1. US Republic Corporation balance sheet, December 31, 20X3 ASSETS LIABILITIES A
ID: 2724678 • Letter: 1
Question
1. US Republic Corporation balance sheet, December 31, 20X3
ASSETS
LIABILITIES AND SHAREHOLDERS’ EQUITY
Cash
$ 1,000,000
Notes payable, bank
$ 4,000,000
Accounts receivable
5,000,000
Accounts payable
2,000,000
Inventory
7,000,000
Accrued wages and taxes
2,000,000
Fixed assets, net
17,000,000
Long-term debt
12,000,000
Preferred stock
4,000,000
Common stock
2,000,000
Retained earnings
4,000,000
Total assets
$30,000,000
Total liabilities and
shareholders’ equity
$30,000,000
US Republic Corporation statement of income and retained earnings, year ended December 31, 20X3
Net sales
Credit
$16,000,000
Cash
4,000,000
Total
$20,000,000
Cost and Expenses
Cost of goods sold
$12,000,000
Selling, general, and administrative
expenses
2,200,000
Depreciation
1,400,000
Interest
1,200,000
$16,800,000
Net income before taxes
$ 3,200,000
Taxes on income
1,200,000
Net income after taxes
$ 2,000,000
Less: Dividends on preferred stock
240,000
Net income available to common
shareholders
$ 1,760,000
Add: Retained earnings at 1/1/X3
2,600,000
Subtotal
$ 4,360,000
Less: Dividends paid on common stock
360,000
Retained earnings 12/31/X3
$ 4,000,000
a. Fill in the 20X3 column in the table that follows.
US Republic Corporation
RATIO
20X1
20X2
20X3
INDUSTRYNORMS
1. Current ratio
250%
200%
225%
2. Acid-test ratio
100%
90%
110%
3. Receivable turnover
5.0×
4.5×
6.0×
4. Inventory turnover
4.0×
3.0×
4.0×
5. Long-term debt/total capitalization
35%
40%
33%
6. Gross profit margin
39%
41%
40%
7. Net profit margin
17%
15%
15%
8. Return on equity
15%
20%
20%
9. Return on investment
15%
12%
12%
10. Total asset turnover
0.9×
0.8×
1.0×
11. Interest coverage ratio
5.5×
4.5×
5.0×
b. Evaluate the position of the company using information from the table.
Cite specific ratio levels and trends as evidence.
c. Indicate which ratios would be of most interest to you and what your
decision would be in each of the following situations:
(i) US Republic wants to buy $500,000 worth of merchandise
inventory from you, with payment due in 90 days.
(ii) US Republic wants you, a large insurance company, to pay off its
note at the bank and assume it on a 10-year maturity basis at a
current rate of 14 percent.
(iii) There are 100,000 shares outstanding, and the stock is selling for
$80 a share. The company offers you 50,000 additional shares at
this price.
ASSETS
LIABILITIES AND SHAREHOLDERS’ EQUITY
Cash
$ 1,000,000
Notes payable, bank
$ 4,000,000
Accounts receivable
5,000,000
Accounts payable
2,000,000
Inventory
7,000,000
Accrued wages and taxes
2,000,000
Fixed assets, net
17,000,000
Long-term debt
12,000,000
Preferred stock
4,000,000
Common stock
2,000,000
Retained earnings
4,000,000
Total assets
$30,000,000
Total liabilities and
shareholders’ equity
$30,000,000
US Republic Corporation statement of income and retained earnings, year ended December 31, 20X3
Net sales
Credit
$16,000,000
Cash
4,000,000
Total
$20,000,000
Cost and Expenses
Cost of goods sold
$12,000,000
Selling, general, and administrative
expenses
2,200,000
Depreciation
1,400,000
Interest
1,200,000
$16,800,000
Net income before taxes
$ 3,200,000
Taxes on income
1,200,000
Net income after taxes
$ 2,000,000
Less: Dividends on preferred stock
240,000
Net income available to common
shareholders
$ 1,760,000
Add: Retained earnings at 1/1/X3
2,600,000
Subtotal
$ 4,360,000
Less: Dividends paid on common stock
360,000
Retained earnings 12/31/X3
$ 4,000,000
Explanation / Answer
Solution 1: The solution is computed with the formulas shown below :
Solution 2:
Analysis :
It is very clear when compared to the industry standard the the company's liquidity is not meeting the industry standards as it is lesser than the industry standarads and higher the current ratio more the liquiduty of the company
It is also observable that the profit margin is upto the industry standard and hence the company has a good operqational efffciency as it is able to perform better over the years but the net profit margin is reduced from 15% to 10 % which clearly shows that there is a increase in the indirect expenses and hence the company has to focus more on reducing the indirect cost
The long term debt / capitalization has increased from 40% to 54.55% and more than the industry norms which clearly shows that the company has expandeed and raised funds and hence more debts are issued and so the indirect cost in increased because of which the net profit margin has reduced from 15% to 10 %
Solution 3:
The ratio which would interst all the three scenerio would be :
1) inventory turnver ratio , accounts receivable ratio because both the ratio willl help in understanding that when the stock is again converted to cash and whwe the payment is received by the company from its customer
2) The long term debt /market cap ratio so that it maintains the industry standard and the company has not much of risk exposure
3) Debt / Equity ratio and also the profit of the company
RATIO 20X1 20X2 Formula 20X3 in percentage 1. Current ratio 250% 200% current asset/current liabilities 162.5 2. Acid-test ratio 100% 90% Cuurent asset- inventories /Current liabilities 75 3. Receivable turnover 5.0× 4.5× Total revenue /average receivables 4 4. Inventory turnover 4.0× 3.0× Total revenue /average inventory 2.86 5. Long-term debt/total capitalization 35% 40% 54.55 6. Gross profit margin 39% 41% Gross profit /Total Revenue 40 7. Net profit margin 17% 15% Net profit /Total Revenue 10 8. Return on equity 15% 20% Net profit /Total equity 20 9. Return on investment 15% 12% Net profit /Total investment 6.67 10. Total asset turnover 0.9× 0.8× Total sales /Total asset 0.67 11. Interest coverage ratio 5.5× 4.5× EBIT/Interest expense 3.67Related Questions
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