Week Five Exercise Assignment
Financial Ratios
- 1. Liquidity ratios.Edison, Stagg, and Thornton have the following financial information at the close of business on July 10:
| Edison | Stagg | Thornton | ||||
| Cash | $4,000 | $2,500 | $1,000 | |||
| Short-term investments | 3,000 | 2,500 | 2,000 | |||
| Accounts receivable | 2,000 | 2,500 | 3,000 | |||
| Inventory | 1,000 | 2,500 | 4,000 | |||
| Prepaid expenses | 800 | 800 | 800 | |||
| Accounts payable | 200 | 200 | 200 | |||
| Notes payable: short-term | 3,100 | 3,100 | 3,100 | |||
| Accrued payables | 300 | 300 | 300 | |||
| Long-term liabilities | 3,800 | 3,800 | 3,800 | |||
- Compute the current and quick ratios for each of the three companies. (Round calculations to two decimal places.) Which firm is the most liquid? Why?
- 2. Computation and evaluation of activity ratios.The following data relate to Alaska Products, Inc:
| 19X5 | 19X4 | |||
| Net credit sales | $832,000 | $760,000 | ||
| Cost of goods sold | 440,000 | 350,000 | ||
| Cash, Dec. 31 | 125,000 | 110,000 | ||
| Average Accounts receivable | 180,000 | 140,000 | ||
| Average Inventory | 70,000 | 50,000 | ||
| Accounts payable, Dec. 31 | 115,000 | 108,000 | ||
- Compute the accounts receivable and inventory turnover ratios for 19X5. Alaska rounds all calculations to two decimal places.
- 3. Profitability ratios, trading on the equity.Digital Relay has both preferred and common stock outstanding. The com pany reported the following information for 19X7:
| Net sales | $1,500,000 |
| Interest expense | 120,000 |
| Income tax expense | 80,000 |
| Preferred dividends | 25,000 |
| Net income | 130,000 |
| Average assets | 1,100,000 |
| Average common stockholders equity | 400,000 |
- Compute the gross profit margin ratio, the return on equity and the return on assets, rounding calculations to two decimal places.
- Does the firm have positive or negative financial leverage? Briefly ex plain.
- Horizontal analysis. Mary Lynn Corporation has been operating for several years. Selected data from the 20X1 and 20X2 financial statements follow.
|
20X2 |
20X1 |
||
| Current Assets | $ 76,000 | $ 80,000 | |
| Property, Plant, and Equipment (net) | 99,000 | 90,000 | |
| Intangibles | 25,000 | 50,000 | |
| Current Liabilities | 40,800 | 48,000 | |
| Long-Term Liabilities | 143,000 | 160,000 | |
| Stockholders Equity | 16,200 | 12,000 | |
| Net Sales | 500,000 | 500,000 | |
| Cost of Goods Sold | 332,500 | 350,000 | |
| Operating Expenses | 93,500 | 85,000 | |
Prepare a horizontal analysis for 20X1 and 20X2. Briefly comment on the results of your work.
- Vertical analysis. Mary Lynn Corporation has been operating for several years. Selected data from the 20X1 and 20X2 financial statements follow.
|
20X2 |
20X1 |
||
| Current Assets | $ 76,000 | $ 80,000 | |
| Property, Plant, and Equipment (net) | 99,000 | 90,000 | |
| Intangibles | 25,000 | 50,000 | |
| Current Liabilities | 40,800 | 48,000 | |
| Long-Term Liabilities | 143,000 | 160,000 | |
| Stockholders Equity | 16,200 | 12,000 | |
| Net Sales | 500,000 | 500,000 | |
| Cost of Goods Sold | 332,500 | 350,000 | |
| Operating Expenses | 93,500 | 85,000 | |
Prepare a vertical analysis for 20X1 and 20X2. Briefly comment on the results of your work.
6. Ratio computation. The financial statements of the Lone Pine Company follow.
|
LONE PINE COMPANY Comparative Balance Sheets December 31, 20X2 and 20X1 ($000 Omitted) |
|||
|
20X2 |
20X1 |
||
| Assets | |||
| Current Assets | |||
| Cash and Short-Term Investments | $ 400 | $ 600 | |
| Accounts Receivable (net) | 3,000 | 2,400 | |
| Inventories | 2,000 | 2,200 | |
| Total Current Assets | $5,400 | $5,200 | |
| Property, Plant, and Equipment | |||
| Land | $1,700 | $ 600 | |
| Buildings and Equipment (net) | 1,500 | 1,000 | |
| Total Property, Plant, and Equipment | $3,200 | $1,600 | |
| Total Assets | $8,600 | $6,800 | |
| Liabilities and Stockholders Equity | |||
| Current Liabilities | |||
| Accounts Payable | $1,800 | $1,700 | |
| Notes Payable | 1,100 | 1,900 | |
| Total Current Liabilities | $2,900 | $3,600 | |
| Long-Term Liabilities | |||
| Bonds Payable | 4,100 | 2,100 | |
| Total Liabilities | $7,000 | $5,700 | |
| Stockholders Equity | |||
| Common Stock | $ 200 | $ 200 | |
| Retained Earnings | 1,400 | 900 | |
| Total Stockholders Equity | $1,600 | $1,100 | |
| Total Liabilities and Stockholders Equity | $8,600 | $6,800 | |
|
LONE PINE COMPANY Statement of Income and Retained Earnings For the Year Ending December 31,20X2 ($000 Omitted) |
|||
| Net Sales* |
$36,000 |
||
| Less: Cost of Goods Sold | $20,000 | ||
| Selling Expense | 6,000 | ||
| Administrative Expense | 4,000 | ||
| Interest Expense | 400 | ||
| Income Tax Expense |
2,000 |
32,400 | |
| Net Income |
$ 3,600 |
||
| Retained Earnings, Jan. 1 |
900 |
||
|
$ 4,500 |
|||
| Cash Dividends Declared and Paid |
3,100 |
||
| Retained Earnings, Dec. 31 |
$ 1,400 |
||
| *All sales are on account. | |||
Instructions
Compute the following items for Lone Pine Company for 20X2, rounding all calcu lations to two decimal places when necessary:
a. Quick ratio
b. Current ratio
c. Inventory-turnover ratio
d. Accounts-receivable-turnover ratio
e. Return-on-assets ratio
f. Net-profit-margin ratio
g. Return-on-common-stockholders equity
h. Debt-to-total assets
i. Number of times that interest is earned
j. Dividend payout rate