Week Five Exercise Assignment

20) Week Five Exercise Assignment

Financial Ratios

1.Liquidity ratios. Edison, Stagg, and Thornton have the following financial information at the close of business on July 10:

 

Edison Stagg   Thornton

Cash     $4,000 $2,500 $1,000

Short-term investments 3,000    2,500    2,000

Accounts receivable      2,000    2,500    3,000

Inventory           1,000    2,500    4,000

Prepaid expenses         800       800       800

Accounts payable         200       200       200

Notes payable: short-term          3,100    3,100    3,100

Accrued payables         300       300       300

Long-term liabilities       3,800    3,800    3,800

 

Compute the current and quick ratios for each of the three companies. (Round calculations to two decimal places.) Which firm is the most liquid? Why?

 

2.Computation and evaluation of activity ratios. The following data relate to Alaska Products, Inc:

 

19X5     19X4

Net credit sales             $832,000           $760,000

Cost of goods sold       440,000             350,000

Cash, Dec. 31   125,000             110,000

Average Accounts receivable     180,000             140,000

Average Inventory         70,000 50,000

Accounts payable, Dec. 31        115,000             108,000

 

Compute the accounts receivable and inventory turnover ratios for 19X5. Alaska rounds all calculations to two decimal places.

 

3.Profitability ratios, trading on the equity. Digital Relay has both preferred and common stock outstanding. The com­pany reported the following information for 19X7:

 

Net sales          $1,500,000

Interest expense            120,000

Income tax expense      80,000

Preferred dividends       25,000

Net income       130,000

Average assets             1,100,000

Average common stockholders’ equity   400,000

 

Compute the gross profit margin ratio, the return on equity and the return on assets, rounding calculations to two decimal places.

Does the firm have positive or negative financial leverage? Briefly ex­plain.

 

4.Horizontal analysis. Mary Lynn Corporation has been operating for several years. Selected data from the 20X1 and 20X2 financial statements follow.

 

20X2     20X1

Current Assets $ 76,000            $ 80,000

Property, Plant, and Equipment (net)      99,000 90,000

Intangibles        25,000 50,000

Current Liabilities           40,800 48,000

Long-Term Liabilities      143,000             160,000

Stockholders’ Equity     16,200 12,000

Net Sales          500,000             500,000

Cost of Goods Sold      332,500             350,000

Operating Expenses      93,500 85,000

 

Prepare a horizontal analysis for 20X1 and 20X2. Briefly comment on the results of your work.

 

5.Vertical analysis. Mary Lynn Corporation has been operating for several years. Selected data from the 20X1 and 20X2 financial statements follow.

 

20X2     20X1

Current Assets $ 76,000            $ 80,000

Property, Plant, and Equipment (net)      99,000 90,000

Intangibles        25,000 50,000

Current Liabilities           40,800 48,000

Long-Term Liabilities      143,000             160,000

Stockholders’ Equity     16,200 12,000

Net Sales          500,000             500,000

Cost of Goods Sold      332,500             350,000

Operating Expenses      93,500 85,000

 

Prepare a vertical analysis for 20X1 and 20X2. Briefly comment on the results of your work.

 

6. Ratio computation. The financial statements of the Lone Pine Company follow.

LONE PINE COMPANY

 

Comparative Balance Sheets

 

December 31, 20X2 and 20X1 ($000 Omitted)

20X2     20X1

Assets

Current Assets

Cash and Short-Term Investments          $ 400    $ 600

Accounts Receivable (net)         3,000    2,400

Inventories        2,000    2,200

Total Current Assets      $5,400 $5,200

Property, Plant, and Equipment

Land     $1,700 $ 600

Buildings and Equipment (net)   1,500    1,000

Total Property, Plant, and Equipment     $3,200 $1,600

Total Assets      $8,600 $6,800

Liabilities and Stockholders’ Equity

Current Liabilities

Accounts Payable         $1,800 $1,700

Notes Payable 1,100    1,900

Total Current Liabilities   $2,900 $3,600

Long-Term Liabilities

Bonds Payable             4,100    2,100

Total Liabilities $7,000 $5,700

Stockholders’ Equity

Common Stock             $ 200    $ 200

Retained Earnings         1,400    900

Total Stockholders’ Equity         $1,600 $1,100

Total Liabilities and Stockholders’ Equity            $8,600 $6,800

LONE PINE COMPANY

 

Statement of Income and Retained Earnings

 

For the Year Ending December 31,20X2 ($000 Omitted)

Net Sales*         $36,000

Less: Cost of Goods Sold         $20,000

Selling Expense            6,000

Administrative Expense             4,000

Interest Expense           400

Income Tax Expense     2,000    32,400

Net Income       $ 3,600

Retained Earnings, Jan. 1          900

$ 4,500

Cash Dividends Declared and Paid        3,100

Retained Earnings, Dec. 31        $ 1,400

*All sales are on account.

 

Instructions

 

Compute the following items for Lone Pine Company for 20X2, rounding all calcu­lations to two decimal places when necessary:

 

1. Quick ratio

 

1. Current ratio

 

1. Inventory-turnover ratio

 

1. Accounts-receivable-turnover ratio

 

1. Return-on-assets ratio

 

1. Net-profit-margin ratio

 

1. Return-on-common-stockholders’ equity

 

1. Debt-to-total assets

 

1. Number of times that interest is earned

 

1. Dividend payout rate