6. The following accounts are reported for the Whitewasher Corp. for the end of
ID: 2732221 • Letter: 6
Question
6. The following accounts are reported for the Whitewasher Corp. for the end of fiscal year 2013 (all figures in millions): Cash = $12.0 Accounts Payable = $108.0 Inventories = $180.0 Total Current Assets = $395.0 Short-term Investments = $23.0 Long-term Bonds = $150.0 Net Plant and equipment = $300.0 Total Current Liabilities = $270.0 Accruals = $72.0 Common stock = $50.0 Total Common equity = $275.0 Sales = $1,240 Number of Shares outstanding = 5 million Market price per share = $52.00 Construct a balance sheet for Whitewasher for fiscal year end 2013. Assume that the only missing accounts are accounts receivable, notes payable, and retained earnings. Everything else is assumed to be zero. (10 pts.)
7. Given the information for The Whitewasher Corp. in #8 above, calculate the Quick Ratio, Days Sales Outstanding, Fixed Assets Turnover, Debt ratio, Equity Multiplier and Market to Book ratio. Also, if Whitewasher’s ROE was 11.4% for 2013, what must have been its Profit Margin for 2013? (10 pts.)
8. The Vernon Corp. has $3.1 million in current assets and $1.4 million in current liabilities. It has $600,000 in inventory. Vernon would like to borrow money in the form of notes payable to increase its inventory in preparation for an expansion into a new sales territory. How much money could it borrow before its current ratio drops below 1.8 (the lowest its bank is willing to see it go)? How much total inventory will it have it borrows that amount? (6 pts.)
9. The Vernon Corp. (from above) also has $30 million in total debt on which it pays an interest rate of 8%. It has a profit margin of 5% on annual sales of $70 million. The bank does not lend to anyone with a TIE ratio below 5. Will the bank be willing to lend to Vernon? (6 pts.)
Explanation / Answer
6.
Assets
(in millions)
Liabilities and Stockholder's equity
(in millions)
Cash
$ 12.00
Accounts Payable
$ 108.00
Inventories
$ 180.00
Accruals
$ 72.00
Short-term Investments
$ 23.00
Notes payable
$ 90.00
Accounts receivable
$ 180.00
Total Current Liabilities
$ 270.00
Total current assets
$ 395.00
Long-term Bonds
$ 150.00
Total liabilities
$ 420.00
Net Plant and equipment
$ 300.00
Common stock
$ 50.00
Retained earnings
$ 225.00
Total Common equity
$ 275.00
Total assets
$ 695.00
Total Liabilities and Stockholder's equity
$ 695.00
7.
Quick ratio = (Current assets – Inventories) / Current liabilities = ($395 - $180)/$270 = 0.80
Days sales outstanding = (Accounts receivable / Sales) * 365 days = ($180/$1,240)*365 days = 52.98 days
Fixed asset turnover ratio = Sales/ Fixed assets = $1,240/$300 = 4.13 times
Debt ratio = Long term bonds/Total assets = $150/$695 = 0.22
Equity multiplier = Total assets/Total common equity = $695/$275 = 2.53
Market to book ratio = Market value per share / Book value per share = $52 / ($275/5) = $52/$55 = 0.95
ROE = Profit margin*Asset turnover*equity multiplier
0.114 = Profit margin*4.13*2.53
Profit margin = 0.114/10.4489 = 0.0109 = 1.09%
Assets
(in millions)
Liabilities and Stockholder's equity
(in millions)
Cash
$ 12.00
Accounts Payable
$ 108.00
Inventories
$ 180.00
Accruals
$ 72.00
Short-term Investments
$ 23.00
Notes payable
$ 90.00
Accounts receivable
$ 180.00
Total Current Liabilities
$ 270.00
Total current assets
$ 395.00
Long-term Bonds
$ 150.00
Total liabilities
$ 420.00
Net Plant and equipment
$ 300.00
Common stock
$ 50.00
Retained earnings
$ 225.00
Total Common equity
$ 275.00
Total assets
$ 695.00
Total Liabilities and Stockholder's equity
$ 695.00
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