CONNECT WITH LEARNSMART FOR BODIE: ESSE
CONNECT WITH LEARNSMART FOR BODIE: ESSE
11th Edition
ISBN: 2819440196246
Author: Bodie
Publisher: MCG
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Chapter 14, Problem 1PS
Summary Introduction

(A)

Adequate information:

Cost of goods sold - $2850000

Opening inventory - $480000

Closing inventory - $490000

To calculate inventory turnover ratio

Introduction:

Inventory turnover ratio is a turnover ratio which shows how inventory is managed by dividing cost of goods sold by average inventory. It measures the number of times a company sold its average inventory during a year.

Expert Solution
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Explanation of Solution

Calculation of Inventory turnover ratio

  Inventory turnover ratio =                 Cost of goods sold                                         _________________________________                                          ( opening inventory +closing inventory) / 2                                    =           $2850000                                        ___________________                                        ( $480000+$490000) / 2                                    = 5.87 times

Conclusion

The inventory turnover ratio of Heifer Sports Inc. is 5.87 times.

Summary Introduction

(B)

Adequate information:

Shareholder's equity - $960000

Total Liabilities=  $4300000  $960000 = $3340000

Introduction:

The debt-equity ratio is a financial ratio which measures the financial health of the company. It shows relative contribution of capital by creditors with the contribution by equity shareholders.

Expert Solution
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Explanation of Solution

Calculation of Debt-Equity ratio

  Debtequity ratio = Total liabilities / shareholders equity                           = $3340000 / $960000                           = 3.48

Conclusion

The debt-equity ratio of Heifer Sports Inc. is 3.48.

Summary Introduction

(C)

Adequate information:

Net Income - $410000

Accounts receivables for year ending 2014 - $690000

Accounts receivables for year ending 2015 - $660000

Inventory for year ending 2014 - $480000

Inventory for year ending 2015 - $490000

Accounts payable for year ending 2014 - $450000

Accounts payable for year ending 2015 - $340000

Introduction:

The statement of cash flows shows cash flow from operations is adequate for dividend payments at sustainable levels. It is an evidence for well being of the company.

It is denoted as Net income (including depreciation & amortization) + Changes in working capital.

Expert Solution
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Explanation of Solution

Statement of cash flow from operating activities

    Particulars Amount (In $)
    Net Income

    Changes in accounts receivable ($690000 - $660000)

    Changes in inventories ($480000 - $490000)

    Changes in accounts payable ($450000 - $340000)

    410000

    30000

    (10000)

    110000

    Cash Flow from Operating Activities 540000
Conclusion

The cash flow from operating activities for Heifer Sports Inc. is $540000

Summary Introduction

(D)

Adequate information:

Sales - $5500000

Accounts receivables for year ending 2014 - $690000

Accounts receivables for year ending 2015 - $660000

Introduction:

The average collection period is the average time lag for a business between the date of sale and the date of payment owed in terms of accounts receivables. It is expressed as:

Average collection period = 365 / receivables turnover ratio

Where receivable turnover ratio = Net credit sales / average accounts receivables

Expert Solution
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Explanation of Solution

   Receivables turnover ratio = Net credit sales / Average accounts receivables                                           =       $5500000                                               _________________                                               ( $690000+$660000)/2                                           = 8.1

Now Average collection period

  

Conclusion

The average collection period for Heifer Sports Inc. is 45 days approximately.

Summary Introduction

(E)

Adequate information:

Sales - $5500000

Total assets for year ending 2014 - $4010000

Total assets for year ending 2015 - $4300000

Introduction:

Assets turnover ratio is a financial ratio which measures the ability of the firm to generate sales from its total assets. It is denoted as Net sales / average total assets.

Expert Solution
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Explanation of Solution

  Assets Turnover Ratio =          Net Sales                                         _______________________                                                Average total assets                                       =         $5500000                                          ___________________                                         ( $4010000+$4300000)/2                                       = 1.32 times

Conclusion

The assets turnover ratio for Heifer Sports Inc. is 1.32 times.

Summary Introduction

(F)

Adequate information:

EBIT or Earnings before interest and taxes - $870000

Interest expense - $130000

Introduction:

Interest coverage ratio is a profitability ratio which determines the ability of the company to pay interest on its outstanding debt. It is calculated by dividing earnings before interest and taxes by interest expense.

Expert Solution
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Explanation of Solution

  Interest Coverage ratio = Earnings before interest and taxes                                        _____________________________                                                      Interest Expense                                      = $870000                                        ________                                        $130000                                     = 6.7 times

Conclusion

The interest coverage ratio for Heifer Sports Inc. is 6.7 times.

Summary Introduction

(G)

Adequate information:

EBIT or Earnings before interest and taxes - $870000

Sales - $5500000

Introduction:

Operating profit margin measures the profit a company makes on sales after paying for variable cost of production but before paying interest and taxes. It is calculated by dividing a company's operating profit by its net sales.

Expert Solution
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Explanation of Solution

  Operating profit margin = Operating profit or EBIT                                          _____________________                                                       Net sales                                       = $870000                                          _________    × 100                                           $5500000                                       = 16 %

Conclusion

The operating profit margin for Heifer Sports Inc. is 16%.

Summary Introduction

(H)

Adequate information:

Net Income - $410000

Shareholder's equity - $960000 Introduction: It measures the financial performance of the company by focusing only on the profitability of equity investments. It is expressed as:

  Return on Equity =   Net IncomeShareholder's equity

Expert Solution
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Explanation of Solution

Calculation of return on equity.

  Return on Equity =   Net IncomeShareholder's equity

   = $410000 $960000 ×100 =43%                                                                    

Conclusion

The return on equity for Heifer Sports Inc. is 43%.

Summary Introduction

(I)

Adequate information:

Assets - $4300000

Equity - $960000

EBIT or Earnings before interest and taxes - $870000

Interest expense - $130000

Introduction:

Compound leverage factor is denoted as interest coverage X leverage ratio where

  

Leverage ratio = Assets Debt

_______ = 1 +_______

Equity Equity

Expert Solution
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Explanation of Solution

Calculation of leverage ratio

Leverage ratio = Assets/ equity

                           = $4300000 $960000                         = 4.47

Compound leverage ratio = interest coverage ratio * leverage ratio

  =$870000$130000×447=30%

Summary Introduction

(J)

Adequate information:

Net Income - $410000

Accounts receivables for year ending 2014 - $690000

Accounts receivables for year ending 2015 - $660000

Inventory for year ending 2014 - $480000

Inventory for year ending 2015 - $490000

Accounts payable for year ending 2014 - $450000

Accounts payable for year ending 2015 - $340000

Introduction:

The statement of cash flows shows cash flow from operations is adequate for dividend payments at sustainable levels. It is an evidence for well being of the company.

It is denoted as Net income(including depreciation & amortization) + Changes in working capital.

Expert Solution
Check Mark

Explanation of Solution

Statement of cashflow from operatingactivities

  ParticularsAmount ( In $) Net Income +      Changes in accounts receivable ( $690000  $660000 ) +      Changes in inventories ( $480000  $490000 ) +Changes in accounts payable ( $450000  $340000 ) 410000 30000 ( 10000 ) 110000Cash Flow from Operating Activities540000

Conclusion

The net cash provided by operating activities for Heifer Sports Inc. is $540000

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Financial ratio analysis; Author: The Finance Storyteller;https://www.youtube.com/watch?v=MTq7HuvoGck;License: Standard Youtube License