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Thursday, 12 September 2013

Some recent financial statements for Smolira Golf, Inc., follow. SMOLIRA GOLF, INC. Balance Sheets as of December 31, 2013 and 2014 2013 2014 2013 2014 Assets Liabilities and Owners’ Equity Current assets Current liabilities Cash $ 2,851 $ 2,707 Accounts payable $ 2,213 $ 2,720 Accounts receivable 4,707 5,661 Notes payable 1,810 2,236 Inventory 12,718 13,662 Other 102 119 Total $ 20,276 $ 22,030 Total $ 4,125 $ 5,075 Long-term debt $ 14,500 $ 17,260 Owners’ equity Common stock and paid-in surplus $ 44,000 $ 44,000 Fixed assets Accumulated retained earnings 15,714 39,988 Net plant and equipment $ 58,063 $ 84,293 Total $ 59,714 $ 83,988 Total assets $ 78,339 $ 106,323 Total liabilities and owners’ equity $ 78,339 $ 106,323 SMOLIRA GOLF, INC. 2014 Income Statement Sales $ 189,770 Cost of goods sold 127,403 Depreciation 5,213 EBIT $ 57,154 Interest paid 1,310 Taxable income $ 55,844 Taxes 19,545 Net income $ 36,299 Dividends $ 12,025 Retained earnings 24,274 Required: Find the following financial ratios for Smolira Golf (use year-end figures rather than average values where appropriate): (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16). Enter the profitability ratios as percents.) 2013 2014 Short-term solvency ratios a. Current ratio times times b. Quick ratio times times c. Cash ratio times times Asset utilization ratios d. Total asset turnover times e. Inventory turnover times f. Receivables turnover times Long-term solvency ratios g. Total debt ratio times times h. Debt-equity ratio times times i. Equity multiplier times times j. Times interest earned ratio times k. Cash coverage ratio times Profitability ratios l. Profit margin % m. Return on assets % n. Return on equity % Explanation: Here, we need to calculate several ratios given the financial statements. The ratios are: Short-term solvency ratios: a. Current ratio = Current assets / Current liabilities Current ratio2013 = $20,276 / $4,125 Current ratio2013 = 4.92 times Current ratio2014 = $22,030 / $5,075 Current ratio2014 = 4.34 times b. Quick ratio = (Current assets – Inventory) / Current liabilities Quick ratio2013 = ($20,276 – 12,718) / $4,125 Quick ratio2013 = 1.83 times Quick ratio2014 = ($22,030 – 13,662) / $5,075 Quick ratio2014 = 1.65 times c. Cash ratio = Cash / Current liabilities Cash ratio2013 = $2,851 / $4,125 Cash ratio2013 = .69 times Cash ratio2014 = $2,707 / $5,075 Cash ratio2014 = .53 times Asset utilization ratios: d. Total asset turnover = Sales / Total assets Total asset turnover = $189,770 / $106,323 Total asset turnover = 1.78 times e. Inventory turnover = COGS / Inventory Inventory turnover = $127,403 / $13,662 Inventory turnover = 9.33 times f. Receivables turnover = Sales / Receivables Receivables turnover = $189,770 / $5,661 Receivables turnover = 33.52 times Long-term solvency ratios: g. Total debt ratio = (Current liabilities + Long-term debt) / Total assets Total debt ratio2013 = ($4,125 + 14,500) / $78,339 Total debt ratio2013 = .24 times Total debt ratio2014 = ($5,075 + 17,260) / $106,323 Total debt ratio2014 = .21 times h. Debt-equity ratio = (Current liabilities + Long-term debt) / Total equity Debt-equity ratio2013 = ($4,125 + 14,500) / $59,714 Debt-equity ratio2013 = .31 times Debt-equity ratio2014 = ($5,075 + 17,260) / $83,988 Debt-equity ratio2014 = .27 times i. Equity multiplier = 1 + D/E ratio Equity multiplier2013 = 1 + .31 Equity multiplier2013 = 1.31 times Equity multiplier2014 = 1 + .27 Equity multiplier2014 = 1.27 times j. Times interest earned = EBIT / Interest Times interest earned = $57,154 / $1,310 Times interest earned = 43.63 times k. Cash coverage ratio = (EBIT + Depreciation) / Interest Cash coverage ratio = ($57,154 + 5,213) / $1,310 Cash coverage ratio = 47.61 times Profitability ratios: l. Profit margin = Net income / Sales Profit margin = $36,299 / $189,770 Profit margin = .1913, or 19.13% m. Return on assets = Net income / Total assets Return on assets = $36,299 / $106,323 Return on assets = .3414, or 34.14% n. Return on equity = Net income / Total equity Return on equity = $36,299 / $83,988 Return on equity = .4322, or 43.22%

