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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
Cost of goods sold _______
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
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%