I.

Liquidity Ratios Net Working Capital = Current A

Current Assets
Current Liabilities
Net Working Capital

Slightly improved in Year 2.

Net Working Capital Ratio = Net

Net Working Capital
Divide by: Total Assets
Net Working Capital Ratio

Slightly improved in Year 2.

Current Ratio = Current Assets /

Current Assets
Current Liabilities
Current Ratio
The cash provided by operating activities are Year 2 = $1,503 and Year 1 = $1,410. Note:
there are only two years of data provided, so the average current liabilities will be the
same for both Years 2 and 1 calculations. It is ($4,044 + 4,020) ÷ 2 = $4,032.
Quick Ratio
Requirement: Cash and Cash Equivalents
1. Net Working Capital for Years 1 and 2 Add: Accounts Receivable
2. Net Working Capital Ratio for Years 1 and 2 Add: Marketable Securities
3. Current Ratio for Years 1 and 2 Quick Assets
4. Quick Ratio for Years 1 and 2 Divide by: Current Liabilities
5. Cash Ratio for Years 1 and 2 Quick Ratio
6. Cash Flow Ratio
Cash Ratio
Cash and Cash Equivalents
Add: Marketable Securities
Numerator
Divide by: Current Liabilities
Cash Ratio

Cash Flow Ratio

Operating Cash Flows
Average Current Liabilities
 Cash Flow Ratio

Current Ratio = Current assets/C

Quick Ratio = Quick Assets / Cur
Current Assets - Quick Assets = I

Cash
Accounts Receivable
Inventory
Current Assets
Fixed Assets
Total Assets

Quick Assets
Cash
Accounts Receivable

Increase same amount

IF Ratio > 1
IF Ratio <1

Decrease same amount

D INCREASE Current Assets
DECREASE Current Liabilities IF Ratio > 1
B Current Ratio would DECREASE IF Ratio <1

Situation 2: If Current Assets is 180k and Current Liabilities is 90k

Ratio > 1 Ratio will Increase if: Decrease same amount
B Current Asset Current Liab
Before 180,000.00 90,000.00 2.00
B (20,000.00) (20,000.00)
After 160,000.00 70,000.00 2.29

D Current Ratio would DECREASE

Current Asset Current Liab
Before 180,000.00 90,000.00 2.00
B 50,000.00 50,000.00
After 230,000.00 140,000.00 1.64
IIA. Solvency Ratios

Current Liabilities
Long-term Liabilities
Total Liabilities
Total Equity
Debt-to-Equity

Long-term Liabilities
Total Equity
LT Debt to Equity

Total Liabilites
Total Assets
Debt to Total Assets

Requirements for Years 1 and 2:

Debt to Equity
Long-term Debt to Equity
Debt to Total Assets

IIB. Earnings Coverages Ratio Interest Coverage Ratio

 Fixed Charge Coverage Ratio
Numerator:
EBIT
Add: Operating and Short-term L
EB Fixed charges and Taxes

Denominator:
Interest Expense
Requirements: Add: Operating and Short-term L
Interest Coverage (Times Interest Earned Ratio) Add: Req. Total Payments on loa
Fixed Charge Coverage Ratio Fixed Charges

EB Fixed Charges and Taxes

Divide by: Fixed Charges
Fixed Charge Coverage Ratio

Cash Flow to Fixed Charges Rati

Cash Flow to Fixed Charges Ratio
Numerator:
Net Cash Flow from Operations
Add back: Cash Tax Payments
Add back: Cash interest paymen
Add back: ST and Operating leas
Cash Flow before Fixed Charges

Denominator:
Interest Expense
Add: Operating and Short-term L
Add: Req. Total Payments on loa
Fixed Charges related to Operati

