6375000

Inventory =1125000

COGS/Inventory =$6,375,000/$1,125,000=5.67

Sales/Fixed Assets

Sales =7,500,000

Fixed assets =1,350,000

Sales /Fixed Assets =7,500,000/1,350,000=5.56

Sales/total Assets

Sales =7,500,000

Total Assets=$4,280,000

Sales / Total Assets =7,500,000/4,280,000=1.75

Net Income /Sales

Net Income =$116,021

Sales =$7,500,000

So Net Income /Sales = 116,021/7,500,000=.015 Thats 1.5%

Net Income /Total Assets

Net Income =$116,021

Total Assets =$4,280,000

Net Income /total assets=116,021/4,280,000=2.71%

Net Income /Common Equity

Net income =$116,021

Common Equity=$1,743,750

Net Income /Common Equity =116,021/1,743,750=6.65%

Total debt/total Assets

Total Debt=$1,068,750

Total Assets =$4,280,000

Total Debt / Total Assets =$1,068,750/$4,280,000=24.97%

Total Liabilities /total Assets

Total liabilities =Current liability+long term debt =$1,068,750+$1,467,500=$2,536,250

Total Assets =4,280,000

Total Liabilities /total equities =$2,536,250/4,280,000=59.26%

b.DuPont Equation Extended =Net Profit /Sales*Sales/total Assets*Assets/Equity

For Firm

Solving for the equation we arrive at ROE=Net Income /Equity

Which is 6.65%(116,021/1,743,750)

For Industry ROE

Solving for the equation we arrive at ROE=Net Income /Equity

=Net Income /equity =9.0%(given)


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