Answer 5 – “ Modern Appliances Corporation”

Modern Appliances Corporation has reported its financial results for the year ended December 31, 2017.

Modern Appliances Corporation

Income Statement for the Fiscal

Year Ended December 31, 2017

Net Sales $5,398,412,000
Cost of goods sold 3,432,925,255
Gross profit $1,965,486,745
Selling, general, and admin. expenses 1,036,311,231
Depreciation 299,928,155
Operating income $ 629,247,359
Interest expense 35,826,000
EBT $ 593,421,359
Income taxes 163,104,554
Net earnings $ 430,316,805
Modern Appliances Corporation

Balance Sheet as of December 31, 2017

Assets: Liabilities and Equity:
Cash and cash equivalents $ 514,412,159 Short-term borrowings $ 117,109,865
Accounts receivable 1,046,612,233 Trade accounts payable 466,937,985
Inventory 981,870,990 Other current liabilities 994,289,383
Other current assets 313,621,610
Total current assets $2,856,516,992 Total current liabilities $1,578,337,233
Net fixed assets 754,660,275 Long-term debt 1,200,691,565
Goodwill 118,407,710 Common stock 397,407,352
Other assets 665,058,761 Retained earnings 1,218,207,588
Total assets $4,394,643,738 Total liabilities and equity $4,394,643,738

Using the information from the financial statements, complete a comprehensive ratio analysis for
Modern Appliances Corporation.

a. Calculate these liquidity ratios: current and quick ratios.

Current ratio = Current asset/Current liability

= 2,856,516,992/1,578,337,233

= 1.81
Quick ratios= Quick asset/Current Liability

= (2,856,516,992-981,870,990)/1,578,337,233

= 1.18

b. Calculate these efficiency ratios: inventory turnover, accounts receivable turnover, DSO.

Inventory turnover = COGS/Total inventory

= 3,432,925,255/981,870,990

=3.50

Accounts receivable turnover= Total sales / Accounts receivable

= 5,398,412,000/1,046,612,233

=5.16

DSO = 365/Accounts receivable turnover

= 365/5.16

= 70.74

c. Calculate these asset turnover ratios: total asset turnover, fixed asset turnover.

Total asset turnover = Total sales/ Total assets

= 5,398,412,000/4,394,643,738

= 1.23

Fixed asset turnover = Total sales/Total Fixed asset

= 5,398,412,000/754,660,275

= 7.15

d. Calculate these leverage ratios: total debt ratio, debt-to-equity ratio, equity multiplier.

Debt ratio = Total debt/Total asset

= (1,578,337,233 + 1,200,691,565)/4,394,643,738

= 0.63

Debt to equity = Total debt/Total equity

= (1,578,337,233 + 1,200,691,565)/(397,407,352 + 1,218,207,588)

= 1.72

Equity multiplier = Total asset/Total equity

= 4,394,643,738/(397,407,352 + 1,218,207,588)
 = 2.72

e. Calculate these coverage ratios: times interest earned, cash coverage.

Times interest earned = EBIT/Interest

= 629,247,359/35,826,000

= 17.56

Cash coverage ratio = (EBIT + depreciation)/Interest

= (629,247,359 + 299,928,155)/35,826,000

= 25.94

f. Calculate these profitability ratios: gross profit margin, net profit margin, ROA, ROE.

Gross profit = Total gross profit/ Total sales

= (1,965,486,745/5,398,412,000) x 100

= 36.41

Net profit margin = Net profit/ Total sales

= (430,316,805/5,398,412,000) x 100

= 7.97

ROA = Net profit/Total assets

= (430,316,805/4,394,643,738) x 100

= 9.79

ROE = Net profit/Total equity

= [430,316,805/(397,407,352 + 1,218,207,588)] x 100

= 26.63

g. Use the DuPont identity, after calculating the component ratios, to compute ROEoss

ROE using DU PONT = Net profit margin x equity multiplier x asset turnover

= [(430,316,805/5,398,412,000) x 100] x [4,394,643,738/(397,407,352 + 1,218,207,588)] x

(5,398,412,000/4,394,643,738)

= 7.97 x 2.72 x 1.23

=26.66