Question

Given the following information on Cherry Corporation, please calculate the requested ratios that follow the financial...

Given the following information on Cherry Corporation, please calculate the requested ratios that follow the financial information. You must show your work, that is how you arrived at your calculated figure or you will not receive the indicated point value.

Cherry Corporation's Balance Sheet

Assets

Current Assets

Cash                                  $ 925,000

Accounts Receivable        $2,550,000

Marketable Securities       $1,025,000

Inventory                          $1,425,000

Total Current Assets                                 $ 5,925,000

Fixed Assets

      Property Plant & Equip    $6,975,000

      Research & Develop.        $1,157,000

      Good Will                         $793,000

      Total Fixed Assets                                    $ 8,925,000

Total Assets                                                          $14,850,000

Liabilities & Owner's Equity

Current Liabilities

      Accounts Payable                   $1,425,000

      Notes Payable                         $2,650,000

      Total Current Liabilities                           $4,075,000

Long-term Liabilities

      Long-term Debt                      $3,857,000

      Owner's Equity                       $6,918,000

Total Liabilities & Equity                                    $14,850,000

Cherry's Income Statement

Sales                                                          $29,870,000

Cost of Goods Sold                                   $22,591,000

Gross Profit                                               $ 7,279,000

Sales, General & Admin Exp.                  $   800,700

Depreciation                                             $ 1,462,500

Operating Expenses                                  $ 1,365,800

Earnings Before Interest & Taxes            $ 3,650,000

Interest Expense                                       $    520,455

Earnings Before Taxes                             $ 3,129,545

Taxes (25%)                                              $   782,386

Preferred Dividend                                   $    362,000

Net Income                                               $ 1,985,159

Common Dividends                                  $   794,064

Retained Earnings                                     $ 1,191,095

Given the above information please calculate the following for 20 points (@2 points each):

1.What is Cherry's Gross Profit margin? Net Profit Margin?

2.Please calculate Cherry's Return on Equity.

3.What is Cherry's Days Sales Outstanding?

4.Using the following formula; ROE x Retention Ratio = Growth Rate; Please calculate the growth rate of Cherry.

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Homework Answers

Answer #1

Gross profit Margin

Gross profit Margin = (Gross Profit / Sales) x 100

= ($72,79,000 / $2,98,70,000) x 100

= 24.37%

Net Profit Margin

Net Profit Margin = (Net Income / Sales) x 100

= ($19,85,159 / $2,98,70,000) x 100

= 6.65%

Return on Equity

Return on Equity = (Net Income / Owners Equity) x 100

= ($19,85,159 / $69,18,000) x 100

= 28.70%

Days Sales Outstanding

Days Sales Outstanding = Accounts Receivables / Credit sales per day

= $25,50,000 / ($2,98,70,000 / 365 Days)

= $25,50,000 / $81,836

= 31.16 Days

Growth Rate

Retention Ratio = (Addition to Retained Earnings / Net Income) x 100

= ($11,91,095 / $19,85,159) x 100

= 60%

Therefore, the Growth Rate = Return on Equity x Retention Ratio

= 28.70% x 0.60

= 17.22%

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