Group1

JINGCO, John Ryan

KATADA, Mark Raven
MANABAT, Ian Rovanne
TAN, Yendrick

BLUE FONT = FINAL ANSWER

1. DAYS SALES OUTSTANDING Baxley Brothers has a DSO of 23 days, and its
annual sales are $3,650,000. What is its accounts receivable balance? Assume that it
uses a 365-day year.

Given:
Day Sales Outstanding (DSO) = 23 Days
Annual Sales = $3,650,000
Days per year = 365 days

Required: Accounts Receivable Balance

Solution:
365
𝐷𝑆𝑂 = 𝑅𝑇𝑂
𝐶𝑟𝑒𝑑𝑖𝑡 𝑆𝑎𝑙𝑒𝑠
𝑅𝑇𝑂 = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑅
23 𝑥 3650000
𝐴𝑅 = 365
AR = $230,000

2. DEBT TO CAPITAL RATIO Kaye’s Kitchenware has a market/book ratio equal to 1.

Its stock price is $12 per share and it has 4.8 million shares outstanding. The firm’s total
capital is $110 million and it finances with only debt and common equity. What is its
debt-to-capital ratio?

Given:
Market/Book Ratio = 1
Stock Price = $12 per share
Outstanding Shares = 4.8 million
Total Capital = $110million

Required: Debt-to-capital ratio

Solution:
Total Liabilities = Total Capital - (Outstanding Shares x Stock Price)
TL = $110million - (4.8million x $12) = $52.4million
 𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
𝐷𝑒𝑏𝑡 − 𝑡𝑜 − 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑟𝑎𝑡𝑖𝑜 = 𝑇𝑜𝑡𝑎𝑙 𝑐𝑎𝑝𝑖𝑡𝑎𝑙
$52.4𝑚𝑖𝑙𝑙𝑖𝑜𝑛
𝐷𝑒𝑏𝑡 − 𝑡𝑜 − 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑟𝑎𝑡𝑖𝑜 = $110𝑚𝑖𝑙𝑙𝑖𝑜𝑛
Debt-to-capital ratio is 0.4764 or 47.64%

3. DuPONT ANALYSIS Henderson’s Hardware has an ROA of 11%, a 6% profit margin,

and an ROE of 23%. What is its total assets turnover? What is its equity multiplier?

Given :
ROA = 11%
PM = 6%
ROE = 23%

Required: Total Assets Turnover, Equity Multiplier

Solution:
𝑆𝑎𝑙𝑒𝑠 𝑅𝑂𝐴
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 = 𝐴𝑠𝑠𝑒𝑡𝑠
= 𝑃𝑀
11%
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 = 6%
Total Assets Turnover = 1.83 times

𝐴𝑠𝑠𝑒𝑡𝑠 𝑅𝑂𝐸
𝐸𝑞𝑢𝑖𝑡𝑦 𝑀𝑢𝑙𝑡𝑖𝑝𝑙𝑖𝑒𝑟 = 𝐸𝑞𝑢𝑖𝑡𝑦
= 𝑅𝑂𝐴
23%
𝐸𝑞𝑢𝑖𝑡𝑦 𝑀𝑢𝑙𝑡𝑖𝑝𝑙𝑖𝑒𝑟 = 11%
Equity Multiplier = 2.09 times

5. PRICE/EARNINGS RATIO A company has an EPS of $2.40, a book value per share
of $21.84, and a market/book ratio of 2.7. What is its P/E ratio?

Given:
Market/Book Ratio = 2.7
Book value per share = $21.84
EPS = $2.40

Required: P/E Ratio

Solution:
Market Price per share = Book value per share x Market/Book Ratio
Market Price per Share = $21.84 x 2.7 = $58.97

𝑀𝑎𝑟𝑘𝑒𝑡 𝑃𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 $58.97

𝑃/𝐸 𝑅𝑎𝑡𝑖𝑜 = 𝐸𝑃𝑆
= $2.4
 P/E Ratio = 24.57

18. TIE RATIO MPI Incorporated has $6 billion in assets, and its tax rate is 35%. Its
basic earning power (BEP) ratio is 11%, and its return on assets (ROA) is 6%. What is
MPI’s times interest-earned (TIE) ratio?

