Problem 3-6 Du Pont Analysis Gardial & Son has an ROA of 9%, a 3% profit margin,
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Question
Problem 3-6
Du Pont Analysis
Gardial & Son has an ROA of 9%, a 3% profit margin, and a return on equity equal to 13%.
What is the company's total assets turnover? Round your answer to two decimal places.
What is the firm's equity multiplier? Round your answer to two decimal places.
Current and Quick Ratios
Ace Industries has current assets equal to $7 million. The company's current ratio is 2.5, and its quick ratio is 2.0.
What is the firm's level of current liabilities? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000
$
What is the firm's level of inventories? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000
$
Problem 3-8
Profit Margin and Debt Ratio
Assume you are given the following relationships for the Haslam Corporation:
Calculate Haslam's profit margin. Do not round intermediate calculations. Round your answer to two decimal places.
%
Calculate Haslam's liabilities-to-assets ratio. Do not round intermediate calculations. Round your answer to two decimal places.
%
Suppose half of Haslam's liabilities are in the form of debt. Calculate the debt-to-assets ratio. Do not round intermediate calculations. Round your answer to two decimal places.
%
Problem 3-9
Current and Quick Ratios
The Nelson Company has $1,650,000 in current assets and $550,000 in current liabilities. Its initial inventory level is $330,000, and it will raise funds as additional notes payable and use them to increase inventory.
How much can Nelson's short-term debt (notes payable) increase without pushing its current ratio below 1.3? Round your answer to the nearest cent.
$
What will be the firm's quick ratio after Nelson has raised the maximum amount of short-term funds? Round your answer to two decimal places.
Problem 3-10
Times-Interest-Earned Ratio
The Morris Corporation has $850,000 of debt outstanding, and it pays an interest rate of 8% annually. Morris's annual sales are $3.4 million, its average tax rate is 40%, and its net profit margin on sales is 3%. If the company does not maintain a TIE ratio of at least 5 to 1, its bank will refuse to renew the loan and bankruptcy will result. What is Morris's TIE ratio? Round intermediate calculations to two decimal places. Round your answer to two decimal places.
Sales/total assets 1.9 Return on assets (ROA) 3% Return on equity (ROE) 9%Explanation / Answer
Problem 3-6
1. Given, ROA = 9%, Profit Margin = 3%, Return on Equity = 13%
ROA = Net Income / Total Assets,
Assets =1, Net Income = 0.09, Sales = 0.09 / 3 x 100 = 3, Equity = 0.09 / 13 x 100 = 0.69
Calculation of Total Assets Turnover = Sales / Total Assets
Assets Turnover = 3 / 1 = 3Times
Equity Multiplier = Total Assets/ Equity
Equtiy Multiplier = 1 / 0.69 = 1.45
2. Given, Current Ratio = 2.5, Quick Ratio = 2, Current Assets = 7,000,000
Current Ratio = Current Assets / Current Liabilities
2.5 = 7,000,000 / X = $2,800,000
Current Liabilites = $2,800,000
Calculation of Level of Inventories:
Quick Ratio = Quick Assets (Current Assets - Inventories) / Current Liabilities
2 = X / 2,800,000 = $5,600,000
Inventories = Total Current Assets - Quick Assets
Inventories = 7,000,000 - 5,600,000 = $1,400,000
Problem 3-8
3. Given, Sales= 1.9, Total Assets= 1, Return on Assets = 3%, ROE =9%
Net Income = 1 x 3% = 0.03, Equity = 0.03 /9 x 100 = 0.33, Liabilities = Total Assets- Equity = 1 - 0.33 = 0.67
Debt = 0.67 / 2 =0.33
Profit Margin = 0.03 / 1.9 x 100 = 1.58%
Liabilties to Assets Ratio = 0.67 / 1 = 67%
Debt to Assets Ratio = 0.33 / 1 =33%
Problem 3-9
4. Given, Current Assets = $1,650,000, Current Liabilties = $550,000, Inventories= $330,000
Current Ratio = 1,650,000 / 550,000 = 3
Target Current Ratio = 1.3
Difference between CA and CL at Target Ratio Level = 0.3
Liablities at Target Ratio = 1,100,000 /0.3 =$3,666,667
Assets = 3,666,667 x 1.3 =$4,766,667
Short Term Debt can be Increased by = $3,116,667
Inventory = 3,116,667 + 330,000 = $3,446,667
Quick Ratio = Current Assets - Inventory / Current Liabilites
Quick ratio = 1,320,000 / 3,666,667 = 0.36
Problem 3-10
5. Given, Debt = 850,000, Interest = 850,000 x 8% =$68,000, Sales = 3,400,000,
Profit on Sales= 3,400,000 x 3% =$ 102,000, tax Rate= 40%
Times- Interest Earned Ratio = EBIT / Interest
Times Interest Earned Ratio = 102,000 / 68,000 = 1.5 Times
So, Bank will not give loan because ratio is below required Ratio.
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