financial leverage, and degree of combined leverage. (Use footnote 2 10r D and f

ID: 2652862 • Letter: F

Question

financial leverage, and degree of combined leverage. (Use footnote 2 10r D and footnote 3 for DCL) Use the information in parts a and b to discuss the risk associated with this com- e. pany. Given the risk, decide whether a bank should loan funds to Ryan Boot. Ryan Boot Company is trying to plan the funds nceded for 2014. The management anticipates an increase in sales of 20 percent, which can be absorbed without increas- ing fived assets d. What would be Ryan's needs for external funds based on the current balance sheet? Compute RNF (required new funds). Notes payable (current) and bonds are not part of the liability calculation. What would be the required new funds if the company brings its ratios into line with the industry average during 2014? Specifically examine receivables turr- over, inventory turnover, and the profit margin. Use the new values to recompute the factors in RNF (assume liabilities stay the same). e. RYAN BOOT COMPANY

Explanation / Answer

Answer: A

Ryan Boot Company

Analysis Ratios

Ryan Boot

Industry

Profit margin

$292,500 ÷ 7,000,000

4.18%

5.75%

Return on assets

$292,500 ÷ 8,130,000

3.60%

6.90%

Return on equity

$292,500 ÷ 2,880,000

10.16%

9.20x

Receivables turnover

$7,000,000 ÷ 3,000,000

2.33x

4.35x

Inventory turnover

$7,000,000 ÷ 1,000,000

7.00x

6.50x

Fixed asset turnover

$7,000,000 ÷ 4,000,000

1.75x

1.85x

Total asset turnover

$7,000,000 ÷ 8,130,000

0.86x

1.20x

Current ratio

$4,130,000 ÷ 2,750,000

1.50x

1.45x

Quick ratio

$3,130,000 ÷ 2,750,000

1.14x

1.10x

Debt to total assets

$5,250,000 ÷ 8,130,000

64.58%

25.05%

Interest coverage

$700,000 ÷ 250,000

2.80x

5.35x

Fixed charge coverage

($700,000 + $200,000)/$250,000 + $200,000 + ($65,000/ (1-.35) = $900,000/$550,000

1.64x

4.62x

Answer:b contribution margin.

CM = Sales – Variable expenses

CM = $7,000,000 – 4,200,000

CM = $2,800,000

Contribution Margin Ratio = CM ÷ Sales

CMR = $2,800,000 ÷ 7,000,000

CMR = 40%

BEP = Total Fixed Assets ÷ CMR

BEP = $2,100,000 ÷ 40%

BEP = $5,250,000 in sales dollars

Cash BEP = same as above accept the non cash expenses would be removed from the fixed assets per the instructor help.

Cash BEP = (TFA – Non Cash expenses) ÷ CMR

Cash BEP = ($2,100,000 – 500,000) ÷ 40%

Cash BEP = $1,600,000 ÷ 40%

Cash BEP = $4,000,000