GE1715

SAMPLE PROBLEMS ON FINANCIAL RATIOS

1. The management of International Heal Medical Company is evaluating the

performance of its three (3) divisions. The Booboo Division had operating profit of
₱24,950 and on average used assets with a book value of ₱311,900. The Splint
Division had an operating profit of ₱17,500 and used average assets of ₱177,950.
The Intensive Care Division had an operating profit of ₱28,500 and average assets
of ₱475,000. The company is planning to award the Intensive Care Division relying
on its high operating profit. Should the management continue with this decision?
Justify your answer.

Answer:
ROI for the Booboo Division: 24,950 / 311,900 = 0.0799 or 8%
ROI for the Splint Division: 17,500 / 177,950 = 0.0983 or 9.83%
ROI for the Intensive Care Division: 28,500 / 475,000 = 0.06 or 6%

The most profit is Splint Division so the company can’t award the Intensive Care
Division.
The Splint Division is doing highest with a ROI of 9.83%. ROI is a good place to
equate divisions of varying sizes. We measure ROI as operating profit separated by
average assets.

2. Charlie’s Construction Company is a growing construction business that has a few

contracts to build storefronts in Pasay. Charlie’s balance sheet shows beginning
assets of ₱1,000,000 and an ending balance of ₱2,000,000 of assets. During the
current year, Charlie’s company had a net income of ₱20,000,000. Compute for
the company’s return on assets and interpret the results.

Answer:
Beginning assets = ₱1,000,000
Ending Balance = ₱2,000,000
Net Income = ₱20,000,000
Total Average assets
= 2,000,000 - 1,000,000
= 1,000,000

Return on assets Ratio

= 20,000,000 / 1,000,000
= 20%

3. Dave’s Guitar Shop is thinking about building an addition onto the back of its
existing building for more storage. Dave consults with his banker about applying for
a new loan. The bank asks for Dave’s balance to examine his overall debt levels.
The banker discovers that Dave has total assets of ₱5,000,000 and total liabilities
of ₱25,000. Compute for Dave’s debt ratio.

Answer:

25 , 000/5 , 000 , 000=0.005∨0.5 %

Rubric for checking:

CRITERIA POINTS
Complete solution with correct answer 5
Last two (2) major steps of the solution are incorrect 4
Half of the solution is correct 3
First two (2) major steps of the solution are correct 2
First major step of the solution is correct 1

07 Activity 2 *Property of STI

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