1.

Using the formula for NWC, we get:

NWC = CA CL
CA = CL + NWC = $3,720 + 1,370 = $5,090
So, the current ratio is:
Current ratio = CA / CL = $5,090/$3,720 = 1.37 times
And the quick ratio is:
Quick ratio = (CA Inventory) / CL = ($5,090 1,950) / $3,720 = 0.84 times

2.

We need to find net income first. So:

ROA = Net income / TA = $2,320,000 / $17,500,000 = .1326 or 13.26%
TE = $17,500,000 6,300,000 = $11,200,000
ROE = Net income / TE = 2,320,000 / $11,200,000 = .2071 or 20.71%

3.
The average collection period for an outstanding accounts receivable balance was 39.92 days.
4.

On average, a unit of inventory sat on the shelf 36.23 days before it was sold.

5. Equity multiplier = 1 + D/E = 2.70

6.

Net income

= Addition to RE + Dividends

= $430,000 + 175,000 = $605,000

Earnings per share

= NI / Shares

= $605,000 / 210,000 = $2.88 per share

Dividends per share

= Dividends / Shares

= $175,000 / 210,000 = $0.83 per share

Book value per share = TE / Shares

= $5,300,000 / 210,000 = $25.24 per share

Market-to-book ratio

= Share price / BVPS

= $63 / $25.24 = 2.50 times

P/E ratio

= Share price / EPS

= $63 / $2.88 = 21.87 times

Sales per share

= Sales / Shares

= $4,500,000 / 210,000 = $21.43

P/S ratio

= Share price / Sales per share = $63 / $21.43 = 2.94 times

7.

ROE = .1771 or 17.71%

8. This question gives all of the necessary ratios for the DuPont Identity except the equity multiplier, so,
using the DuPont Identity:
ROE = (PM)(TAT)(EM)
ROE = .1827 = (.068)(1.95)(EM)
EM = .1827 / (.068)(1.95) = 1.38
D/E = EM 1 = 1.38 1 = 0.38
9.

Decrease in inventory is a source of cash

Decrease in accounts payable is a use of cash
Increase in notes payable is a source of cash
Increase in accounts receivable is a use of cash
Change in cash = sources uses = $375 190 + 210 105 = $290
Cash increased by $290

10.

Days sales in payables = 365 / 4.72 = 77.28 days

The company left its bills to suppliers outstanding for 77.25 days on average. A large value for this
ratio could imply that either (1) the company is having liquidity problems, making it difficult to pay
off its short-term obligations, or (2) that the company has successfully negotiated lenient credit terms
from its suppliers.

11. New investment in fixed assets is found by:

Net investment in FA = (NFAend NFAbeg) + Depreciation
Net investment in FA = $835 + 148 = $983
The company bought $983 in new fixed assets; this is a use of cash.
12. The equity multiplier is:
EM = 1 + D/E
EM = 1 + 0.65 = 1.65
One formula to calculate return on equity is:
ROE = (ROA)(EM)
ROE = .085(1.65) = .1403 or 14.03%

ROE can also be calculated as:

ROE = NI / TE
So, net income is:
NI = ROE(TE)
NI = (.1403)($540,000) = $75,735
13. through 15:
2008

#13

2009

#13

#14

#15

Assets
Current assets
Cash
Accounts receivable
Inventory
Total
Fixed assets
Net plant and equipment
Total assets
Liabilities and Owners Equity
Current liabilities
Accounts payable
Notes payable
Total
Long-term debt
Owners' equity
Common stock and paid-in
surplus
Accumulated retained earnings
Total
Total liabilities and owners' equity

