Having trouble with the average collection period, fixed asset and Return on equ

Question

Having trouble with the average collection period, fixed asset and Return on equity ratios in this problem as well as the interpretation of b thru e. Any help would be appreciated. Important note that 15% of sales are cash sales, with the remaining 85% being credit sales.

Using the following financial statements for Pamplin Inc:

$178

Having trouble with the average collection period, fixed asset and Return on equity ratios in this problem as well as the interpretation of b thru e. Any help would be appreciated. Important note that 15% of sales are cash sales, with the remaining 85% being credit sales.

Using the following financial statements for Pamplin Inc:

a. Compute the following ratios for both 2002 and 2003 INDUSTRY NORM Current ratio 5.00 Acid-test(quick)ratio 3.00 Inventory turnover 2.20 Average collection period 90.00 Debt ratio 0.33 Times interest earned 7.00 Total asset turnover 0.75 Fixed asset turnover 1.00 Operating profit margin 20% Return on common equity 9% b. How liquid is the firm? c. Is management generating adequate operating profit on the firm's assets? d. How is the firm financing its assets? e. Are the common stockholders receiving a good return on their investmeng? Pamplin Inc., Balance Sheet at 12/31/02 and 12/31/03 2002 2003 ASSETS Cash $200 $150 Accounts receivable 450 425 Inventory 550 625 Current assets 1,200 1,200 Plant and equipment 2,200 2,600 Less: accumulated depreciation (1,000) (1,200) Net plant and equipment 1,200 1,400      Total assets $2,400 $2,600 LIABILITIES AND OWNERS' EQUITY Accounts payable $200 $150 Notes payable-current(9%) 0 150 Current liabilities $200 $300 Bonds(8 1/3% interest) 600 600 Owners' equity Common stock $300 300 Paid-in capital 600 600 Retained earnings 700 800     Total owners' equity $1,600 $1,700 Total liabilities and owners' equity $2,400 $2,600 Pamplin Inc., Income Statement for Years Ending 12/31/02 and 12/31/03 2002 2003 Sales(all credit) $1,200 $1,450 Cost of goods sold 700 850 Gross profit $500 $600 Operating expenses 30 40 Depreciation 220 250 200 240 Operating income $250 $360 Interest expense 50 64 Net income before taxes 200 296 Taxes(40%) 80 118 Net income $120

$178

Explanation / Answer

average collection period=365*(450/1200)=137

2003 =365*(425/1450)=107

Fixed asset=1200/1200=1

fixed asset 2003=1450/1400=1.03

return on equity= 120/1600=7.5%

2003 =178/1700=10.47%

current ratio= 1200/200=6

2003= 1200/300=4

acid test ratio= 650/200=3.25

2003= 575/300=1.92

inventory turnover=700/550=1.27

2003= 850/625=1.36

Debt ratio= 800/2400=0.33

2003= 900/2600=0.346

times interest earned ratio= 250/50=5

2003= 360/64=5.625

total asset turnover=1200/2400=0.5

2003= 1450/2600=0.5576

operating profit margin= 120/1200=10%

2003= 178/1450=12.27%

b.liquidity of firm is good enough but less than previous year.if the acid-test ratio is much lower than the working capital ratio, it means current assets are highly dependent on inventory.

Companies with ratios of less than 1 cannot pay their current liabilities and should be looked at with extreme caution.

c. yes

d. firm is financing its assets through debt and equity

e. yes.....

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