Cash Flow before Fixed Charges

Fixed Charges
Cash Flow to Fixed charges Rati

Interest Coverage
 Fixed Charge Coverage Ratio

Earnings before Fixed charges an

Fixed Charges
Let’s assume that repayment of principal in Year 2 is $200 and Year 1 is $75. Let’s also
assume that there are no lease payments being made.
Fixed Charge Coverage Ratio
Requirements: Interest Coverage (Times Interest Earned Ratio)
Fixed Charge Coverage Ratio
Cash Flow to Fixed Charges = (Cash

Cash Flow from Operations

Add back: Fixed Charges
Add back: Tax Payments
Adjusted Cash Flow from Operati
Fixed Charges
Cash Flow to Fixed Charges Rati

II C. Operating and Financial Leverages DOL

% Change in EBIT / % Change i
Contribution Margin/EBIT

DFL
% Change in Net Income/% Ch
EBIT/EBT

DTL
DOL x DFL

DOL
EBIT

% Change in EBIT / % Change i

DFL
% Change in Net Income/% Ch

DTL
DOL x DFL

% Change in Net Income/% Chan

1% Change in Sales = 1.24% Chan

% Change in Sales
x DTL
% Change in Net Income
Year 1 Net Income
Proj. Increase in Net Income
Add: Year 1 Net Income
Proj. Year 2 Income
 Purchase
1-Jan
III. Operating Efficiency/Activity Ratios
Operating Cycle?
Cash Cycle?

Credit Sales
Average Accounts Receivable
Acc Rec. Turnover Ratio

COGS (3.6 M x 75%)

Divide by: Ave. Inventory
Inventory Turnover

Purchases
Divide by: Accounts Payable
Acc Payable Turnover

A/R
TO 10.00
Days 36.50
 Operating Cycle (Days AR + Days Invty)
Cash Cycle (OC - Days AP)

Total Asset Turnover and Fixed Asset Turnover Ratio Total Asset Turnover
Fixed Asset Turnover
et Working Capital = Current Assets - Current Liabilities
Year 2 Year 1
urrent Assets 2,717.00 2,427.00
urrent Liabilities 4,044.00 4,020.00
et Working Capital (1,327.00) (1,593.00)

ghtly improved in Year 2.

et Working Capital Ratio = Net Working Capital/Total Assets

et Working Capital (1,327.00) (1,593.00)
vide by: Total Assets 11,397.00 10,714.00
et Working Capital Ratio (0.12) (0.15)

ghtly improved in Year 2.

urrent Ratio = Current Assets / Current Liabilities

Year 2 Year 1
urrent Assets 2,717.00 2,427.00
urrent Liabilities 4,044.00 4,020.00
urrent Ratio 0.67 0.60
.67:1 .60:1

(Cash + AR + MS)/Current Liabili Year 2 Year 1

ash and Cash Equivalents 524.00 411.00
dd: Accounts Receivable 1,026.00 945.00
dd: Marketable Securities - -
uick Assets 1,550.00 1,356.00
vide by: Current Liabilities 4,044.00 4,020.00
0.38 0.34

(Cash + MS)/Current Liabilities

ash and Cash Equivalents 524.00 411.00
dd: Marketable Securities - -
524.00 411.00
vide by: Current Liabilities 4,044.00 4,020.00
0.13 0.10

ash Flow Ratio Operating Cash Flows / Current Liabilities

perating Cash Flows 1,503.00 1,410.00
verage Current Liabilities 4,032.00 4,032.00
ash Flow Ratio 0.37 0.35

urrent Ratio = Current assets/Current Liabilities 1.40

uick Ratio = Quick Assets / Current Liabilities 1.20
urrent Assets - Quick Assets = Inventory