Some recent financial statements for Smolira Golf, Inc., follow.

SMOLIRA GOLF, INC. Balance Sheets as of December 31, 2013 and 2014
	2013		2014			2013		2014
Assets					Liabilities and Owners’ Equity
Current assets					Current liabilities
Cash	$	2,851	$	2,707	Accounts payable	$	2,213	$	2,720
Accounts receivable		4,707		5,661	Notes payable		1,810		2,236
Inventory		12,718		13,662	Other		102		119

Total	$	20,276	$	22,030	Total	$	4,125	$	5,075

					Long-term debt	$	14,500	$	17,260
					Owners’ equity
					Common stock
					and paid-in surplus	$	44,000	$	44,000
Fixed assets					Accumulated retained earnings		15,714		39,988

Net plant and equipment	$	58,063	$	84,293	Total	$	59,714	$	83,988

Total assets	$	78,339	$	106,323	Total liabilities and owners’ equity	$	78,339	$	106,323

SMOLIRA GOLF, INC. 2014 Income Statement
Sales	$	189,770
Cost of goods sold		127,403
Depreciation		5,213

EBIT	$	57,154
Interest paid		1,310

Taxable income	$	55,844
Taxes		19,545

Net income	$	36,299

Dividends	$	12,025
Retained earnings		24,274

Required:

Find the following financial ratios for Smolira Golf (use year-end figures rather than average values where appropriate): (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16). Enter the profitability ratios as percents.)

		2013		2014
Short-term solvency ratios
a.	Current ratio		times		times
b.	Quick ratio		times		times
c.	Cash ratio		times		times
Asset utilization ratios
d.	Total asset turnover				times
e.	Inventory turnover				times
f.	Receivables turnover				times
Long-term solvency ratios
g.	Total debt ratio		times		times
h.	Debt-equity ratio		times		times
i.	Equity multiplier		times		times
j.	Times interest earned ratio				times
k.	Cash coverage ratio				times
Profitability ratios
l.	Profit margin				%
m.	Return on assets				%
n.	Return on equity				%

Explanation:

Here, we need to calculate several ratios given the financial statements. The ratios are:

Short-term solvency ratios:

Current ratio = Current assets / Current liabilities

Current ratio₂₀₁₃ = $20,276 / $4,125

Current ratio₂₀₁₃ = 4.92 times

Current ratio₂₀₁₄ = $22,030 / $5,075

Current ratio₂₀₁₄ = 4.34 times

Quick ratio = (Current assets – Inventory) / Current liabilities

Quick ratio₂₀₁₃ = ($20,276 – 12,718) / $4,125

Quick ratio₂₀₁₃ = 1.83 times

Quick ratio₂₀₁₄ = ($22,030 – 13,662) / $5,075

Quick ratio₂₀₁₄ = 1.65 times

Cash ratio = Cash / Current liabilities

Cash ratio₂₀₁₃ = $2,851 / $4,125

Cash ratio₂₀₁₃ = .69 times

Cash ratio₂₀₁₄ = $2,707 / $5,075

Cash ratio₂₀₁₄ = .53 times

Asset utilization ratios:

Total asset turnover = Sales / Total assets

Total asset turnover = $189,770 / $106,323

Total asset turnover = 1.78 times

Inventory turnover = COGS / Inventory

Inventory turnover = $127,403 / $13,662

Inventory turnover = 9.33 times

Receivables turnover = Sales / Receivables

Receivables turnover = $189,770 / $5,661

Receivables turnover = 33.52 times

Long-term solvency ratios:

Total debt ratio = (Current liabilities + Long-term debt) / Total assets

Total debt ratio₂₀₁₃ = ($4,125 + 14,500) / $78,339

Total debt ratio₂₀₁₃ = .24 times

Total debt ratio₂₀₁₄ = ($5,075 + 17,260) / $106,323

Total debt ratio₂₀₁₄ = .21 times

Debt-equity ratio = (Current liabilities + Long-term debt) / Total equity

Debt-equity ratio₂₀₁₃ = ($4,125 + 14,500) / $59,714

Debt-equity ratio₂₀₁₃ = .31 times

Debt-equity ratio₂₀₁₄ = ($5,075 + 17,260) / $83,988

Debt-equity ratio₂₀₁₄ = .27 times

Equity multiplier = 1 + D/E ratio

Equity multiplier₂₀₁₃ = 1 + .31

Equity multiplier₂₀₁₃ = 1.31 times

Equity multiplier₂₀₁₄ = 1 + .27

Equity multiplier₂₀₁₄ = 1.27 times

Times interest earned = EBIT / Interest

Times interest earned = $57,154 / $1,310

Times interest earned = 43.63 times

Cash coverage ratio = (EBIT + Depreciation) / Interest

Cash coverage ratio = ($57,154 + 5,213) / $1,310

Cash coverage ratio = 47.61 times

Profitability ratios:

Profit margin = Net income / Sales

Profit margin = $36,299 / $189,770

Profit margin = .1913, or 19.13%

Return on assets = Net income / Total assets

Return on assets = $36,299 / $106,323

Return on assets = .3414, or 34.14%

Return on equity = Net income / Total equity

Return on equity = $36,299 / $83,988

Return on equity = .4322, or 43.22%

The most recent financial statements for Shinoda Manufacturing Co. are shown below: Income Statement Balance Sheet Sales $ 64,100 Current assets $ 27,500 Debt $ 43,700 Costs 44,730 Fixed assets 80,400 Equity 64,200 Taxable income $ 19,370 Total $ 107,900 Total $ 107,900 Tax (30%) 5,811 Net Income $ 13,559 Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 42 percent dividend payout ratio. No external equity financing is possible. Required: What is the sustainable growth rate? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).) Sustainable growth rate % Explanation: To calculate the sustainable growth rate, we need to find the ROE and the plowback ratio. The ROE for the company is: ROE = Net income / Equity ROE = $13,559 / $64,200 ROE = .2112 or 21.12% The computation of the plowback ratio: b = 1 – .42 b = .58 The sustainable growth rate is: Sustainable growth rate = [(ROE)(b)] / [1 – (ROE)(b)] Sustainable growth rate = [(.2112)(.58)] / [1 – (.2112)(.58)] Sustainable growth rate = .1396, or 13.96%

The most recent financial statements for Shinoda Manufacturing Co. are shown below:

Income Statement			Balance Sheet
Sales	$	64,100	Current assets	$	27,500	Debt	$	43,700
Costs		44,730	Fixed assets		80,400	Equity		64,200

Taxable income	$	19,370	Total	$	107,900	Total	$	107,900

Tax (30%)		5,811

Net Income	$	13,559

Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 42 percent dividend payout ratio. No external equity financing is possible.

Required:

What is the sustainable growth rate? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).)