Given:
BEP = 11%
Total Assets = $6 Billion
Tax Rate = 35%
ROA = 6%

Required: TIE Ratio

Solution:
Earnings before interest and tax (EBIT) = $6billion x 11% = $0.66billion

𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
𝑅𝑂𝐴 = 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
Net Income = $6billion x 6% = $0.36billion

Earning before tax (1 - tax rate) = Net Income

EBT (1 - 0.35) = $0.36billion
EBT (0.65) = $0.36billion
$0.36𝑏𝑖𝑙𝑙𝑖𝑜𝑛
𝐸𝐵𝑇 = 0.65
EBT = $0.5538billion

EBIT - Interest = EBT

Interest = EBIT - EBT = $0.66billion - $0.5538billion = $0.1062billion

𝐸𝐵𝐼𝑇 $0.66𝑏𝑖𝑙𝑙𝑖𝑜𝑛
𝑇𝐼𝐸 𝑅𝑎𝑡𝑖𝑜 = 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡
= $0.1062𝑏𝑖𝑙𝑙𝑖𝑜𝑛
TIE Ratio = 6.21 times

19. CURRENT RATIO The Stewart Company has $2,392,500 in current assets and
$1,076,625 in current liabilities. Its initial inventory level is $526,350, and it will raise
funds as additional notes payable and use them to increase inventory. How much can
its short-term debt (notes payable) increase without pushing its current ratio below 2.0?

Given:
Current Assets (CA) = $2,392,500
Current Liabilities (CL) = $1,076,625
Initial Inventory Level = $526,350
Required: Maximum Increase in short-term debt and inventory without lowering current ratio
below 2.0

Solution:
Let x be Increase in short-term debt and inventory,

(𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 + 𝑥) ($2,392,500 + 𝑥)

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑅𝑎𝑡𝑖𝑜 = (𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 + 𝑥)
= ($1,076,625 + 𝑥)
2.0 x (1,076,625 + x) = (2,392,500 + x)
2153250 + 2x = 2392500 + x
2x - x = 2392500 - 2153250
x = $239,250

Maximum increase in short-term debt to finance inventory without lowering current ratio
below 2.0 will be $239,250

20. DSO AND ACCOUNTS RECEIVABLE Ingraham Inc. currently has $205,000 in
accounts receivable, and its days sales outstanding (DSO) is 71 days. It wants to
reduce its DSO to 20 days by pressuring more of its customers to pay their bills on time.
If this policy is adopted, the company’s average sales will fall by 15%. What will be the
level of accounts receivable following the change? Assume a 365-day year.

Given:
Current AR = $205,000
DSO = 71 days

Required: Accounts Receivable after change considering desired DSO of 20 days

Solution:
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑅 𝑥 365 $205,000 𝑥 365
𝐶𝑟𝑒𝑑𝑖𝑡 𝑆𝑎𝑙𝑒𝑠 = 𝐷𝑆𝑂
= 71
= $1053873. 239
Revised Credit Sales = $1053873. 239 x 85% = $895792.25
𝑅𝑒𝑣𝑖𝑠𝑒𝑑 𝐶𝑟𝑒𝑑𝑖𝑡 𝑠𝑎𝑙𝑒𝑠 𝑥 𝑑𝑒𝑠𝑖𝑟𝑒𝑑 𝐷𝑆𝑂 $895792.25 𝑥 20
𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 𝑎𝑓𝑡𝑒𝑟 𝑐ℎ𝑎𝑛𝑔𝑒 = 365
= 365
AR after change = $49084.51

22. BALANCE SHEET ANALYSIS Complete the balance sheet and sales information
using the following financial data:

Total assets turnover: 1.5x

Days sales outstanding: 36.5 days
Inventory turnover ratio: 5x
Fixed assets turnover: 3.0x
Current ratio: 2.0x
Gross profit margin on sales: (Sales - Cost of goods sold) ∕ Sales = 25%
Calculation is based on a 365-day year.

Balance Sheet

Cash $168,750 Current Liabilities $112,500

Accounts receivable $22,500 Long-term Debt 60,000

Inventories $33,750 Common Stock $30,000

Fixed Assets $75,000 Retained Earnings 97,500

Total Assets $300,000 Total Liabilities and $300,000

Equity

Sales $225,000 Cost of goods sold $168,750

Sales:

𝑆𝑎𝑙𝑒𝑠 𝑆𝑎𝑙𝑒𝑠
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 = 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 = 150000
( 2
)
Sales = Total Asset Turnover x 150000 = 1.5 x 150000 = $225,000

Account Receivable:

𝐷𝑎𝑦𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 𝑠𝑎𝑙𝑒 36.5

𝐶𝑟𝑒𝑑𝑖𝑡 𝑆𝑎𝑙𝑒 𝑥 365
= 225000 𝑥 365
= $22,500

Cost of Goods Sold:

𝑆𝑎𝑙𝑒𝑠 − 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑

𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 𝑀𝑎𝑟𝑔𝑖𝑛 = 𝑆𝑎𝑙𝑒𝑠
225000− 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑
25% = 225000
225000 x 0.25 = 225000 - Cost of Goods Sold
Cost of Goods Sold = 225000 - (225000 x 0.25) = $168,750

Inventories:

𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑

𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑅𝑎𝑡𝑖𝑜 = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
168750
5 = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
 168750
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 = 5
= $33,750

Fixed Assets:

𝑆𝑎𝑙𝑒𝑠
𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡𝑠 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 = 𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡𝑠
225000
3= 𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡𝑠
225000
𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡𝑠 = 3
= $75,000

Cash:

Total Assets: $300,000

Cash = Total Assets - AR - Inv - Fixed Assets
Cash = 300,000 - 22,500 - 33,750 - 75,000 = $168,750

Current Liabilities:

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑅𝑎𝑡𝑖𝑜 = 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
Current Assets = Cash + AR + Inventories = $168,750 + $22,500 +$33,750 = $225,000
$225,000
2 = 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
$225,000
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 = 2
= $112,500

Total Liabilities and Equity:

Total Assets = Total Liabilities and Equity

Total Liabilities and Equity = $300,000

Common Stock:

Common Stock = Total Liabilities and Equity - (Current Liabilities + Long-term Debt + Retained
Earnings)

Common Stock = 300000 - (112500 + 60000 + 97500) = $30,000

23. RATIO ANALYSIS Data for Barry Computer Co. and its industry averages follow.
The firm’s debt is priced at par, so the market value of its debt equals its book value.
Since dollars are in thousands, number of shares are shown in thousands too.

a. Calculate the indicated ratios for Barry.

 Ratio Barry Industry Average

Current 1.98 2.0x

Quick 1.25 1.3x

Days Sales Outstanding 76.29 days 35 days

Inventory Turnover 6.66 6.7x

Total Assets Turnover 1.7 3.0x

Profit Margin 1.70% 1.2%

ROA 2.88% 3.6%

ROE 7.56% 9.0%

ROIC 4.42% 7.5%

TIE 2.11 3.0x

Debt/Total Capital 41.54% 47.0%

M/B 1.2% 4.22

P/E 15.87% 17.86

EV/EBITDA 6.24% 9.14

Current Ratio = Current Assets / Current Liabilities = 655,000 / 330,000 = 1.98

Quick Ratio = (Cash + Receivables) / Current Liabilities = ($77,500 + $336,000)/$330,000 =
1.25
Days Sales Outstanding = (Accounts Receivable/Credit Sales) x365 =
($336,000/$1607500)x365 = 76.29days
Inventory Turnover = Sales / Inventory = 1607500 / 241500 = 6.66
Total Assets Turnover = Sales / Total Assets = 1607500 / 947500 = 1.7
Profit Margin = Net Income / Sales = 27300/1607500 = 1.70%
ROA = Net Income / Total Assets = 27300 / 947500 = 2.88%
ROE = Net Income / Common Equity = 27300 / 361000 = 7.56%
ROIC = Net Income / Invested Capital = 27300 / (361000+256500) = 4.42%
TIE = (Net Income + Interest Expense) / Interest Expense = (27300 + 24500) / 24500 = 2.11
Debt/Total Capital = Long Term Debt/ Total Capital = 256500 / (256500 + 361000) = 41.54%
M/B = Market capitalization / Book Value = 433200/361000 = 1.2%
P/E Ratio = Market Price / EPS = 12 / 0. 75623 = 15.87%
EV/EBITDA = Enterprise Value / EBITDA = 696200/111500 = 6.24%
Enterprise Value = Market capitalization + Long term debt + Notes payable - cash
EBITDA = EBIT + Depreciation

b. Construct the DuPont equation for both Barry and the industry.

For Barry:
ROE = Profit Margin * Total Assets Turnover * Equity Multiplier
= (27300/1607500) * (1607500 / 947500) * (947500/361000)
= 0.0756 or 7.56%

For Industry:
ROE = Profit Margin * Total Assets Turnover * Equity Multiplier
= (1.2%) * (3) * (9.0%/3.6%)
= 0.09 or 9%

c. Outline Barry’s strengths and weaknesses as revealed by your analysis.

The firm's days sales outstanding ratio is more than twice as long as the industry
average, indicating that credit should be tightened or a stricter collection program
implemented. Because the total assets turnover ratio is significantly lower than the
industry average, sales should be boosted, assets reduced, or both. While the
company's profit margin is greater than the industry average, its other profitability ratios
are lower - net income should be higher given the amount of equity, assets, and
invested capital. Finally, its market value ratios are lower than the industry average.
However, the firm appears to be in ordinary liquidity, and its financial leverage is
comparable to that of others in the industry.

d. Suppose Barry had doubled its sales as well as its inventories, accounts receivable,
and common equity during 2018. How would that information affect the validity of your
ratio analysis? (Hint: Think about averages and the effects of rapid growth on ratios if
averages are not used. No calculations are needed.)

If 2019 marks a period of supernormal growth for the company, ratios based on this
year will be correct, and a comparison to industry averages will be significant. Potential
investors simply need to look at 2019 ratios to be properly informed, and a return to
normal conditions in 2020 might benefit the company's stock price.