10.00 Current Liab 30.00

ccounts Receivable 26.00 Noncurrent L 40.00
6.00 Equity 30.00
urrent Assets 42.00
xed Assets 58.00 Total L and E 100.00
100.00

uick Assets 36.00

10.00
ccounts Receivable 26.00

crease same amount

Ratio will From To
DECREASE 2 1 1/2
INCREASE 0.67 0.75
To
ecrease same amount 1 1/2
Ratio will From To 0.67
INCREASE 1 1/2 2
DECREASE 0.67 0.50
To
CA CL Current Ratio 2
A no effect increase 0.50
B (20,000.00) (20,000.00) DECREASE
C - no effect
D 50,000.00 50,000.00 INCREASE
 Year 2 Year 1
urrent Liabilities 4,044.00 4,020.00
ng-term Liabilities 4,827.00 4,625.00
otal Liabilities 8,871.00 8,645.00
2,526.00 2,069.00
ebt-to-Equity 3.51 4.18

ng-term Liabilities 4,827.00 4,625.00

2,526.00 2,069.00
Debt to Equity 1.91 2.24

otal Liabilites 8,871.00 8,645.00

11,397.00 10,714.00
ebt to Total Assets 78% 81%

terest Coverage Ratio EBIT/Interest Expense

1,175,000.00 60,000.00 19.58
xed Charge Coverage Ratio

1,175,000.00
dd: Operating and Short-term Lease Payments Expensed 45,000.00
B Fixed charges and Taxes 1,220,000.00

enominator:
terest Expense 60,000.00
dd: Operating and Short-term Lease Payments Expensed 45,000.00
dd: Req. Total Payments on loans and Finance Leases 200,000.00
xed Charges 305,000.00

B Fixed Charges and Taxes 1,220,000.00

vide by: Fixed Charges 305,000.00
xed Charge Coverage Ratio 4.00

ash Flow to Fixed Charges Ratio

et Cash Flow from Operations 500,000.00

dd back: Cash Tax Payments 475,000.00
dd back: Cash interest payments on loans and 60,000.00
dd back: ST and Operating lease payments 45,000.00
ash Flow before Fixed Charges 1,080,000.00

enominator:
terest Expense 60,000.00
dd: Operating and Short-term Lease Payments Expensed 45,000.00
dd: Req. Total Payments on loans and Finance Leases 200,000.00 <- Financing Activity, not included/added back in
xed Charges related to Operating Cash Flow 305,000.00

ash Flow before Fixed Charges 1,080,000.00

xed Charges 305,000.00
ash Flow to Fixed charges Ratio 3.54

terest Coverage EBIT/ Interest Expense

Year 2 Year 1
 Earnings Bef Int and Taxes 1,868.00 1,766.00
Interest Expense 319.00 307.00
Interest Coverage Ratio 5.86 5.75

xed Charge Coverage Ratio

Net Income 1,103.00 1,004.00
Add: Tax 444.00 468.00
Add: Interest Expense 319.00 307.00
Add back: Operating and Lease 200.00 75.00
arnings before Fixed charges and taxes 2,066.00 1,854.00

Interest Expense 319.00 307.00

Add back: Operating and Lease 200.00 75.00
xed Charges 519.00 382.00

xed Charge Coverage Ratio 3.98 4.85

sh Flow to Fixed Charges = (Cash from Operations + Fixed Charges + Tax Payments) ÷ Fixed Charges
Year 2 Year 1
ash Flow from Operations 1,503.00 1,410.00
dd back: Fixed Charges 519.00 382.00
dd back: Tax Payments 444.00 468.00
djusted Cash Flow from Operations 2,466.00 2,260.00
xed Charges 519.00 382.00
ash Flow to Fixed Charges Ratio 4.75 5.92
 Numerator Denominator
Change in EBIT / % Change i 14.53% 12.50% 1.16
ontribution Margin/EBIT 2,000.00 1,720.00 1.16

Numerator Denominator
Change in Net Income/% Ch 15.24% 14.53% 1.05
1,720.00 1,640.00 1.05

DOL DFL DTL

1.16 1.05 1.22
1% Change in Sales = 1.22% Change in Net Income
INC in Sales INC in Net Inco Year 2 Projected Income
12.50% 15.25%
150.06 1,134.06

