BA 2802 – Principles of Finance

Problems for Recitation #1

1. Use the following financial information to answer this question.

a. Using these financial statements, calculate all the ratios that you can for this company in
2009 and 2010.
b. Prepare the DuPont decomposition of ROA and ROE for this company.
c. Assume that the company distributes 40% of its net income as dividends to its
shareholders. Given this assumption, calculate the Internal and Sustainable Growth
Rates for this company.

2. a. ABC Company has total debt ratio of 0.6. Given this information, calculate the
Debt/Equity ratio of this firm.
b. A fire has destroyed a large percentage of the financial records of the Strongwell Co. You
have the task of piecing together information in order to release a financial report. You
have found the return on equity to be 13.8 percent. Sales were $979,000, the total debt
ratio was 0.42, and total debt was $548,000. Calculate the return on assets for this firm.
c. Global Ventures has a return on equity of 9.8 percent, a retention ratio of 60 percent, and
a profit margin of 4.5 percent. The company paid $378 in dividends and has net working
capital of $100. Net fixed assets are $18,550 and current liabilities are $520. Calculate
the total equity of the firm.
3. You have been working for just few days as an analyst in the credit department of a major investment
bank. You and your boss are working on analysis of financial statement of two local companies, The
ABC Inc., and The XYZ Corp. During lunch, your boss got into an argument with the CEO and got fired.
Now, it is your responsibility to finish the analysis of financial positions of these two companies.

Income Statement, 2015 The ABC Inc. The XYZ Corp.

Sales 3,500,000 4,750,000
Cost of Goods Sold 2,800,000 3,610,000
Earnings Before Interest and Taxes (EBIT) 700,000 1,140,000
Interest Expense 77,700 94,800
Earnings Before Taxes (EBT) 622,300 1,045,200
Taxes 248,920 418,080
Net Income 373,380 627,120

Balance Sheet, 2015 The ABC Inc. The XYZ Corp.

Cash 210,000 285,000
Accounts Receivable 350,000 475,000
Inventory 700,000 1,140,000
Fixed Assets 1,000,000 1,600,000
Total 2,260,000 3,500,000

Accounts Payable 455,000 760,000

LT Debt 555,000 790,000
Stockholders’ Equity 1,250,000 1,950,000
Total 2,260,000 3,500,000
a. Compute the ratios your boss has been unable to compute before being fired.

The ABC Inc. The XYZ Corp.

Current Ratio 2.77 2.50

Quick Ratio ________ ________

Total Asset Turnover 1.55 1.36

Inventory Turnover ________ ________

Debt/Equity Ratio ________ 0.79

Times Interest Earned 9 ________

Profit Margin ________ ________

Return on Equity 0.30 0.32

b. Comment on the difference between the return on equity of these two firms. Indicate one area
which might be a potential problem for each firm and briefly discuss why you consider it as a
potential problem.
c. Calculate how much the ABC company can grow the next year by using the retained
earnings and borrowing while keeping its debt ratio constant if the ABC company
distributes $210,000 worth dividends.
d. Calculate how much the XYZ company can grow the next year by using only the retained
earnings if the company keeps 50% of its net income as retained earnings.