CHAPTER 3: FINANCIAL STATEMENT ANALYSIS TOOLS

CHAPTER 3: FINANCIAL STATEMENT ANALYSIS TOOLSInstructor’s Manual Problem SetSolutions can be found in the accompanying Excel files. Note that if you wish to see all of the formulas at once, you may use the CTRL+` (Control plus grave accent) shortcut key to toggle them on or off. 1.Sweet Dreams Corp. has prepared the following financial statements:Sweet Dreams Corp.Sweet Dreams Corp.Income StatementBalance SheetFor the Year Ended Dec. 31 2017As of Dec. 31 201720172016Assets20172016Sales3,074,0002,567,000Cash431,000339,000Cost of Goods Sold2,088,0001,711,000Accounts Receivable503,000365,000Gross Profit986,000856,000Inventories289,000300,000Selling and G&A Expenses294,000295,000Total Current Assets1,223,0001,004,000Fixed Expenses35,00035,000Gross Fixed Assets4,669,0004,322,000Depreciation Expense239,000223,000Accumulated Depreciation2,295,0002,056,000EBIT418,000303,000Net Fixed Assets2,374,0002,266,000Interest Expense93,00091,000Total Assets3,597,0003,270,000Earnings Before Taxes325,000212,000Liabilities and Owners’ EquityTaxes94,00064,000Accounts Payable382,000270,000Net Income231,000148,000Short-term Notes Payable79,00099,000Accrued Expenses159,000114,000Total Current Liabilities620,000483,000Long-term Debt1,023,000967,000Total Liabilities1,643,0001,450,000Common Stock819,000808,000Retained Earnings1,135,0001,012,000Total Shareholder’s Equity1,954,0001,820,000Total Liabilities and Owners’ Equity3,597,0003,270,00015Chapter 3: Financial Statement Analysis ToolsInstructor’s Manual Problem Seta)Set up a worksheet similar to the one in Exhibit 4-4, page 124, and calculate all of the ratios for Sweet Dreams Corp.b)Verify the change in 2017 Sweet Dreams Corp’s ROE using the Du Pont method.c)Using the Altman’s model for privately held firms and public ones, calculate the Z-score for Sweet Dreams Corp. Assume that the market value of Sweet Dreams Corp. is $1,200,000.d)Calculate Sweet Dreams Corp.’s economic profit for these years and compare it to net income. Assume that the weighted average cost of capital is 12%. e)Using the following 2017 industry averages, evaluate Sweet Dreams Corp.’s financial situation. Set up a ratio analysissystem similar to the one in Exhibit 3-6, page 92.RatioValueRatioValueCurrent Ratio2.50xDebt to Equity0.90xQuick Ratio0.60xLong-Term Debt to Equity40.00%Inventory Turnover Ratio6.50xTimes Interest Earned2.50xAccounts Receivable Turnover Ratio8.00xCash Coverage Ratio3.50xAverage Collection Period40.00 daysGross Profit Margin20.00%Fixed Asset Turnover2.00xOperating Profit Margin7.00%Total Asset Turnover2.00xNet Profit Margin5.00%Total Debt Ratio50.00%Return on Total Assets5.00%Long-Term Debt Ratio20.00%Return on Equity8.00%LTD to Total Capitalization30.00%Return on Common Equity10.00%