Year 2 Year 1
1,866.00 1,779.00

Numerator Denominator
Change in EBIT / % Change i 4.89% 7.97% 0.61

Numerator Denominator
Change in Net Income/% Ch 10% 4.89% 2.02

DOL DFL
0.61 2.02 1.24

Change in Net Income/% Change in Sales

% Change in Sales = 1.24% Change in Net Income

Change in Sales 7.97%

1.24
Change in Net Income 9.86%
ar 1 Net Income 1,004.00
oj. Increase in Net Income 99.00
dd: Year 1 Net Income 1,004.00
oj. Year 2 Income 1,103.00
 Payment Sale Collection
5-Jan 15-Jan 25-Jan

perating Cycle? 25 days

20 days

3,600,000.00
verage Accounts Receivable 360,000.00
cc Rec. Turnover Ratio 10.00 times
Inventory
OGS (3.6 M x 75%) 2,700,000.00 Beg 320,000.00 End
vide by: Ave. Inventory 295,000.00 Purchases 2,650,000.00 COGS
ventory Turnover 9.15 times 2,970,000.00

2,650,000.00
vide by: Accounts Payable 215,000.00
cc Payable Turnover 12.33 times

Invty A/P
9.15 12.33
39.88 29.61
 (Days AR + Days Invty) 76.38 days
46.77 days

otal Asset Turnover Sales/Average Assets 1.07

xed Asset Turnover Sales/Average Net PPE 3.76
ty, not included/added back in the NUMERATOR
y
270,000.00
2,700,000.00
2,970,000.00
I. Profitability Ratios

% of comp(cost inc/total cost)

Contract Price
Costs incurred to date
Est. Cost to complete
Total Estimated Cost
Total Estimated Gross Profit
x % of completion
Gross Profit to date
D Less: Previous year GP
Gross Profit CY
Revenue Recognition Revenue
Contract Identify Contract
Obligations Determine the Performance Obligations distinct and if it "can stand on
Price Determine the Transaction Price
Allocate Allocate Price for Each Performance Obligations % stand-alone price for each p
Recognize Recognize Revenue as p. oblig. are fulfilled a point in time (1-time) = sell
II. ROA and ROE over time (periodic service)
EBIT
Less: Interest
EBT
Less: Taxes
Net Income

Average
Ratio

Net Sales
Average Asse
Asset TO

Net Sales
Average Asse
Asset TO
Conduct a ROA and ROE Analysis
Step 1:
Sustainable Growth Rate Dividend Payout Ratio = DPS/

Step 2:
Net Income
Less: Preferred Dividends
Income Avai. For CS
Div: Average Common Equity
ROCE

Common Stock
APIC
Retained Earnings
Requirements: Dividend Payout Ratio
Return on Common Equity
Sustainable Growth Rate

V-B. Earnings Ratios

1-Jan
1-Apr
1-Aug
1-Nov
Diluted Earnings Per Share
Basic Earnings Per share
Options Computation:

300,000 Cash Inflow/ $27 Ave

Convertible Bonds:

Convertible Preferred Stock

BEPS
Add: Options
Add: Conv. Pr

Add: conv. B

LOWEST EPS Effect is the MOS

 #1

#3
#2

#4

Rank then Compute for DEPS

Income Shares
BEOS 35,000.00 10,000.00 3.50
Convertible Bond A 1,340.00 1,000.00
36,340.00 11,000.00 3.30
Convertible Pref share A 1,485.00 750.00
37,825.00 11,750.00 3.22
Convertible Bond B 1,365.00 500.00
39,190.00 12,250.00 3.20 DEPS
Conv Pref Share B 3,410.00 1,000.00
42,600.00 13,250.00 3.22 <- IGNORED
 of comp(cost inc/total cost) 0.30 0.50
Year 1 Year 2
ontract Price 15,000,000.00 15,000,000.00
osts incurred to date 3,000,000.00 5,500,000.00 <- 3M + 2.5M
t. Cost to complete 7,000,000.00 5,500,000.00
otal Estimated Cost 10,000,000.00 11,000,000.00
otal Estimated Gross Profit 5,000,000.00 4,000,000.00
% of completion 0.30 0.50
oss Profit to date 1,500,000.00 2,000,000.00
ss: Previous year GP - (1,500,000.00)
oss Profit CY 1,500,000.00 500,000.00
4,500,000.00 3,000,000.00