$8,436
21,530
38,760
$68,726

2.86%
7.29%
13.12%
23.26%

$10,157
23,406
42,650
$76,213

3.13%
7.21%
13.14%
23.48%

1.2040
1.0871
1.1004
1.1089

1.0961
0.9897
1.0017
1.0095

226,706
$295,432

76.74%
100%

248,306
$324,519

76.52%
100%

1.0953
1.0985

0.9971
1.0000

$43,050
18,384
$61,434
25,000

14.57%
6.22%
20.79%
8.46%

$46,821
17,382
$64,203
32,000

14.43%
5.36%
19.78%
9.86%

1.0876
0.9455
1.0451
1.2800

0.9901
0.8608
0.9514
1.1653

$40,000
168,998
$208,998
$295,432

13.54%
57.20%
70.74%
100%

$40,000
188,316
$228,316
$324,519

12.33%
58.03%
70.36%
100%

1.0000
1.1143
1.0924
1.0985

0.9104
1.0144
0.9945
1.0000

The common-size balance sheet answers are found by dividing each category by total assets. For
example, the cash percentage for 2008 is:
$8,436 / $295,432 = .0286 or 2.86%
This means that cash is 2.86% of total assets.

The common-base year answers for Question 14 are found by dividing each category value for 2009
by the same category value for 2008. For example, the cash common-base year number is found by:
$10,157 / $8,436 = 1.2040
This means the cash balance in 2009 is 1.2040 times as large as the cash balance in 2008.
The common-size, common-base year answers for Question 15 are found by dividing the commonsize percentage for 2009 by the common-size percentage for 2008. For example, the cash calculation
is found by:
3.13% / 2.86% = 1.0961
This tells us that cash, as a percentage of assets, increased by 9.61%.
16.

2008

Sources/Us
es

2008

Assets
Current assets
Cash
Accounts receivable
Inventory
Total
Fixed assets
Net plant and equipment
Total assets
Liabilities and Owners Equity
Current liabilities
Accounts payable
Notes payable
Total
Long-term debt
Owners' equity
Common stock and paid-in surplus
Accumulated retained earnings
Total
Total liabilities and owners' equity

$8,436
21,530
38,760
$68,726

$1,721
1,876
3,890
$7,487

U
U
U
U

$10,157
23,406
42,650
$76,213

$226,706
$295,432

$21,600
$29,087

U
U

$248,306
$324,519

$43,050
18,384
$61,434
25,000

3,771
1,002
2,769
$7,000

S
U
S
S

$46,821
17,382
$64,203
32,000

$40,000
168,998
$208,998
$295,432

$0
19,318
$19,318
$29,087

S
S
S

$40,000
188,316
$228,316
$324,519

The firm used $29,087 in cash to acquire new assets. It raised this amount of cash by increasing
liabilities and owners equity by $29,087. In particular, the needed funds were raised by internal
financing (on a net basis), out of the additions to retained earnings, an increase in current liabilities,
and by an issue of long-term debt.

17. a.

Current ratio
Current ratio 2008
Current ratio 2009

= Current assets / Current liabilities

= $68,726 / $61,434 = 1.12 times
= $76,213 / $64,203 = 1.19 times

b.

Quick ratio
Quick ratio 2008
Quick ratio 2009

= (Current assets Inventory) / Current liabilities

= ($67,726 38,760) / $61,434 = 0.49 times
= ($76,213 42,650) / $64,203 = 0.52 times

c.

Cash ratio
Cash ratio 2008
Cash ratio 2009

= Cash / Current liabilities

= $8,436 / $61,434 = 0.14 times
= $10,157 / $64,203 = 0.16 times

d.

NWC ratio
NWC ratio 2008
NWC ratio 2009

= NWC / Total assets

= ($68,726 61,434) / $295,432 = 2.47%
= ($76,213 64,203) / $324,519 = 3.70%

e.

Debt-equity ratio
Debt-equity ratio 2008
Debt-equity ratio 2009

= Total debt / Total equity

= ($61,434 + 25,000) / $208,998 = 0.41 times
= ($64,206 + 32,000) / $228,316 = 0.42 times

Equity multiplier
Equity multiplier 2008
Equity multiplier 2009

= 1 + D/E
= 1 + 0.41 = 1.41
= 1 + 0.42 = 1.42

Total debt ratio

Total debt ratio 2008
Total debt ratio 2009

= (Total assets Total equity) / Total assets

= ($295,432 208,998) / $295,432 = 0.29
= ($324,519 228,316) / $324,519 = 0.30

f.

