财务管理课后答案第三章.doc

Chapter 3Discussion Questions3-1.If we divide users of ratios into short-term lenders, long-term lenders, and stockholders, in which ratios would each group be most interested, and for what reasons?Short-term lendersliquidity ratios because their concern is with the firms ability to pay short-term obligations as they come due.Long-term lendersleverage ratios because they are concerned with the relationship of debt to total assets. They also will examine profitability to insure that interest payments can be made.Stockholdersprofitability ratios, with secondary consideration given to debt utilization, liquidity, and other ratios. Since stockholders are the ultimate owners of the firm, they are primarily concerned with profits or the return on their investment.3-2.Explain how the Du Pont system of analysis breaks down return on assets. Also explain how it breaks down return on stockholders equity.The Du Pont system of analysis breaks out the return on assets between the profit margin and asset turnover.Return on Assets=Profit MarginAsset TurnoverIn this fashion, we can assess the joint impact of profitability and asset turnover on the overall return on assets. This is a particularly useful analysis because we can determine the source of strength and weakness for a given firm. For example, a company in the capital goods industry may have a high profit margin and a low asset turnover, while a food processing firm may suffer from low profit margins, but enjoy a rapid turnover of assets.The modified form of the Du Pont formula shows:This indicates that return on stockholders equity may be influenced by return on assets, the debt-to-assets ratio or a combination of both. Analysts or investors should be particularly sensitive to a high return on stockholders equity that is influenced by large amounts of debt.3-3.If the accounts receivable turnover ratio is decreasing, what will be happening to the average collection period?If the accounts receivable turnover ratio is decreasing, accounts receivable will be on the books for a longer period of time. This means the average collection period will be increasing.3-4.What advantage does the fixed charge coverage ratio offer over simply using times interest earned?The fixed charge coverage ratio measures the firms ability to meet all fixed obligations rather than interest payments alone, on the assumption that failure to meet any financial obligation will endanger the position of the firm.3-5.Is there any validity in rule-of-thumb ratios for all corporations, for example, a current ratio of 2 to 1 or debt to assets of 50 percent?No rule-of-thumb ratio is valid for all corporations. There is simply too much difference between industries or time periods in which ratios are computed. Nevertheless, rules-of-thumb ratios do offer some initial insight into the operations of the firm, and when used with caution by the analyst can provide information.3-6.Why is trend analysis helpful in analyzing ratios?Trend analysis allows us to compare the present with the past and evaluate our progress through time. A profit margin of 5 percent may be particularly impressive if it has been running only 3 percent in the last ten years. Trend analysis must also be compared to industry patterns of change.3-7.Inflation can have significant effects on income statements and balance sheets, and therefore on the calculation of ratios. Discuss the possible impact of inflation on the following ratios, and explain the direction of the impact based on your assumptions.a. Return on investment.b. Inventory turnover.c. Fixed asset turnover.d. Debt-to-assets ratio.a.Inflation may cause net income to be overstated and total assets to be understated causing an artificially high ratio that is misleading.b.Inflation may cause sales to be overstated. If the firm uses FIFO accounting, inventory will also reflect “inflation-influenced” dollars and the net effect will be nil.If the firm uses LIFO accounting, inventory will be stated in old dollars and too high a ratio could be reported.c.Fixed assets will be understated relative to their replacement cost and to sales and too high a ratio could be reported.d.Since both are based on historical costs, no major inflationary impact will take place in the ratio.3-8.What effect will disinflation following a highly inflationary period have on the reported income of the firm?Disinflation tends to lower reported earnings as inflation-induced income is squeezed out of the firms income statement. This is particularly true for firms in highly cyclical industries where prices tend to rise and fall quickly.3-9.Why might disinflation prove to be favorable to financial assets?Because it is possible that prior inflationary pressures will no longer seriously impair the purchasing power of the dollar, lessening inflation also means that the required return that investors demand on financial assets will be going down, and with this lower demanded return, future earnings or interest should receive a higher current evaluation.3-10.Comparisons of income can be very difficult for two companies even though they sell the same products in equal volume. Why?There are many different methods of financial reporting accepted by the accounting profession as promulgated by the Financial Accounting Standards Board. Though