Question

Data for Lozano Chip Company and its industry averages follow.

Lozano Chip Company: Balance Sheet as of December 31, 2019 (Thousands of Dollars)
Cash	$   210,000		Accounts payable	$   600,000
Receivables	1,575,000		Notes payable	100,000
Inventories	1,130,000		Other current liabilities	535,000
Total current assets	$2,915,000		Total current liabilities	$1,235,000
Net fixed assets	1,335,000		Long-term debt	400,000
			Common equity	2,615,000
Total assets	$4,250,000		Total liabilities and equity	$4,250,000

Lozano Chip Company: Income Statement for Year Ended December 31, 2019 (Thousands of Dollars)
Sales	$7,500,000
Cost of goods sold	6,375,000
Selling, general, and administrative expenses	913,000
Earnings before interest and taxes (EBIT)	$   212,000
Interest expense	40,000
Earnings before taxes (EBT)	$   172,000
Federal and state income taxes (25%)	43,000
Net income	$   129,000

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 (365-day year)	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	%	10.0	%
   Total liabilities/Total assets	%	60.0	%

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 %.

Answer 1

a )

Current ratio = Current Asset / Current Liabilities

= $ 2915000 / $1235000

= 2.36

Day sales outstanding =[ Accounts receivable / Sales] * 365

= [1575000 / 7500000] * 365

= 0.21

= 21 days

Cost of goods sold / Inventory

= 6375000 / 1130000

= 5.64

Sales / Fixed Asset =

= 7500000 /1335000

= 5.61

Total Asset turn over = Sales / Total Asset

= 7500000 / 4250000

= 1.76 %

Profit margin = Net income / Sales

= 129000 / 7500000

= 1.72%

Net income / Total Asset

= 129000 / 4250000

= 3.03 %

Net income / Common equity

= 129000 / 2615000

= 4.93 %

Total debt / Total Asset

Total debt = Total liabilities and equity - Common equity

= 4250000 - 2615000

= 1635000

= 1635000 / 4250000

= 38.47 %

Total liability / Total equity

=  635000 / 2615000

= 24.28

b )

ROE = Profit margin * Total Asset turn over * Equity multiplier

Equity multiplier = Total Asset / Equity

= 4250000 / 2615000

ROE = 1.72 % * 1.76 % * 1.62 %

= 4.90 %

Industry ROE = 1.2 % * 3 % *

Common equity / Total asset = 1 - 60% = 40%

Equity multiplier = 1 / 40% = 2.5

ROE = 1.2 % * 3 % * 2.5 %  

= 9%