4-9 Suppose you were comparing a discount merchandiser with a high-end merchandi

ID: 2546892 • Letter: 4

Question

4-9 Suppose you were comparing a discount merchandiser with a high-end merchandiser. Suppose further that both companies had identical ROEs. If you applied the DuPont equation to both firms, would you expect the three components to be the same for each company? If not, explain what balance sheet and income statement items might lead to the component differences.

4-10 Indicate the effects of the transactions listed in the following table on total current assets, current ratio, and net income. Use (+) to indicate an increase, (-) to indicate a decrease, and (0) to indicate either no effect or an indeterminate effect. Be prepared to state any nec- essary assumptions and assume an initial current ratio of more than 1.0. (Note: A good ac- counting background is necessary to answer some of these questions; if yours is not strong, answer just the questions you can.)

Total Current Effect on Current Assets Ratio Net Income a.

Cash is acquired through issuance of additional common stock

f. Merchandise is sold on credit

h. A cash dividend is declared and paid
i. Cash is obtained through short-term bank loans

m. Current operating expenses are paid

q. Accounts receivable are collected

s. Merchandise is purchased on credit

Explanation / Answer

Answer: 4-9

When comparing a discount merchandiser and a high-end merchandiser with identical ROEs, the three components of the DuPont equation should not be the same. It can be expected that the high end merchandiser will have a lower profit margin because the net income should be lower due to the higher cost of supplies. The high end merchandiser should also have a higher total asset and total equity balance than the discount merchandiser. This would lead to a difference in the equity multiplier. The high end merchandiser should have a higher total assets turnover with a larger figure in sales. This can be due to the distinctions between the luxury good and the discount good.

Answer: 4-10

Particulars

Total current Assets

Effect on Current Ratio

Effect On Net Income

Cash is acquired through issuance of additional stock

Merchandise is sold on credit

A cash dividend is declared and paid

Cash is obtained through short term bank loans

Currents operating expenses are paid

Accounts receivables are collected

Merchandise is purchased on credit