(3-5) How might (a) seasonal factors and (b) different growth rates distort a co
ID: 2701438 • Letter: #
Question
(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?
(3-2) 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?
(3-11) 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 %u2013 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
Sales _______
Cost of goods sold _______
Balance Sheet
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%u2019s strengths and weaknesses as revealed by your analysis.
Lozano Chip Company: Balance Sheet as of December 31, 2013 (Thousands
of Dollars)
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%
Explanation / Answer
a . Current asset/ current liability=2
Days sales outstanding =35 days
Sales/Inventory =6.67
Sales/Fixed assets=5.55
Sales/Total assets =1.754
Net income/Sales =1.5%
Net income/Total assets=2.64%
Net income/common equity=6.45%
Total liabilities/Total assets =59%
B. Du pont
Lozano
ROI= [(net profit/sales)*(sales/total assets)]
= [(113022/7500000)*(7500000/4275000)]
= 0.0264 or 2.64%
Industry
ROI= 1.2%*3=0.036 or 3.6%
c. strengths.
ROI measyres the profit which a firm earns on investing a unit of capital.
The net income/ sales helps in determining the efficiency with which the affairs of the business being managed.
Weakness
By comparing fixed asset turnover with industry avg. it is seen that investments in fixed assets is not judicious.
d. The ratio of Lozano will be more than industry average... by doubling the figures the net income/fixed asset increases to 11.11 which gives an indication that the investment in fixed assets is judicious.
sales/iventory ratio will remain same..
net income/sales will also increase.
net income/total asset will also increase.
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