Long-term debt ratio

= Long-term debt / (Long-term debt + Total equity)
Long-term debt ratio 2008 = $25,000 / ($25,000 + 208,998) = 0.11
Long-term debt ratio 2009 = $32,000 / ($32,000 + 228,316) = 0.12
18.
ROE = 0.15 = (PM)(TAT)(EM) = (PM)(S / TA)(1 + D/E)
Solving the DuPont Identity for profit margin, we get:
PM = [(ROE)(TA)] / [(1 + D/E)(S)]
PM = [(0.15)($3,105)] / [(1 + 1.4)( $5,726)] = .0339
Now that we have the profit margin, we can use this number and the given sales figure to solve for
net income:
PM = .0339 = NI / S
NI = .0339($5,726) = $194.06

19. PM = 0.087 = NI / Sales = $218,000 / Sales; Sales = $2,505,747

Credit sales are 70 percent of total sales, so:
Credit sales = $2,515,747(0.70) = $1,754,023
Now we can find receivables turnover by:
Receivables turnover = Credit sales / Accounts receivable = $1,754,023 / $132,850 = 13.20 times
Days sales in receivables = 365 days / Receivables turnover = 365 / 13.20 = 27.65 days
20.
CR = CA / CL
CA = CR(CL) = 1.25($875) = $1,093.75
To find the total assets, we must first find the total debt and equity from the information given. So,
we find the sales using the profit margin:
PM = NI / Sales
NI = PM(Sales) = .095($5,870) = $549.10
We now use the net income figure as an input into ROE to find the total equity:
ROE = NI / TE
TE = NI / ROE = $549.10 / .185 = $2,968.11
Next, we need to find the long-term debt. The long-term debt ratio is:
Long-term debt ratio = 0.45 = LTD / (LTD + TE)
Inverting both sides gives:
1 / 0.45 = (LTD + TE) / LTD = 1 + (TE / LTD)
Substituting the total equity into the equation and solving for long-term debt gives the following:
2.222 = 1 + ($2,968.11 / LTD)
LTD = $2,968.11 / 1.222 = $2,428.45

Now, we can find the total debt of the company:

TD = CL + LTD = $875 + 2,428.45 = $3,303.45
And, with the total debt, we can find the TD&E, which is equal to TA:
TA = TD + TE = $3,303.45 + 2,968.11 = $6,271.56
And finally, we are ready to solve the balance sheet identity as:
NFA = TA CA = $6,271.56 1,093.75 = $5,177.81
21. Child: Profit margin = NI / S = $3.00 / $50

= .06 or 6%

Store: Profit margin = NI / S = $22,500,000 / $750,000,000

= .03 or 3%

ROE = NI / TE = NI / (TA TD)

ROE = $22,500,000 / ($420,000,000 280,000,000) = .1607 or 16.07%
22. The solution requires substituting two ratios into a third ratio. Rearranging D/TA:
Firm A
D / TA = .35
(TA E) / TA = .35
(TA / TA) (E / TA) = .35
1 (E / TA) = .35
E / TA = .65
E = .65(TA)

Firm B
D / TA = .30
(TA E) / TA = .30
(TA / TA) (E / TA) = .30
1 (E / TA) = .30
E / TA = .30
E = .70 (TA)

Rearranging ROA, we find:

NI / TA = .12
NI = .12(TA)

NI / TA = .11
NI = .11(TA)

Since ROE = NI / E, we can substitute the above equations into the ROE formula, which yields:
ROE = .12(TA) / .65(TA) = .12 / .65 = 18.46%

ROE = .11(TA) / .70 (TA) = .11 / .70 = 15.71%

23. This problem requires you to work backward through the income statement. First, recognize that
Net income = (1 t)EBT. Plugging in the numbers given and solving for EBT, we get:
EBT = $13,168 / (1 0.34) = $19,951.52
Now, we can add interest to EBT to get EBIT as follows:
EBIT = EBT + Interest paid = $19,951.52 + 3,605 = $23,556.52

