s 296 118 cah sakes with the semaring 83 beng t Evaluating current and pro forma
ID: 2729833 • Letter: S
Question
s 296 118 cah sakes with the semaring 83 beng t Evaluating current and pro forma profitability) (Financial ratios-investment 4-10.e annual sales for Salco, Inc. were $4.,5 million last year. All sales are on r The firm's end-of-year balance sheet was as follows: credit Current assets Net fixed assets 500,000 Liabilities 1,000,000 900.000 Owners' equity The firm's income state s income statement for the year was as follows: Sales Cast of goods sold Gross profit Operating expenses Operating profits Interest expense Earnings before taxes income taxes (50%) $4,500,000 13,500,000) $1,000,000 (500,000) 500,000 (100,000) 400,000 (200,000) Net income a. Calculate Salco's total asset turnover, operating profit margin, and operating a. return on assets. b. Salco plans to renovate one of its plants, which will require an added invest- ment in plant and equipment of $1 million. The firm will maintain its pres- ent debt ratio of 0.5 when financing the new investment and expects sales to remain constant. The operating profit margin will rise to 13 percent.What will be the new operating return on assets for Salco after the plant's renovation? c. Given that the plant renovation in part (b) occurs and Salco's interest expense rises by $50,000 per year, what will be the return earned on the common stock- holders' investment? Compare this rate of return with that earned before the renovation. HitFinancial analysis) The T. P. Jarmon Company manufactures and sells a line of exclusive sportswear. The firm's sales were $600,000 for the year just ended, and its total assets exceeded $400,000. The company was started by Mr. Jarmon just 10 years ago and has been profitable eve for the firm, Brent Vehlim, has decided to seek a line of credit totaling $80,000 from the firm's bank. In the past, the company has relied on its suppliers to financea lar arge part of its needs for inventory. However, in recent months tight moneyExplanation / Answer
Ratio
Formula
Calculation
Industry Average
Evaluation
Current Ratio
Current Assets/Current Liabilities
138300/75000
=1.84
1.80
Satisfied
Acid Test Ratio
Current assets-Inventory/current Liabilities
138300-8400/75000=.72
.90
poor
Debt Ratio
Total Debt/Total Assets
225000/408300=.55
.50
Satisfied
Times Interest Earned
Net operating income/Interest Expense
80000/10000=8
10
poor
Average Collection Period
Accounts Receivable/Sales per day
33000*365/600000=20.1 days
20
satisfied
Operating Income Return on investment
Operating Income/Total Assets
80000/408000=19.6%
16.8%
Good
Operating Profit Margin
Operating Income/Sales
80000/600000=13.3%
14%
Satisfied
Gross Profit Margin
Gross Profit/sales
140000/600000=23.3%
25%
Satisfied
Total Asset Turnover
Sales/Total Assets
600000/408300=1.47
1.2
Good
Fixed Asset Turnover
Sales/Net Fixed Assets
600000/270000=2.22
1.8
Good
Return On Equity
Common Earnings Available/Common Investment
42900/183300=23.4%
12%
Good
B)Liquidity Ratios and financial rations will be considered by the bank to decide whether the Line of credit should be extended or no . However the profitability ratio also can be considered by the credit manager .
C) T.P JAMON AND CO
STATEMENT OF CASH FLOW FOR THE YEAR ENDING DECEMBER 31,2015
Cash Flows From Operating Activities
PARTICULARS
Amount in $
Amount in $
Net Income
42900
Adjustments
Deprecation
30000
Decrease in Accounts Receivable
9000
Increase In Inventory
(33000)
Decrease in prepaid rent
100
Increase in accounts payable
9000
Decrease in accruals
(1000)
14100
Net
Cash Flows From Operating Activities
57000
Cash Flow From Investing Activities
Purchase of Marketable securities
(200)
Purchase of Plan and Equipment
(14000)
Net Cash Flow From Investing Activities
(14200)
Cash Flow From Financing Activities
Decrease in Notes Payable
(2000)
Decrease in Long Term Debt
(10000)
Payment of Dividends
(31800)
Net Cash Flow From Financing Activities
(43800)
Net Decrease In Cash Flow
57000-14200-43800
$1000
D) From the above financial ratios it can be interpreted that The firm is profitable and with special conditions put forward by the bank in sanctioning the loan loan can be provided
Ratio
Formula
Calculation
Industry Average
Evaluation
Current Ratio
Current Assets/Current Liabilities
138300/75000
=1.84
1.80
Satisfied
Acid Test Ratio
Current assets-Inventory/current Liabilities
138300-8400/75000=.72
.90
poor
Debt Ratio
Total Debt/Total Assets
225000/408300=.55
.50
Satisfied
Times Interest Earned
Net operating income/Interest Expense
80000/10000=8
10
poor
Average Collection Period
Accounts Receivable/Sales per day
33000*365/600000=20.1 days
20
satisfied
Operating Income Return on investment
Operating Income/Total Assets
80000/408000=19.6%
16.8%
Good
Operating Profit Margin
Operating Income/Sales
80000/600000=13.3%
14%
Satisfied
Gross Profit Margin
Gross Profit/sales
140000/600000=23.3%
25%
Satisfied
Total Asset Turnover
Sales/Total Assets
600000/408300=1.47
1.2
Good
Fixed Asset Turnover
Sales/Net Fixed Assets
600000/270000=2.22
1.8
Good
Return On Equity
Common Earnings Available/Common Investment
42900/183300=23.4%
12%
Good
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