the industry has continually tried to provide uniform guidelines and procedures, many options remain open to the reporting firm. Every item on the income statement and balance sheet must be given careful attention. Two apparently similar firms may show different values for sales, research and development, extraordinary losses, and many other items.Chapter 3Problems1.Griffey Junior Wear, Inc., has $800,000 in assets and $200,000 of debt. It reports net income of $100,000.a.What is the return on assets?b.What is the return on stockholders equity?3-1.Solution:Griffey Junior Weara.b.2.Hugh Snore Bedding, Inc., has assets of $400,000 and turns over its assets 1.5 times per year. Return on assets is 12 percent. What is its profit margin (return on sales)?3-2.Solution:Hugh Snore Bedding, Inc.3One-Size-Fits-All Casket Co.s income statement for 2008 is as follows:Sales$3,000,000Cost of goods sold2,100,000Gross profit900,000Selling and administrative expense450,000Operating profit450,000Interest expense75,000Income before taxes375,000Taxes (30%)112,500Income after taxes$262,500a.Compute the profit margin for 2008.b.Assume in 2009, sales increase by 10 percent and cost of goods sold increases by 25%. The firm is able to keep all other expenses the same. Once again, assume a tax rate of 30 percent on income before taxes. What are income after taxes and the profit margin for 2009?3-3.Solution:One Size-Fits-All Casket Co.a.Profit margin for 2008b.Sales$3,300,000*Cost of goods sold2,625,000*Gross profit675,000Selling and administrative expense450,000Operating profit225,000Interest expense75,000Income before taxes150,000Taxes (30%)45,000Income after taxes (2008)$105,000 * $3,000,000 1.10 = $3,300,000* $2,100,000 1.25 = $2,625,000Profit Margin for 20094Using the Du Pont method, evaluate the effects of the following relationships for the Butters Corporation.a.Butters Corporation has a profit margin of 7 percent and its return on assets (investment) is 25.2 percent. What is its assets turnover?b.If the Butters Corporation has a debt-to-total-assets ratio of 50 percent, what would the firms return on equity be?c.What would happen to return on equity if the debt-to-total-assets ratio decreased to 35 percent?3-4.Solution:Butters Corporationa.b.3-14. (Continued)c.5.Assume the following data for Interactive Technology and Silicon Software.Interactive Technology (IT)Silicon Software (SS)Net income.$ 15,000$ 50,000Sales150,0001,000,000Total assets.160,000400,000Total debt.60,000240,000Stockholders equity.100,000160,000a.Compute return on stockholders equity for both firms using ratio 3a in the text. Which firm has the higher return?b.Compute the following additional ratios for both firms.Net income/SalesNet income/Total assetsSales/Total assetsDebt/Total assetsc.Discuss the factors from part b that added or detracted from one firm having a higher return on stockholders equity than the other firm as computed in part a.3-5.SolutionInteractive Technology and Silicon Softwarea. Interactive Silicon Technology (IT) Software (SS)Silicon Software (SS) has a much higher return on stockholders equity than Interactive Technology (IT).3-5. (Continued)b.InteractiveSiliconTechnology (IT)Software (SS)c. As previously indicated, Silicon Software (SS) has a substantially higher return on stockholders equity than Interactive Technology (IT). The reason is certainly not to be found on return on the sales dollar where Interactive Technology has a higher return than Silicon Software (10% vs. 5%).However, Silicon Software has a higher return than Interactive Technology on total assets (12.5% versus 9.37%). The reason is clearly to be found in total asset turnover, which strongly favors Silicon Software over Interactive Technology (2.5x versus .937x). This factor alone leads to the higher return on total assets.6.Perez Corporation has the following financial data for the years 2007 and 2008:20072008Sales$8,000,000$10,000,000Cost of goods sold6,000,0009,000,000Inventory.800,0001,000,000a.Compute inventory turnover based on ratio number 6, Sales/Inventory, for each year.b.Compute inventory turnover based on an alternative calculation that is used by many financial analysts, Cost of goods sold/Inventory, for each year.c.What conclusions can you draw from part a and part b?3-6.Solution:Perez Corporation20072008a.b.c.Based on the sales to inventory ratio, the turnover has remained constant at 10x. However, based on the cost of goods sold to inventory ratio, it has improved from 7.5x to 9x.The latter ratio may be providing a false picture of improvement in this example simply because cost of goods sold has gone up as percentage of sales (from 75 percent to 90 percent). Inventory is not really turning over any faster.7.The balance sheet for Stud Clothiers is shown below. Sales for the year were $2,400,000, with 90 percent of sales sold on credit.STUD CLOTHIERSBalance Sheet 200XAssetsLiabilities and EquityCash$ 60,000Accounts payable.$ 220,000Accounts receivable.240,000Accrued taxes30,000Inventory350,000Bonds payable (long-term) 150,000Plant and equipment. 410,000Common stock.80,000Paid-in capital200,000Retained earnings. 380,000Total assets.