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Managerial Finance

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Chapter 3 Questions

(3-3)  Over the past year, M. D. Ryngaert & Co. has realized an increase in its current ratio and a

drop in its total assets turnover ratio. However, the company’s sales, quick ratio, and fixed

assets turnover ratio have remained constant. What explains these changes?

(3-5)  How might (a) seasonal factors and (b) different growth rates distort a comparative ratio

analysis? Give some examples. How might these problems be alleviated?

(3-6)  Why is it sometimes misleading to compare a company’s financial ratios with those of

other firms that operate in the same industry?

Chapter 3 Problems

(3-1)  Greene Sisters has a DSO of 20 days. The company’s average daily sales are $20,000. What

is the level of its accounts receivable? Assume there are 365 days in a year.

(3-2)  Vigo Vacations has $200 million in total assets, $5 million in notes payable, and $25

million in long-term debt. What is the debt ratio?

(3-3)  Winston Washers’s stock price is $75 per share. Winston has $10 billion in total assets. Its

balance sheet shows $1 billion in current liabilities, $3 billion in long-term debt, and

$6 billion in common equity. It has 800 million shares of common stock outstanding.

What is Winston’s market/book ratio?

(3-7)  Ace Industries has current assets equal to $3 million. The company’s current ratio is 1.5,

and its quick ratio is 1.0. What is the firm’s level of current liabilities? What is the firm’s

level of inventories?

(3-11)  Complete the balance sheet and sales information in the table that follows for J. White

Industries using the following financial data:

Total assets turnover: 1.5

Gross profit margin on sales: (Sales – Cost of goods sold)/Sales = 25%

Total liabilities-to-assets ratio: 40%

Quick ratio: 0.80

Days sales outstanding (based on 365-day year): 36.5 days

Inventory turnover ratio: 3.75

Partial Income Statement Information

Sales                                    _______

Cost of goods sold            _______

Balance Sheet

Cash                                    _______       Accounts payable                  ______

Accounts receivable        _______       Long-term debt                       50,000

Inventories                        _______        Common stock                        ______

Fixed assets        _______                     Retained earnings                    100,000

Total assets        $400,000                   Total liabilities and equity       ______

(3-13)  Data for Lozano Chip Company and its industry averages follow.

a. Calculate the indicated ratios for Lozano.

b. Construct the extended Du Pont equation for both Lozano and the industry.

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

Lozano Chip Company: Balance Sheet as of December 31, 2013 (Thousands

of Dollars)

Cash                                  $  225,000       Accounts payable                 $  601,866

Receivables                       1,575,000       Notes payable                           326,634

Inventories                       1,125,000       Other current liabilities           525,000

Total current assets       $2,950,000            Total current liabilities   $1,453,500

Net fixed assets                1,350,000       Long-term debt                     1,068,750

                                      __________          Common equity                   1,752,750

Total assets                     $4,275,000       Total liabilities and equity  $4,275,000

Lozano Chip Company: Income Statement for Year Ended December 31, 2013

(Thousands of Dollars)

Sales                                                                            $  7,500,000

Cost of goods sold                                                          6,375,000

Selling, general, and administrative expenses             825,000

Earnings before interest and taxes (EBIT)                  $  300,000

Interest expense                                                                111,631

Earnings before taxes (EBT)                                          $  188,369

Federal and state income taxes (40%)                            75,348

Net income                                                                      $  113,022

Ratio                                                                       Lozano                    Industry Average

Current assets/Current liabilities               __________                          2.0

Days sales outstanding (365-day year)    __________                         35.0 days

COGS/Inventory                                             __________                           6.7

Sales/Fixed assets                                         __________                         12.1

Sales/Total assets                                          __________                          3.0

Net income/Sales                                          __________                          1.2%

Net income/Total assets                               __________                          3.6%

Net income/Common equity                      __________                          9.0%

Total debt/Total assets                                __________                       30.0%

Total liabilities/Total assets                          __________                       60.0%