W2_Practice_Problems-financial_ratios

docx

School

Grand Canyon University *

*We aren’t endorsed by this school

Course

495

Subject

Finance

Date

Jan 9, 2024

Type

docx

Pages

851

Uploaded by EarlRedPanda4068

Week 2 Practice Problems Remember for all work submitted as a grade, you must show the formula, calculation, and answer to receive credit. PROBLEM #1: Please note there are three parts to this problem and the last one should be a separate Word document in Memo format Directions: 1) Using the Financial Statements in Problem P3-1 at the end of the chapter in your book and the other information provided, complete the following table. You must show all formulas, calculations, and answers. Additional information needed: Sales 2014 $550,000 CGS 2014 $400,000 Par Value $6/share Market Price $20.00 EACS 2014 $35,000 Complete the Ratios below: Current Ratio: 1) 2014= 116,200/71,00= 1.64 2)2015= 138,300/75,000= 1.84 Quick Ratio 1) 116,200-50,000/71,000= 0.93 2) 138,300- 82,000/75, 000= 0.75 Inventory Turnover 1)2014: 400,000/50,000= 8 2)2015: 460,000/82,000=5.6 Avg Collection Period 1) 2014: 42,200/1507= 28 2) 2015: 34,100/1644= 21 Debt Ratio 1) 2014: 231,000/401, 200= 0.58 (58%) 2) 2015: 225,000/408,000= 0.55 (55%) Times Interest Earned XXXXXXXXX Gross Profit Margin 1) 2014: 550,000-400,000/550,000= 0.27 (27%) 2) 2015: 600,000-460,000/600,000= 0.23 (23%) Net Profit Margin 1) 2014: 35,000/550,000= 0.063 (6.36%) 2) 42,900/600,000=0.0715 (7.15%) Earnings Per Share 1)2014: 35,000/20,000= $1.25 2)2015: 42,900/19,500= $2.20

Return on Assets 1) 2014: 35,000/ 401,200= 0.0872 (8.72%) 2) 2015: 42,900/408,000= 0.1051 (10.51%) Return on Equity 1) 2014: 35,000/ 120,000= 29.17% 2) 2015: 42,900/ 110,200= 38.93% P/E Ratio 1) 2014: 120/ 1.75= 68.57 2)2015: 120/2.20= 54.54 2) Then, using section 3.8 pages 87-90 as an example of the type of analysis, analyze Technica's financial condition as it is related to: (a) Liquidity ● Current ratio : From 2014-2015, there was an increase in Technica’s current ratio from 1.64 to 1.84. ● Quick ratio: From 2014 to 2015, there was a decrease in Technica’s quick ratio from 0.93 to 0.75. (b) Activity ● Inventory turnover : Inventory turnover decreased from 8 to 5.6 between the years of 2014 and 2015 taking place at Technica. ● Average collection period : In 2014, on average it takes Technica about 28 days to collect an account receivable and in 2015 it takes them about 21 days to collect on these accounts. ● Average payment period : Would need the annual purchases to complete this analysis ● Total asset turnover : the higher the turnover the better because it measures the effectiveness of the firm’s assets to generate sales. From 2014-2015, Technica’s total asset turnover increased from 1.37% to 1.47%. Technica is using its efficiently to generate sales. (c) Debt ● Debt ratio : From 2014-2015, Technica’s indebtedness decreased from 58% to 55% indicating that in 2014 the amount of other’s people money was being used to generate profits, the company had financed more than half of its assets with debt. ● Debt-to equity : From 2014-2015, Technica’s debt-to-equity ratio reveals that for every $1.00 common stockholders have invested in the company, Technica’s owed about $1.93 in 2014 and $2.04 in 2015 to creditors. These high debt-to-equity could be an indication that Technica may not be able to generate enough cash to satisfy its debt obligations. (d) Profitability ● Gross/Net Profit margin : From 2014-2015, Technica’s decreased 27% to 23% pertaining the gross profit margin and increased with respective years from 6.36% to 7.15%, the net profit margin measures the firm’s success with respect to earnings to sales; “good” net profit margins differ considerably across industries. ● Earning per share : Technica’s dollar amount of cash distributed to each shareholder is the dividend per share rose from $1.75 in 2014 to $2.20 in 2015. ● Return of Total Assets (ROA): In 2014, this value indicates that Technica earned 8.7 cents on each $1.00 of common stockholders’ asset investment and respectively earned 10.5 cents on each $1.00 of common stockholders’ asset investment.

● Return of Equity (ROE) : In 2014, this value indicates that Technica earned 29.2 cents on the $1.00 of common stock equity and respectively earned 39.0 cents on the $1.00 of common stock equity. (e) Market ● Price/Earnings Ratio : Technica’s investors were paying $68.51 for each $1.00 of earnings and $54.54 for each $1.00 of earnings in the year of 2014 and 2015 respectively. 3) Finally, write a summary of their overall financial condition in a memo to management. This must be a proper memo in Microsoft Word to describe your overall findings and recommendation. Problem #2: Directions: Using the information below for Pebble Corporation and the industry averages for Pebble's line of business to construct the DuPont system of analysis for both Pebble and the industry. Use Figure 3.2 to help with this one. The highlighted values were calculated by using these formulas: 1. ROA: Net profit margin x total asset turnover 2. ROE: ROA X Financial leverage multiplier Pebble 2014 2015 2016 Financial Leverage Multiplier 1.75 1.75 1.85 Net Profit Margin 0.059 0.058 0.049 Total Asset Turnover 2.11 2.18 2.34 ROA 11.4% 12.6% 11.5% ROE 19.9% 22.1% 21.2% Industry Averages Financial Leverage Multiplier 1.67 1.69 1.64 Net Profit Margin 0.054 0.047 0.041 Total Asset Turnover 2.05 2.13 2.15 ROA 11.1% 10.0% 8.8% ROE 18.5% 16.9% 14.4% FINANCIAL CONDITION ● FLM is the ratio of total assets to common stock equity ○ Pebble’s FLM of 1.75, 1.75, 1.85 into the Modified DuPont formula yields the 19.9, 22.1, and 21.2 percent ROE while the industry FLM of 1.67, 1.69, and 1.64 into the Modified DuPont formula yields the 18.5, 16.9, and 14.4 percent ROE in its respective years of 2014, 2015, and 2016 ● Net Profit Margin : measures the firm’s profitability on sales ○ In comparison to the industry average, Pebble’s net margin is fairly close and the higher the net profit margin the better and is could be considered as “good” in its respective years of 2014, 2015, and 2016. ● Total Asset Turnover : indicates the efficiency with which the firm uses its assets to generate sales.

Your preview ends here