Tying the Ratios Together The DuPont equation shows the relationships among asse

Question

Tying the Ratios Together

The DuPont equation shows the relationships among asset management, debt management, and

-Select-liquiditymarketprofitabilityCorrect 1 of Item 1 ratios. Management can use the DuPont equation to analyze ways of improving the firm's performance. Its equation is:

Ratio analysis is important to understand and interpret financial statements; however, sound financial analysis involves more than just calculating and interpreting numbers. -Select-QuantitativeQualitativeForeignCorrect 2 of Item 1 factors also need to be considered.

Quantitative Problem: Rosnan Industries' 2014 and 2013 balance sheets and income statements are shown below.

What is the firm’s 2014 current ratio? Round your answer to two decimal places.

The 2014 current ratio indicates that Rosnan has -Select-insufficientsufficientCorrect 1 of Item 3 current assets to meet its current obligations as they come due.

What is the firm’s 2014 total assets turnover ratio? Round your answer to four decimal places.

Given the 2014 current and total assets turnover ratios calculated above, if Rosnan’s 2014 quick ratio is 1.0 then an analyst might conclude that Rosnan’s fixed assets are managed -Select-efficientlyinefficientlyCorrect 1 of Item 4.

What is the firm’s 2014 debt-to-capital ratio? Round your answer to two decimal places.
%

If the industry average debt-to-capital ratio is 30%, then Rosnan’s creditors have a -Select-smallerbiggerCorrect 1 of Item 5 cushion than indicated by the industry average.

What is the firm’s 2014 profit margin? Round your answer to two decimal places.
%

If the industry average profit margin is 12%, then Rosnan’s lower than average debt-to-capital ratio might be one reason for its high profit margin.
-Select-TrueFalseCorrect 1 of Item 6

What is the firm’s 2014 price/earnings ratio? Round your answer to two decimal places.

Using the DuPont equation, what is the firm’s 2014 ROE? Round your answer to two decimal places.
%

Balance Sheets: 2014 2013 Cash and equivalents $60   $45   Accounts receivable 275   300   Inventories 375   350         Total current assets $710   $695   Net plant and equipment 2,000   1,490   Total assets $2,710   $2,185   Accounts payable $150   $85   Accruals 75   50   Notes payable 110   135         Total current liabilities $335   $270   Long-term debt 450   290   Common stock 1,225   1,225   Retained earnings 700   400   Total liabilities and equity $2,710   $2,185  

Explanation / Answer

1) Current ratio = current assets/ current liabilities = 710/335 = 2.11, It has sufficient current assets to meet the current obligations.

2) Asset turnover ratio= Net Sales/Average total assets = 2000/(2185+2710)/2 = 0.8172. . Fixed assets are managed inefficiently as it should be higher than 1.

3) Debt/Capital = 335+450/(1225+700)= 0.41=> 41% . Creditors have lesser cushion as ratio is higher than industry average.

4) Profit Margin= Net Income/ Net Sales = 353/2000 = 0.1765= 17.65%.. False. actually due to high debt to capital ratio it has higher leverage and magnifies profit.

5) P/E ratio = Share Price/EPS EPS = (353-53)/100= 300/100=3 => 25/3= 8.33

6) ROE= (Net income/Sales)* (Sales/ Total Assets)* (Total Assets/Shareholder's Equity) = 0.1765*0.8172*(2710/1225+700)= 0.2031= 20.31%

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