Sustainable growth rate

Explanation:

To calculate the sustainable growth rate, we need to find the ROE and the plowback ratio. The ROE for the company is:

ROE	=	Net income / Equity
ROE	=	$13,559 / $64,200
ROE	=	.2112 or 21.12%

The computation of the plowback ratio:

b = 1 – .42

b = .58

The sustainable growth rate is:

Sustainable growth rate	=	[(ROE)(b)] / [1 – (ROE)(b)]
Sustainable growth rate	=	[(.2112)(.58)] / [1 – (.2112)(.58)]
Sustainable growth rate	=	.1396, or 13.96%

The most recent financial statements for Shinoda Manufacturing Co. are shown below: Income Statement Balance Sheet Sales $ 63,600 Current assets $ 25,000 Debt $ 41,200 Costs 44,980 Fixed assets 77,900 Equity 61,700 Taxable income $ 18,620 Total $ 102,900 Total $ 102,900 Tax (35%) 6,517 Net Income $ 12,103 Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 37 percent dividend payout ratio. No external financing is possible. Required: What is the internal growth rate? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).) Internal growth rate % Explanation: To calculate the internal growth rate, we need to find the ROA and the plowback ratio. The ROA for the company is: ROA = Net income / Total assets ROA = $12,103 / $102,900 ROA = .1176 or 11.76% And the plowback ratio is: b = 1 – Payout ratio b = 1 – .37 b = .63 Now, we can use the internal growth rate equation to find: Internal growth rate = [(ROA)(b)] / [1 – (ROA)(b)] Internal growth rate = [.1176(.63)] / [1 – .1176(.63)] Internal growth rate = .0800, or 8.00%

The most recent financial statements for Shinoda Manufacturing Co. are shown below:

Income Statement			Balance Sheet
Sales	$	63,600	Current assets	$	25,000	Debt	$	41,200
Costs		44,980	Fixed assets		77,900	Equity		61,700

Taxable income	$	18,620	Total	$	102,900	Total	$	102,900

Tax (35%)		6,517

Net Income	$	12,103

Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 37 percent dividend payout ratio. No external financing is possible.

Required:

What is the internal growth rate? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).)

Internal growth rate

Explanation:

To calculate the internal growth rate, we need to find the ROA and the plowback ratio. The ROA for the company is:

ROA	=	Net income / Total assets
ROA	=	$12,103 / $102,900
ROA	=	.1176 or 11.76%

And the plowback ratio is:

b = 1 – Payout ratio

b = 1 – .37

b = .63

Now, we can use the internal growth rate equation to find:

Internal growth rate	=	[(ROA)(b)] / [1 – (ROA)(b)]
Internal growth rate	=	[.1176(.63)] / [1 – .1176(.63)]
Internal growth rate	=	.0800, or 8.00%

The Cavo Company has an ROA of 8.7 percent, a profit margin of 8.75 percent, and an ROE of 14.75 percent. Requirement 1: What is the company’s total asset turnover? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) Total asset turnover times Requirement 2: What is the equity multiplier? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) Equity multiplier times Explanation: 1. One equation to calculate ROA is: ROA = (Profit margin)(Total asset turnover) We can solve this equation to find total asset turnover as: 0.087 = 0.0875(Total asset turnover) Total asset turnover = 0.99 times 2. Now, solve the ROE equation to find the equity multiplier which is: ROE = (ROA)(Equity multiplier) 0.1475 = 0.087(Equity multiplier) Equity multiplier = 1.70 times

The Cavo Company has an ROA of 8.7 percent, a profit margin of 8.75 percent, and an ROE of 14.75 percent.

Requirement 1:

What is the company’s total asset turnover? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

Total asset turnover

times

Requirement 2:

What is the equity multiplier? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

Equity multiplier

times

Explanation: 1.

