Question

Tying the Ratios Together The DuPont equation shows the relationships among asset management, debt management, and ratios. Management can use the DuPont equation to analyze ways of improving the firm's performance. Its equation is: Ratio analysis is important to understand and interpret financial statements; however, sound financial analysis involves more than just calculating and interpreting numbers. factors also need to be considered. Quantitative Problem: Rosnan Industries' 2014 and 2013 balance sheets and income statements are shown below. Balance Sheets: 2014 2013 Cash and equivalents $110 $95 Accounts receivable 275 300 Inventories 375 350 Total current assets $760 $745 Net plant and equipment 2,000 1,490 Total assets $2,760 $2,235 Accounts payable $150 $85 Accruals 75 50 Notes payable 160 185 Total current liabilities $385 $320 Long-term debt 450 290 Common stock 1,225 1,225 Retained earnings 700 400 Total liabilities and equity $2,760 $2,235 Income Statements: 2014 2013 Sales $2,000 $1,500 Operating costs excluding depreciation 1,250 1,000 EBITDA $750 $500 Depreciation and amortization 100 75 EBIT $650 $425 Interest 62 45 EBT $588 $380 Taxes (40%) 235 152 Net income $353 $228 Dividends paid $53 $48 Addition to retained earnings $300 $180 Shares outstanding 100 100 Price $25.00 $22.50 WACC 10.00% What is the firm’s 2014 current ratio? Round your answer to two decimal places. The 2014 current ratio indicates that Rosnan has current assets to meet its current obligations as they come due. What is the firm’s 2014 total assets turnover ratio? Round your answer to four decimal places. Given the 2014 current and total assets turnover ratios calculated above, if Rosnan’s 2014 quick ratio is 1.0 then an analyst might conclude that Rosnan’s fixed assets are managed . What is the firm’s 2014 debt-to-capital ratio? Round your answer to two decimal places. % If the industry average debt-to-capital ratio is 30%, then Rosnan’s creditors have a cushion than indicated by the industry average. What is the firm’s 2014 profit margin? Round your answer to two decimal places. % If the industry average profit margin is 12%, then Rosnan’s lower than average debt-to-capital ratio might be one reason for its high profit margin. What is the firm’s 2014 price/earnings ratio? Round your answer to two decimal places. Using the DuPont equation, what is the firm’s 2014 ROE? Round your answer to two decimal places. %

Answer 1

1. firm’s 2014 current ratio = Total Current assets/Total Current liabilities = $760/$385 = 1.97

2. firm’s 2014 total assets turnover ratio = Net sales/Average total assets

Average total assets = (Total assets 2014 + Total assets 2013)/2 = ($2,760 + $2,235)/2 = $4,995‬/2 = $2,497.5‬

firm’s 2014 total assets turnover ratio = $2,000/$2,497.5‬ = 0.8008

3. firm’s 2014 debt-to-capital ratio = (notes payable + Long-term debt)/(notes payable + Long-term debt + no. of shares outstanding*price per share)

firm’s 2014 debt-to-capital ratio = ($160 + $450)/($160 + $450 + 100*$25) = $610/$3,110‬ = 0.20

4. firm’s 2014 profit margin = Net income/Sales = $353/$2,000 = 0.1765‬ or 17.65‬%