equal $1.5 million; its current liabilities equal S plus marketable securities a

Question

equal $1.5 million; its current liabilities equal S plus marketable securities a. If Tabor's accounts receivable are $562,500, what is its average collection b. If Tabor reduces its davs in receivables (average collection period) to 2s what will be its new level of accounts receivable? c. Tabor's inventory turnover ratio is 9 times. What is the level of t 4-9. (Ratio analysis) The financial statements and industry norms are shown Phe financial statements and industry norms are show a. Compute the financial ratios for Pamplin for 2014 and for 2015t inventories? ts and industry norms are shown belou r Pamplin, Inc both against the industry norms. b. How liquid is the firm? c. Are its managers generating an adequate operating profit on the firm's asson d. How is the firm financing its assets? e. Are its managers generating a good return on equity? Current ratio Acid-test (quick) ratio nventory turnover Average collection period Debt ratio Times interest earned Total asset turnover Fixed-asset turnover Operating profit margin Return on common equity INDUSTRY NORM 5.00 3.00 2 20 90.00 0.33 7.00 0.75 1.00 20% 9% cr Pamplin, Inc. Balance Sheet at 12/31/2014 and 12/31/2015 2014 2015 s 200 450 $ 10 Accounts receivable Current assets Plant and equipment Less accumulated depreciation Net plant and equipment Total Total assets Liabilities and Owners' Equity Accounts payable Notes payable-current (9%) Current liabilities Bonds (833% interest, Total debt Owners' equity common stock $1.200 $1.200 $2.200 2,600 $1.200 $1.400 $ 200 $ 200 S 800 s 150 900 Paid-in capital Retained earnings S 300 600 s 300 600 otal owners' equity Total liabilities and owners equity

Explanation / Answer

(4-9)

(a)

(1) Current assets = Current assets / Current liabilities

2014: 1,200 / 200 = 6

2015: 1,200 / 300 = 4

(2) Quick ratio = (Current assets - Inventory) / Current liability

2014: (1,200 - 550) / 200 = 650 / 200 = 3.25

2015: (1,200 - 625) / 300 = 575 / 300 = 1.92

(3) Inventory turnover = Cost of goods sold / Inventory**

2014: 700 / 550 = 1.27

2015: 850 / 625 = 1.36

(4) Average collections period = 365 x (Accounts receivables**) / Credit Sales

2014: 365 x 450 / (1,200 x 0.85) = 161.03

2015: 365 x 425 / (1,450 x 0.85) = 125.86

(5) Debt ratio = Total debt / Total assets

2014: 800 / 2,400 = 0.33

2015: 900 / 2,600 = 0.35

(6) Times interest earned = Operating profit / Interest expense

2014: 250 / 50 = 5

2015: 360 / 64 = 5.63

(7) Total asset turnover = Sales / Total asset**

2014: 1,200 / 2,400 = 0.5

2015: 1,450 / 2,600 = 0.56

(8) Fixed aset turnover = Sales / Fixed asset** (Net plant & equipment)

2014: 1,200 / 1,200 = 1

2015: 1,450 / 1,400 = 0.86

(9) Operating profit margin = (Operating profit / sales) x 100

2014: (250 / 1,200) x 100 = 20.83%

2015: (360 / 1,450) x 100 = 24.83%

(10) Return on common equity = (Net income / Total owner's equity**) x 100

2014: (120 / 1,600) x 100 = 7.5%

2015: (178 / 1,700) x 100 = 10.47%

**It is customary to take the Average value for these balance sheet items in computing these ratios. But since 2013 values are not available, ratios are computed based on year-specific values only.

(b)

In 2014, the firm has lower current ratio and higher quick ratio compared to industry average, and in 2015 also, the firm has lower current ratio and higher quick ratio compared to industry average. So, the firm is less liquid compared to industry average and also it is losing liquidity in 2015 compared to its liquidity position in 2014.

(c)

In both years, the firm is generating an operating margin higher than industry average and operating margin has increased in 2015 compared to in 2014. Therefore, the firm is comfortably well-off in this aspect.

(d)

In both years, firm's total asset turnover is lower relative to industry turnover, even though there is an increase in firm's asset turnover in 2015. However, fixed asset turnover is equal to industry average in 2014 but in 2015, firm's fixed asset turnover is lower than its 2014 value as well as than industry average.

Note: First 4 sub-parts are answered.

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