Assignment 6

Chapter 6:
1. The following information is available on the Vanier Corporation:

BALANCE SHEET AS OF DECEMBER 31,20X6 ( in thousands)

Cash and marketable securities $500 Accounts payable $400
Accounts receivable ? Bank loan ?
Inventories ? Accruals 200
Current assets ? Current liabilities ?
Long-term debt 2,650
Net fixed assets ? Common stock and retained earnings 3,750
Total assets ? Total liabilities and equity ?

INCOME STATEMENT FOR 20X6 (in thousands)

Credit sales $8000
Cost of goods sold ?
Gross profit ?
Selling and administrative expenses ?
Interest expense 400
Profit before taxes ?
Taxes (44% rate) ?
Profit after taxes ?

OTHER INFORMATION
Current ratio 3 to 1
Depreciation $500
Net profit margin 7%
Total liabilities/shareholders’ equity 1 to 1
Average collection period 45 days
Inventory turnover ratio 3 to 1

2 .A company has total annual sales (all credit) of $400,000 and a gross profit margin
of 20 percent. Its current assets are $80,000; current liabilities, $60,000; inventories,
$30,000; and cash, $10,000.
a. How much average inventory should be carried if management wants the
inventory turnover to be 4?
b. How rapidly (in how many days) must accounts receivable be collected if
management wants to have an average of $50,000 invested in receivables?　(Assume
a 360-day year.)

3. US REPUBLIC CORPORATION BALANCE SHEET, DECEMBER 31,20X3

 Assets Liabilities and Shareholders’ Equity
Cash $1,000,000 Notes payable, bank $4,000,000
Accounts receivable 5,000,000 Accounts payable 2,000,000
Inventory 7,000,000 Accrued wages and taxes 2,000,000
Fixed assets, net 17,000,000 Long-term debt 12,000,000
Preferred stock 4,000,000
Common stock 2,000,000
Retained earnings 4,000,000
Total liabilities and
Total assets $30,000,000 shareholders’ equity $30,000,000

US REPUBLIC CORPORATION STATEMENT OF INCOME AND RETAINED EARNINGS,

YEAR ENDED DECEMBER 31, 20X3
Net sales
Credit $16,000,000
Cash 4,000,000
Total $20,000,000
Cost and Expenses
Cost of goods sold $12,000,000
Selling, general and administrative expenses 2,200,000
Depreciation 1,400,000
Interest 1,200,000 $16,800,000
Net income before taxes $3,200,000
Taxes on income 1,200,000
Net income after taxes $2,000,000
Less: Dividends on preferred stock 240,000
Net income available to common shareholders $1,760,000
Add: Retained earnings at 1/1/X3 2,600,000
Subtotal $4,360,000
Less: Dividends paid on common stock 360,000
Retained earnings 12/31/X3 $4,000,000

a. Fill in the 20X3 column in the table that follows.

US REPUBLIC CORPORATION
RATIO 20X1 20X2 20X3 Industry Norms
1.Current ratio 250% 200% 225%
2.Acid-test ratio 100% 90% 110%
3.Receivable turnover 5.0x 4.5x 6.0x
4.Inventory turnover 4.0x 3.0x 4.0x
5.Long-term debt/total capitalization 35% 40% 33%
6.Gross profit margin 39% 41% 40%
 7.Net profit margin 17% 15% 15%
8.Return on equity 15% 20% 20%
9.Return on investment 15% 12% 12%
10.Total asset turnover 0.9x 0.8x 1.0x
11.Interest coverage ratio 5.5x 4.5x 5.0x

b. Evaluate the position of the company using information from the table. Cite
specific ratio levels and trends as evidence.
c. Indicate which ratios would be of most interest to you and what your decision
would be in each of the following situations:
(i) US Republic wants to buy $500,000 worth of merchandise inventory from
you, with payment due in 90 days.
(ii) US Republic wants you, a large insurance company, to pay off its note at the
bank and assume it on a 10-year maturity basis at a current rate of 14
percent.
(iii) There are 100,000 shares outstanding, and the stock is selling for $80 a
share. The company offers you 50,000 additional shares at this price.