Corporate Finance
12th Edition
ISBN: 9781259918940
Author: Ross, Stephen A.
Publisher: Mcgraw-hill Education,
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Suppose a company has a days sales outstanding (DSO) that is considerably higher than itsindustry average. If the company could reduceits accounts receivable to the point where itsDSO was equal to the industry average withoutaffecting its sales or its operating costs, howwould this affect (a) its free cash flow, (b) itsreturn on common equity, (c) its debt ratio,(d) its times-interest-earned ratio, (e) its EBITDAcoverage ratio, (f) its price/earnings ratio, and(g) its market/book ratio?
Now it's time for you to practice what you've learned.
Suppose that you are given the following data for Niles Company:
Note: The data and calculations are based on a 365-day year.
Cash and equivalents
Fixed assets
Sales
Net income
Current liabilities
Current ratio
DSO
ROE
Accounts receivable
Current assets
Total assets
Fill in the table with the appropriate values. (Hint: Use the formulas you learned in the video and exercises in the previous stage of the problem.)
$
ROA
Common equity $
Quick ratio
$787,500
$2,275,000
$8,750,000
$393,750
$840,000
$
$
2.5
18.25
12.00%
Fill in the table with the appropriate values. (Hint: Use the formulas you learned in the video and exercises in the previous stage of the problem.)
Hint: Recall that Current Assets = Cash and Equivalents + Accounts Receivable + Inventories.
A firm has been experiencing low profitability in recent years. Perform an analysis of the firm's financial position using the DuPont equation. The firm has no lease payments but has a $1 million
sinking fund payment on its debt. The most recent industry average ratios and the firm's financial statements are as follows:
Current ratio
Debt-to-capital ratio
Times interest earned
EBITDA coverage
Inventory turnover
Cash and equivalents
Accounts receivables
Inventories
Total current assets
Gross fixed assets
Days sales
outstandinga
aCalculation is based on a 365-day year.
Balance Sheet as of December 31, 2021 (millions of dollars)
$78
Accounts payable
74
147
$299
Less depreciation
Industry Average Ratios
Net fixed assets.
Total assets
2x
15%
5x
10x
9x
25days
Fixed assets turnover
Total assets turnover
Profit margin
Return on total assets
Return on common
equity
Return on invested
capital
216
55
$161
$460
Other current liabilities
Notes payable
Total current liabilities
Long-term debt
Total…
Chapter 2 Solutions
Corporate Finance
Ch. 2 - Prob. 1CQCh. 2 - Prob. 2CQCh. 2 - Prob. 3CQCh. 2 - Prob. 4CQCh. 2 - Prob. 5CQCh. 2 - Cash Flow from Assets Why is it not necessarily...Ch. 2 - Operating Cash flow Why is it not necessarily bad...Ch. 2 - Net Working Capital and Capital Spending Could a...Ch. 2 - Cash Flow to Stockholders and Creditors Could a...Ch. 2 - Prob. 10CQ
Ch. 2 - Building a Balance Sheet Alesha, Inc., has current...Ch. 2 - Building an Income Statement Gia, Inc, has sales...Ch. 2 - Market Values and Book Values Klingon Cruisers,...Ch. 2 - Calculating Taxes Terri Simmons is single and had...Ch. 2 - Calculating OCF Sheaves, Inc., has sales of...Ch. 2 - Prob. 6QAPCh. 2 - Prob. 7QAPCh. 2 - Prob. 8QAPCh. 2 - Prob. 9QAPCh. 2 - Prob. 10QAPCh. 2 - Cash Flows Ritter Corporations accountants...Ch. 2 - Financial Cash Flows The Stancil Corporation...Ch. 2 - Building an Income Statement During the year, the...Ch. 2 - Prob. 14QAPCh. 2 - Prob. 15QAPCh. 2 - Residual Claims Stark: Inc., is obligated to pay...Ch. 2 - Net Income and OCF During 2019, Rainbow Umbrella...Ch. 2 - Prob. 18QAPCh. 2 - Prob. 19QAPCh. 2 - Prob. 20QAPCh. 2 - Prob. 21QAPCh. 2 - Prob. 22QAPCh. 2 - Cash Flows You are researching Time Manufacturing...Ch. 2 - Prob. 24QAPCh. 2 - Prob. 1MCCh. 2 - Prob. 2MCCh. 2 - Prob. 3MC
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- A firm has been experiencing low profitability in recent years. Perform an analysis of the firm's financial position using the DuPont equation. The firm has no lease payments but has a $1 million sinking fund payment on its debt. The most recent industry average ratios and the firm's financial statements are as follows: Industry Average Ratios Current ratio Debt-to-capital ratio Times interest earned EBITDA coverage Inventory turnover Cash and equivalents Accounts receivables Inventories Total current assets Gross fixed assets Less depreciation Days sales outstandinga aCalculation is based on a 365-day year. Balance Sheet as of December 31, 2021 (millions of dollars) $78 Accounts payable Other current liabilities Net fixed assets Total assets Gross profit Selling expenses EBITDA 2x 15% 5x 10x 9x 25days Taxes (25%) Net income 74 147 $299 216 55 $161 $460 Depreciation expense Earnings before interest and taxes (EBIT) Interest expense Earnings before taxes (EBT) Fixed assets turnover…arrow_forwardA firm has $600,00 in current assets and $150,000 in current liabilities. If it uses cash to pay $50,000 in accounts recievalbes will the current ratio increase or decraese? Will the net working capital increase or decrease or stay the same? Why?arrow_forwardA firm has been experiencing low profitability in recent years. Perform an analysis of the firm's financial position using the DuPont equation. The firm has no lease payments but has a $1 million sinking fund payment on its debt. The most recent Industry average ratios and the firm's financial statements are as follows: Current ratio Debt-to-capital ratio Times interest earned EBITDA coverage Inventory turnover Days sales outstanding *Calculation is based on a 365-day year. Cash and equivalents Accounts receivables Inventories Total current assets Gross fixed assets Less depreciation Industry Average Ratios Net fixed assets Total assets 2x 15% 5x 10x 9x Balance Sheet as of December 31, 2021 (millions of dollars) $ 78 Accounts payable 74 Other current liabilities Notes payable Taxes (25%) Net Income 25days 147 $299 216 55 $161 $460 Fixed assets turnover Profit margin Total assets turnover Equity multiplier Total assets turnover Profit margin Return on total assets Return on common…arrow_forward
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