a)
To determine: Required ratios.
a)
Explanation of Solution
Calculation of current ratio:
Hence, current ratio is 2.5
Calculation of Acid-test ratio:
Hence, acid-test ratio is 1.38
Calculation of times interest earned:
Hence, times interest earned is 8.33
Calculation of inventory turnover:
Hence, inventory turnover 3.11
Calculation of total assets turnover:
Hence, total assets turnover is 1.36
Calculation of operating profit margin:
Hence, operating profit margin is 11.1%
Calculation of days in receivables:
Hence, collection period is 48.67 days
Calculation of operating return on assets:
Hence, operating return on assets is 15.15%
Calculation of debt ratio:
Hence, debt ratio is 36.4%
Calculation of return on equity:
Hence, return on equity is 16.57%
Calculation of fixed assets turnover:
Hence, fixed assets turnover is 3.46
b)
1)
To discuss: Liquidity of the firm.
b)
1)
Explanation of Solution
Company A, is certainly less liquid than industry’s average company. Both the current ratio and the acid test ratio are lower, suggesting that Company A has less liquid assets than the market in comparison to the maturing commitments of the company (current liabilities).
In fact, both the receivable accounts and the inventory move more slowly through the working capital process than is true for the industry’s typical company.
b)
2)
To discuss: Whether company managers are generating attractive operating profits on its assets.
b)
2)
Explanation of Solution
In terms of generating returns on the company’s assets, management performs better than the industry 15.2% operating
Company A 11.1% against the industry 8%, thus, the company keeps its costs and expenses lower per sales dollar. On the other hand, as shown by the lower total asset turnover, Company A is less effective in controlling its assets.
b)
3)
To discuss: Ways should the firm financing its assets.
b)
3)
Explanation of Solution
The company uses significantly more leverage than the industry’s average company, indicating a little more financial risk to Company A, but higher equity returns than normal.
Two factors affect the interest rate obtained ratio,
- 1) The operating profit level and,
- 2) The debt level.
Company A has a higher return on assets which raises the interest rate earned, but requires more debt, resulting in higher interest costs and a lower interest rate earned ratio.
Company A’s case, the net results is a higher rate of interest earned, that is, the higher operating return on assets increases the time interest earned more than the higher amount of debt decreases it.
b)
4)
To discuss: Whether managers generating the good returns on equity.
b)
4)
Explanation of Solution
Company A delivers higher equity returns than the industry, resulting from 1) a higher operating return on assets, and 2) a higher amount of debt financing.
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Chapter 4 Solutions
FOUNDATIONS OF FINANCE-MYFINANCELAB
- Analyze and compare Bank of America and Wells Fargo Bank of America Corporation (BAC) and Wells Fargo Company (WFC) are two large financial services companies. The following data (in millions) were taken from a recent years financial statements for both companies: a. Compute the earnings per share for both companies. Round to the nearest cent. a. Which company appears to be more profitable on an earnings-per-share basis? b. Which company would you expect to have the larger quoted market price?arrow_forwardIf given the opportunity, in which of the firms would you invest based on the result of your analysis of both companies and the comparison with the industry? If you would not invest, explain your reasons according to the results obtained. Company Name: Year 2018 Chemicals and Allied Products Industry Ratios ………….. Solvency or Debt Ratios Merck J&J 2018 Debt ratio 0.67 0.61 0.47 Debt-to-equity ratio 0.93 0.51 0.38 Interest coverage ratio 12.27 18.91 -9.43 Liquidity Ratios Current ratio 1.17 1.47 3.47 Quick ratio 0.92 1.16 2.12 Cash ratio 0.40 0.63 2.24 Profitability Ratios Profit margin 14.64% 18.75% -93.4% ROE (Return on equity), after tax 23.03% 25.60% -248.5 ROA (Return on assets) 7.49% 10.00% -146.5 Gross margin 68.06% 66.79% 55.3% Operating margin (Return on sales) 19.62% 24.27%…arrow_forwardProfitability ratios help in the analysis of the combined impact of liquidity ratios, asset management ratios, and debt management ratios on the operating performance of a firm. Your boss has asked you to calculate the profitability ratios of Diusitech Inc. and make comments on its second-year performance as compared with its first-year performance. The following shows Diusitech Inc.'s income statement for the last two years. The company had assets of $8,225 million in the first year and $13,157 million in the second year. Common equity was equal to $4,375 million in the first year, and the company distributed 100% of its earnings out as dividends during the first and the second years. In addition, the firm did not issue new stock during either year. Diusitech Inc. Income Statement For the Year Ending on December 31 (Millions of dollars) Year 2 Year 1 4,445 1,120 222 1,342 3,103 310 2,793 698 2,095 Net Sales Operating costs except depreciation and amortization Depreciation and…arrow_forward
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- Profitability ratios help in the analysis of the combined impact of liquidity ratios, asset management ratios, and debt management ratios on the operating performance of a firm. Your boss has asked you to calculate the profitability ratios of Spandust Industries Inc. and make comments on its second-year performance as compared with its first-year performance. The following shows Spandust Industries Inc.’s income statement for the last two years. The company had assets of $7,050 million in the first year and $11,278 million in the second year. Common equity was equal to $3,750 million in the first year, and the company distributed 100% of its earnings out as dividends during the first and the second years. In addition, the firm did not issue new stock during either year. Spandust Industries Inc. Income Statement For the Year Ending on December 31 (Millions of dollars) Year 2 Year 1 Net Sales 3,810 3,000 Operating costs except depreciation and amortization 1,855 1,723…arrow_forwardHere you will find some income statements and balance sheets for Sears Holdings (SHLD) and Taget Corp (TGT). Assume that you are a financial manager at Sear and want to compare your firm’s situation with that of Target. Calculate represenatative ratios for liquidity, asset management efficiency, financial leverage (capital structure), and profitability for both Sears and Target. How would you summarize the financial performance of Sears compared to target (its benchmark firm)? Include Sears and Targets current ratio, acid-test ratio, average collection period, accounts receivable turnover, inventory turnover, debt ratio, timed interest earned, total asset turnover, fixed asset turnover, gross profit margin, operating profit margin, net profit margin, operating return on assets, and return on equity.arrow_forward5. Profitability ratios Profitability ratios help in the analysis of the combined impact of liquidity ratios, asset management ratios, and debt management ratios on the operating performance of a firm. Your boss has asked you to calculate the profitability ratios of Diusitech Inc. and make comments on its second-year performance as compared with its first-year performance. The following shows Diusitech Inc.'s income statement for the last two years. The company had assets of $4,700 million in the first year and $7,518 million in the second year. Common equity was equal to $2,500 million in the first year, and the company distributed 100% of its earnings out as dividends during the first and the second years. In addition, the firm did not issue new stock during either year. Diusitech Inc. Income Statement For the Year Ending on December 31 (Millions of dollars) Year 2 Year 1 2,540 2,000 1,610 1,495 127 80 1,737 803 80 723 181 542 Net Sales Operating costs except depreciation and…arrow_forward
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