Data for Morton Chip Company and its industry averages follow. Morton Chip Compa
ID: 2666554 • Letter: D
Question
Data for Morton Chip Company and its industry averages follow.Morton Chip Company: Balance Sheet as of December 31, 2010 (Thousands of Dollars)
Cash $ 77,500 Accounts payable $129,000
Receivables 336,000 Notes payable 84,000
Inventories 241,500 Other current liabilities 117,000
Total current assets $655,000 Total current liabilities $330,000
Net fixed assets 292,500 Long-term debt 256,500
Common equity 361,000
Total assets $947,500 Total liabilities and equity $947,500
Morton Chip Company: Income Statement for Year Ended December 31, 2010 (Thousands of Dollars)
Sales $1,607,500
Cost of goods sold 1,392,500
Selling general and administrative expenses 145,000
Earnings before interest and taxes (EBIT) $ 70,000
Interest expense 24,500
Earnings before taxes (EBT) $ 45,500
Federal and state income taxes (40%) 18,200
Net income $ 27,300
a.Calculate the indicated ratios for Morton. Round your answer to two decimal places.
Ratio Morton Industry Average
Current assets/Current liabilities x 2.0x
Days sales outstanding* days 35.0 days
Sales/Inventory x 6.7x
Sales/Fixed assets x 12.1x
Sales/Total assets x 3.0x
Net income/Sales % 1.2%
Net income/Total assets % 3.6%
Net income/Common equity % 9.0%
Total debt/Total assets % 60.0%
*Calculation is based on a 365-day year.
b.Construct the extended Du Pont equation for both Morton and the industry. Round your answer to two decimal places.
For the firm, ROE is %
For the industry, ROE is %
Explanation / Answer
The ratios for Morton given the Balance Sheet and Income Statement numbers are: CA/CL = 1.98 DSO = 76.29 Sales/Inv = 6.66 Sales/FA = 5.50 Sales/TA = 1.70 NI/Sales = 1.70% NI/TA = 2.88% NI/CE = 7.56% TD/TA = 35.94% Extended DuPont is used to find ROE (Return on Equity). ROE = (Net Income)/(Shareholder's Equity) Extended expands this to include three others 1.) Net Income/Sales 2.) Sales/Total Assets 3.) Total Assets/Total Shareholders Equity If you multiply these together you get ROE. You can check this by cross multiplying and canceling out terms until you get to Net Income/Shareholders Equity which is ROE. For Morton: 1.) 1.7% 2.) 1.70x 3.) 2.62x Multiplying those together gives you 7.56% which is what we got from NI/Sales. For the Industry: 1.) 1.20% 2.) 3.00x 3.) 2.50x Multiplying those together gives you 9.0% or the ROE of the industry. Hope this helps!
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