stinct and if it "can stand on its own"

stand-alone price for each performance obligation

point in time (1-time) = sell inventory
er time (periodic service)
 1,700,000.00
(500,000.00)
1,200,000.00
480,000.00
720,000.00

ROA ROE
9,800,000.00 6,500,000.00
7.35% 11.08%

Asset Turnover Net Profit Margin Financial Leverage

Net Sales/Average Assets Net Income/Net Sales Asset/Equity

22,000,000.00 Net Income 720,000.00 Average Asse

9,800,000.00 Net Sales 22,000,000.00 Average Equit
2.24 Net Profit Margin 3.27%

ROA 7.35% ROE 11.08%

Year 2
Net Income 1,103.00

ROA ROE
Average 11,055.50 2,297.50
Ratio 9.98% 48.01%

Asset Turnover Net Profit Margin Financial Leverage

Net Sales/Average Assets Net Income/Net Sales Asset/Equity

11,776.00 Net Income 1,103.00 Average Asse

11,055.50 Net Sales 11,776.00 Average Equit
1.07 Net Profit Margin 9.37%

ROA 9.98% ROE 48.01%

 Step 3:
vidend Payout Ratio = DPS/ BEPS Sustainable Growth Rate
DPS 1.20 (1 - Div Payout Ratio) x ROCE
BEPS 3.84 (1 - 31.25%) x 26.13%
31.25% Sus Growth Rate 17.97%

60,000.00
ss: Preferred Dividends 2,380.00
come Avai. For CS 57,620.00
v: Average Common Equity 220,500.00
26.13%

Year 2 Year 1
ommon Stock 75,000.00 75,000.00
45,000.00 45,000.00
etained Earnings 80,000.00 121,000.00
200,000.00 241,000.00 220,500.00

Shares Stock Split Stock Div Months Average Shares

100,000.00 2.00 1.10 1 220,000.00
10,000.00 2.00 1.10 3/4 16,500.00
(24,000.00) 2.00 1.10 5/12 (22,000.00)
15,000.00 1.00 1.10 1/6 2,750.00
217,250.00
asic Earnings Per share
Net Income 1,000,000.00
 Less: Preferred Dividends 30,000.00
IACS 970,000.00
Div: out common shares 500,000.00
Basic EPS 1.94

ptions Computation:
30,000 shares x $10/share 300,000.00 Cash Inflow
00,000 Cash Inflow/ $27 Average Price 11,111.11 Shares repurchased
Net Shares Added 18,888.89

onvertible Bonds:
After-tax Interest Expense
$1M x 5% x (1-30% Tax) 35,000.00
DEPS Effect Rank
Potential shares 10,000.00 3.50 #3
$1M bonds / $1,000 x 10 Cshares

onvertible Preferred Stock

Pref Dividend 30,000.00
Potential Shares 75,000.00 0.40 #2
7500 PS x 10 C Shares

Income Shares
970,000.00 500,000.00 1.94
dd: Options 18,888.89
30,000.00 75,000.00
1,000,000.00 593,888.89 1.68 DEPS
35,000.00 10,000.00
1,035,000.00 603,888.89 1.71 IGNORED

OWEST EPS Effect is the MOST DILUTIVE

nancial Leverage
set/Equity

9,800,000.00
6,500,000.00
1.51

nancial Leverage
set/Equity

11,055.50
2,297.50
4.81
C
D