This question is based on the information provided in the abbreviated year-end I
ID: 2717702 • Letter: T
Question
This question is based on the information provided in the abbreviated year-end Income Statement and abbreviated year-end Balance Sheet for NMC Corporation shown below.
NMC Corporation Income Statement for the Calendar Year (January 1 - December 31)
Thousands of dollars (except stock price, earnings per share, and dividends per share)
Net sales
$3000
Cost and expenses:
$2734
EBIT
$266
Less interest expense:
$66
Earnings before taxes
$200
Taxes
$80
Net income before preferred dividends
$120
Dividends to preferred stockholders
$8
Net income available to common stock holders
$112
Per share common stock:
Stock Price
$26.50
Earnings per share
$2.24
Dividends per share
$1.84
NMC Corporation Balance Sheet (Average of beginning and end of year)
Assets (thousands of dollars)
Liabilities and Equity (thousands of dollars)
Accounts payable
Market securities
Notes payable
Accounts receivable
Accrued Wages
Accrued Taxes
Total Current Assets:
Total Current Liabilities:
Net plant and equipment:
Total Long Term Debt:
Total Stock Holder’s Equity:
Total Assets:
Total liabilities and equity:
8a. Calculate the NMC financial ratios contained in the following table
Financial Ratios
NMC Values
Industry Values
Operating Profit Margin
15%
Current Ratio
2.5 times
Quick (Acid) Ratio
1.0 times
Total Debt to Total Assets
40%
Return on Assets (ROA)
9%
Times Interest Earned
6.0
Price/Earnings Ratio
12.5 times
8b. How is the ratio Return on Assets (ROA), from part 8a above, influenced by both net profit margin and total asset turnover? Support your answer with appropriate analyses.
8c. Compare your results to the industry ratios and describe what NMC should do to improve its position in the market.
NMC Corporation Income Statement for the Calendar Year (January 1 - December 31)
Thousands of dollars (except stock price, earnings per share, and dividends per share)
Net sales
$3000
Cost and expenses:
$2734
EBIT
$266
Less interest expense:
$66
Earnings before taxes
$200
Taxes
$80
Net income before preferred dividends
$120
Dividends to preferred stockholders
$8
Net income available to common stock holders
$112
Per share common stock:
Stock Price
$26.50
Earnings per share
$2.24
Dividends per share
$1.84
Explanation / Answer
8a. Calculate NMC financial ratios
Operating profit ratio = Operating profit / net sales * 100
= 266 / 3000 * 100 = 8.87%
Current ratio = total Current assets / total Current liabilities
= 700 / 300 = 2.33 times
Quick ratio = Quick assets / current liabilities
= current assets - stock / current liabilities
= 700 - 300 / 300 = 1.33 times
Total debt to total assets = long term debt / total assets
= 800 / 2000 = 0.4 or 40%
Return on assets = EBIT / total assets * 100
= 266 / 2000 * 100
= 13.3%
Times interest earned = EBIT / interest expense
= 266 / 66 = 4.03
Price earnings ratio = market per share / earning per share
= 26.50 / 2.24 = 11.83 times.
8b. net profit margin = net profit / net sales * 100
= 120 / 3000 * 100
= 4%
Total assets turnover ratio = net sales / total assets
= 3000 / 2000 = 1.5
8c. Compare your results to the industry ratios and NMC values
Financial ratios NMC values Industry ratios
Operating profit margin 8.87% 15%
Current ratio 2.33 times 2.5 times
Quick ratio 1.33 times 1.0 times
Total debt to total assets 40% 40%
Return on assets 13.3% 9%
Times interest earned 4.03 6.0
Price / Earning ratio 11.83 times 12.5 times.
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