One equation to calculate ROA is:

ROA = (Profit margin)(Total asset turnover)

We can solve this equation to find total asset turnover as:

0.087 = 0.0875(Total asset turnover)

Total asset turnover = 0.99 times

Now, solve the ROE equation to find the equity multiplier which is:

ROE = (ROA)(Equity multiplier)

0.1475 = 0.087(Equity multiplier)

Equity multiplier = 1.70 times

Bethesda Mining Company reports the following balance sheet information for 2013 and 2014. BETHESDA MINING COMPANY Balance Sheets as of December 31, 2013 and 2014 2013 2014 2013 2014 Assets Liabilities and Owners’ Equity Current assets Current liabilities Cash $ 26,530 $ 34,778 Accounts payable $ 194,422 $ 202,111 Accounts receivable 57,781 78,139 Notes payable 89,520 141,088 Inventory 134,324 201,260 Total $ 283,942 $ 343,199 Total $ 218,635 $ 314,177 Long-term debt $ 246,000 $ 182,750 Owners’ equity Common stock and paid-in surplus $ 209,000 $ 209,000 Accumulated retained earnings 136,940 168,456 Fixed assets Net plant and equipment $ 657,247 $ 589,228 Total $ 345,940 $ 377,456 Total assets $ 875,882 $ 903,405 Total liabilities and owners’ equity $ 875,882 $ 903,405 Suppose that the Bethesda Mining Company had sales of $2,166,873 and net income of $108,381 for the year ending December 31, 2014. Required: Calculate ROE using the Du Pont identity. (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16). Enter the profit margin and return on equity as percents.) Profit margin % Total asset turnover times Equity multiplier times Return on equity % Explanation: Profit margin = Net income / Sales = $108,381 / $2,166,873 = 0.0500 or 5.00% Total asset turnover = Sales / Total assets = $2,166,873 / $903,405 = 2.40 Equity multiplier = Total assets / Total equity = $903,405 / $377,456 = 2.39 Using the Du Pont identity to calculate ROE, we get: ROE = (Profit margin)(Total asset turnover)(Equity multiplier) ROE = (0.0500)(2.40)(2.39) ROE = 0.2871 or 28.71%

Bethesda Mining Company reports the following balance sheet information for 2013 and 2014.

BETHESDA MINING COMPANY Balance Sheets as of December 31, 2013 and 2014
		2013		2014			2013		2014
Assets					Liabilities and Owners’ Equity
Current assets					Current liabilities
Cash	$	26,530	$	34,778	Accounts payable	$	194,422	$	202,111
Accounts receivable		57,781		78,139	Notes payable		89,520		141,088
Inventory		134,324		201,260
					Total	$	283,942	$	343,199
Total	$	218,635	$	314,177
					Long-term debt	$	246,000	$	182,750
					Owners’ equity
					Common stock and paid-in surplus	$	209,000	$	209,000
					Accumulated retained earnings		136,940		168,456
Fixed assets
Net plant and equipment	$	657,247	$	589,228	Total	$	345,940	$	377,456

Total assets	$	875,882	$	903,405	Total liabilities and owners’ equity	$	875,882	$	903,405

Suppose that the Bethesda Mining Company had sales of $2,166,873 and net income of $108,381 for the year ending December 31, 2014.

Required:

Calculate ROE using the Du Pont identity. (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16). Enter the profit margin and return on equity as percents.)

Profit margin		%
Total asset turnover		times
Equity multiplier		times
Return on equity		%

Explanation:

Profit margin	= Net income / Sales
	= $108,381 / $2,166,873
	= 0.0500 or 5.00%

Total asset turnover	= Sales / Total assets
	= $2,166,873 / $903,405
	= 2.40

Equity multiplier	= Total assets / Total equity
	= $903,405 / $377,456
	= 2.39

Using the Du Pont identity to calculate ROE, we get:

ROE	=	(Profit margin)(Total asset turnover)(Equity multiplier)
ROE	=	(0.0500)(2.40)(2.39)
ROE	=	0.2871 or 28.71%