Question

Consider the following financial data for Carmichael Corp.:

Balance Sheet as of December 31, 2019
Cash	$	50,000		Accounts payable	$	31,000
Receivables		87,500		Short-term bank note		97,500
Inventories		76,000		Accruals		21,000
Total current assets	$	213,500		Total current liabilities	$	149,500
				Long-term debt		534,500
Net plant & equip.		881,000		Common equity		410,500
Total assets	$	1,094,500		Total liab. & equity	$	1,094,500
Statement of Earnings for 2019				Industry Average Ratios
Sales revenue	$	919,500		Current ratio		1.8×
Cost of sales		561,000		Quick ratio		1.4×
Gross profit	$	358,500		Days sales outstanding		44 days
Operating expenses		257,000		Inventory turnover		15.0×
EBIT	$	101,500		Total asset turnover		1.1×
Interest expense		41,000		Net profit margin		4.7%
Pre-tax income	$	60,500		Return on assets		5.3%
Income taxes (35%)		21,175		Return on equity		12.6%
Net profit	$	39,325		Debt-to-capital ratio		46%

Compared to its competitors, Carmichael...

	a.	uses less debt financing.
	b.	has a higher return on equity.
	c.	generates more sales per dollar of inventory.
	d.	is more likely to have trouble paying its short-term debts.
	e.	has a higher profit margin.

Answer 1

Debt financing = (bank note + long term debt) / (bank note + long term debt + equity) = 632000 / 1042500 = 60.62%

Industry debt financing = 46%

Thus Option A is incorrect

Return on equity = net income / equity = 39325 / 410500 = 9.58%

Industry ROE = 12.60%

Thus Option B is incorrect

Inventory turnover ratio = COGS / inventory = 561000 / 76000 = 7.38 times

Industry inventory turnover ratio = 15 X

Thus Option C is incorrect

Current ratio = Current assets / Current liabilities = 213500 / 149500 = 1.43 tim

Industry Current ratio = 1.8 x

Option D is correct the company is more likely to have trouble paying its short-term debts because its current ratio is less than industry average

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