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CHAPTER 2 PROBLEMS/CORPORATE FINANCE P2-1       The following data apply to A.L. Kaiser & Company ($ million):...

CHAPTER 2 PROBLEMS/CORPORATE FINANCE

P2-1       The following data apply to A.L. Kaiser & Company ($ million):

Cash and equivalents………………………………………………………………………………………………….$100.00

Fixed assets…………………………………………………………………………………………………………………$283.50

Sales$..............................................................................................................................1,000.00

Net income………………………………………………………………………………………………………………….$50.00

Quick ratio…………………………………………………………………………………………………...................2.0x

Current ratio………………………………………………………………………………………………………………..3.0x

DSO ……………………………………………………………………………………………………………………………40.0 days

ROE……………………………………………………………………………………………………………………………..12.0%

Kaiser has no preferred stock—only common equity, current liabilities, and long-term debt.

Find Kaiser’s (1) accounts receivable (A/R), (2) current liabilities, (3) current assets, (4) total assets, (5) ROA, (6) common equity, and (7) long-term debt.

P2-2       Data for Unilate Textiles’ 2015 financial statements are given in Tables 2.1 and 2.2 in the chapter. Compute the 2015 values of the following ratios:

                                Ratio Unilate Industry 2015 Values          

Current ratio……………………………………………………………………………………………………………………3.9x

Days sales outstanding…………………………………………………………………………………………………..33.5 days

Inventory turnover……………………………………………………………………………………………………………7.2x

Fixed assets turnover………………………………………………………………………………………………………..4.1x

Debt ratio…………………………………………………………………………………………………………………………43.0%

Net profit margin……………………………………………………………………………………………………………….4.6%

Return on assets………………………………………………………………………………………………………………..9.9%

b. Briefly comment on Unilate’s 2015 financial position. Can you see any obvious strengths or weaknesses?

c. Compare Unilate’s 2015 ratios with its 2016 ratios, which are presented in Table 2.6. Comment on whether you believe Unilate’s financial position improved or deteriorated during 2016.           

P2-3       Industry Average Ratios              

Current ratio…………………………………2.0x            Fixed assets turnover………………………………………6.0x

Debt ratio……………………………………30.0%            Total assets turnover……………………………………….3.0x

Times interest earned…………………..7.0x             Profit margin on sales………………………………………3.0%

Inventory turnover………………………8.5x             Return on total assets………………………………………9.0%

Day’s sales outstanding………………24.0 days      return on common equity………………………………12.9%

Finnerty Furniture Company: Balance Sheet as of December 31 ($ million)           

Cash$...............................................45                 Accounts payables…………………………………………..$45

Marketable securities…………………..33                    Notes payable…………………………………………………..45

Net receivables…………………………….66                     other current liabilities……………………………………..21

Inventories………………………………….159                     Total current liabilities………………………………….$111

Total current assets…………………..$303                      Long-term debt………………………………………………24

                                                                                             Total liabilities………………………………………………$135

Gross fixed assets……………………….225                     Common stock……………………………………………….114

   Less depreciation……………………….6(78)                                  Retained earnings………………………………………….201

   Net fixed assets………………………….$147                   Total stockholders’ equity……………………………..$315

   Total assets………………………………..$450                  Total liabilities and equity………………………………$450

Finnerty Furniture Company: Income Statement for Year Ended December 31 ($ million)             

Net sales………………………………………………………………………………………………………………………..$795.0

Cost of goods sold………………………………………………………………………………………………………….(660.0)

Gross profit…………………………………………………………………………………………………………………….$135.0

Selling expenses………………………………………………………………………………………………………………(73.5)

Depreciation expense……………………………………………………………………………………………………. (12.0)

Earnings before interest and taxes (EBIT)…………………………………………………………………………$49.5

Interest expense……………………………………………………………………………………………………………….(4.5)

  Earnings before taxes (EBT)…………………………………………………………………………………………….. $45.0

  Taxes (40%)……………………………………………………………………………………………………………………….(18.0)

  Net income…………………………………………………………………………………………………………………………$27.

a. Calculate all the ratios that appear for the industry for Finnerty Furniture Company and perform an analysis of the financial health of the company when compared to the overall industry.

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Homework Answers

Answer #1

DSO = (Accounts Receivable/Total Sales) x 365

40 = (AR/1000) x 365

Accounts Receivable = $109.59

Quick Ration = (Cash & Cash Equivalents + Accounts Receivable)/Current Liabilities

2 = (100+109.59)/Current Liabilities

Current Liabilities = 104.795

Current Ratio = Current Assets/Current Liabilities

3 = Current Assets/104.795

Current Assets = $314.39

Total Assets = Fixed Assets + Current Assets = 283.50+314.39 = $597.89

Return on Assets = (Net Income/Total Assets) x 100 = 8.36%

Return on Equity = Net Income/Common Equity

.12 = 50/Common Equity

Common Equity = $416.67

Long term debt = Total assets - (Common Equity+Current Liabilites) = $76.425

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