$1,060,000Total liabilities and equity$1,060,000Compute the following ratios:a.Current ratio.b.Quick ratio.c.Debt-to-total-assets ratio.d.Asset turnover.e.Average collection period.3-7.Solution:Stud Clothiersa.3-7. (Continued)b.c.d.e.8.Using the income statement for Times Mirror and Glass Co., compute the following ratios:a.The interest coverage.b.The fixed charge coverage.The total assets for this company equal $80,000. Set up the equation for the Du Pont system of ratio analysis, and compute c, d, and e.c.Profit margin.d.Total asset turnover.e.Return on assets (investment).TIMES MIRROR AND GLASS COMPANYSales$126,000Less: Cost of goods sold 93,000Gross profit$ 33,000Less: Selling and administrative expense11,000Less: Lease expense 4,000Operating profit*$ 18,000Less: Interest expense 3,000Earnings before taxes$ 15,000Less: Taxes (30%) 4,500Earnings after taxes$ 10,500*Equals income before interest and taxes.3-8.Solution:Times Mirror and Glass Co.a.3-8. (Continued)b.c.d.e.9.Omni Technology Holding Company has the following three affiliates:PersonalForeign SoftwareComputersOperationsSales$40,000,000$60,000,000$100,000,000Net income (after taxes)2,000,0002,000,0008,000,000Assets5,000,00025,000,00060,000,000Stockholders equity4,000,00010,000,00050,000,000a.Which affiliate has the highest return on sales?b.Which affiliate has the lowest return on assets?c.Which affiliate has the highest total asset turnover?d.Which affiliate has the highest return on stockholders equity?e.Which affiliate has the highest debt ratio? (Assets minus stockholders equity equalsdebt.)f.Returning to question b, explain why the software affiliate has the highest return on total assets.g.Returning to question d, explain why the personal computer affiliate has a higher return on stockholders equity than the foreign operations affiliate even though it has a lower return on total assets.3-9.Solution:Omni Technology Holding Companya.Net income/salesThe foreign operation affiliate has the highest return on sales.b.Net income/total assetsThe personal computer affiliate has the lowest return on assets3-9. (Continued)c.Sales/total assetsThe software affiliate has the highest return on total asset turnover.d. Net income/Stockholders equityThe Software affiliate has the highest return on stockholders equity.e.Debt/total assetsThe personal computer affiliate has the highest debt/total assets ratio.f.This is because of its high total turnover ratio of 8.0x times in part c.g.This is because the personal computer affiliate has a higher debt ratio (60.0%) than the foreign operations affiliate (16.7%).10.Construct the current assets section of the balance sheet from the following data. (Use cash as a plug figure after computing the other values.)Yearly sales (credit)$720,000Inventory turnover6 timesCurrent liabilities$105,000Current ratio2Average collection period35 daysCurrent assets:Cash$_Accounts receivable_Inventory_Total current assets_3-10.Solution:Inventory= $720,000/6= $120,000Account rec.= ($720,000/360) 35= $70,000Current assets= 2 $105,000= $210,000Cash= $210,000 $120,000 $70,000= $ 20,000Cash$ 20,000Accounts receivable 70,000Inventory 120,000Total current assets$210,00011.The following data are from Sharon Stone and Gravel, Inc., financial statements. The firm manufactures home decorative material. Sales (all credit) were $60 million for 2008.Sales to total assets3.0 timesTotal debt to total assets40%Current ratio2.0 timesInventory turnover10.0 timesAverage collection period18.0 daysFixed asset turnover7.5 timesFill in the balance sheet:Cash_Current debt_t_Accounts receivable_Long-term debt_Inventory_ Total debt_ Total current assets_Equity_Fixed assets_ Total assets_Total debt and stockholders equity_3-11.Solution:Sharon Stone and Gravel, Inc.Sales/total assets= 3.0xTotal assets= $60 million/3.0Total assets= $20 millionTotal debt/total asset= 40%Total assets= $20 million x .4Total assets= $8 millionSales/inventory= 10.0xInventory= $60 million/10.0xInventory= $6 millionAverage daily sales= $60 million/360 days= $166,667 per dayAccounts receivable= 18 days $166,667= $3 million (or)3-11. (Continued)Fixed assets= $60 million/7.5x= $8 millionCash= Total assets inventory accounts receivable fixed assets= $20 million $6 million $3 million $8 million= $3 millionCurrent assets= Cash + accounts receivable + inventory= $3 million + $3 million + $6 million= $12 millionCurrent debt= Current assets/2= $12 million/2= $6 millionLong-term debt= Total debt current debt= $8 million $6 million= $2 millionEquity= Total assets total debt= $20 million $8 million= $12 million3-11. (Continued)Cash.$ 3.0 millionCurrent debt.$ 6.0 millionAccounts receivable.$ 3.0Long-term debt.$ 2.0Inventory.$ 6.0Total debt.$ 8.0Total current assets.$12.0Equity.$12.0Fixed assets.$ 8.0Total assets.$20.0 millionTotal debt and equity.$20.0 million12.Given the following financial statements for Jones Corporation and Smith Corporation:a.To which company would you, as credit manager for a supplier, approve the extension of (short-term) trade credit? Why? Compute all ratios before answering.b.In which one would you buy stock? Why?JONES CORPORATIONCurrent AssetsLiabilitiesCash$ 20,000Accounts payable$100,000Accounts receivable80,000Bonds payable (long-term)80,000Inventory50,000Long-Term AssetsStockholders EquityFixed assets$500,000Common stock$150,000Less: Accumulated depreciation (150,000)Paid-in capitalRetained earnings70,000 100,000*Net fixed assets 350,000 Total assets$500,000Tota