To get EBITD (earnings before interest, taxes, and depreciation), the numerator in the cash coverage
ratio, add depreciation to EBIT:
EBITD = EBIT + Depreciation = $23,556.52 + 2,382 = $25,938.52
Now, simply plug the numbers into the cash coverage ratio and calculate:
Cash coverage ratio = EBITD / Interest = $25,938.52 / $3,605 = 7.20 times
24. The only ratio given which includes cost of goods sold is the inventory turnover ratio, so it is the last
ratio used. Since current liabilities is given, we start with the current ratio:
Current ratio = 1.40 = CA / CL = CA / $365,000
CA = $511,000
Using the quick ratio, we solve for inventory:
Quick ratio = 0.85 = (CA Inventory) / CL = ($511,000 Inventory) / $365,000
Inventory = CA (Quick ratio CL)
Inventory = $511,000 (0.85 $365,000)
Inventory = $200,750
Inventory turnover = 5.82 = COGS / Inventory = COGS / $200,750
COGS = $1,164,350
25. PM = NI / S = 13,482,000 / 138,793 = 0.0971 or 9.71%
NI = PM Sales
NI = 0.0971($274,213,000) = $26,636,355
26.

Short-term solvency ratios:

Current ratio
= Current assets / Current liabilities
Current ratio 2008
= $56,260 / $38,963 = 1.44 times
Current ratio 2009
= $60,550 / $43,235 = 1.40 times
Quick ratio
Quick ratio 2008
Quick ratio 2009

= (Current assets Inventory) / Current liabilities

= ($56,260 23,084) / $38,963 = 0.85 times
= ($60,550 24,650) / $43,235 = 0.83 times

Cash ratio
Cash ratio 2008
Cash ratio 2009

= Cash / Current liabilities

= $21,860 / $38,963 = 0.56 times
= $22,050 / $43,235 = 0.51 times

Asset utilization ratios:

Total asset turnover
= Sales / Total assets
Total asset turnover
= $305,830 / $321,075 = 0.95 times
Inventory turnover
Inventory turnover

= Cost of goods sold / Inventory

= $210,935 / $24,650 = 8.56 times

Receivables turnover
Receivables turnover

= Sales / Accounts receivable

= $305,830 / $13,850 = 22.08 times

Long-term solvency ratios:

Total debt ratio
= (Total assets Total equity) / Total assets
Total debt ratio 2008
= ($290,328 176,365) / $290,328 = 0.39
Total debt ratio 2009
= ($321,075 192,840) / $321,075 = 0.40
Debt-equity ratio
Debt-equity ratio 2008
Debt-equity ratio 2009

= Total debt / Total equity

= ($38,963 + 75,000) / $176,365 = 0.65
= ($43,235 + 85,000) / $192,840 = 0.66

Equity multiplier
Equity multiplier 2008
Equity multiplier 2009

= 1 + D/E
= 1 + 0.65 = 1.65
= 1 + 0.66 = 1.66

Times interest earned

Times interest earned

= EBIT / Interest
= $68,045 / $11,930 = 5.70 times

Cash coverage ratio

Cash coverage ratio

= (EBIT + Depreciation) / Interest

= ($68,045 + 26,850) / $11,930 = 7.95 times

Profitability ratios:
Profit margin
Profit margin

= Net income / Sales

= $36,475 / $305,830 = 0.1193 or 11.93%

Return on assets
Return on assets

= Net income / Total assets

= $36,475 / $321,075 = 0.1136 or 11.36%

Return on equity
Return on equity

= Net income / Total equity

= $36,475 / $192,840 = 0.1891 or 18.91%

27. The DuPont identity is:

ROE = (PM)(TAT)(EM)
ROE = (0.1193)(0.95)(1.66) = 0.1891 or 18.91%

28.

SMOLIRA GOLF CORP.

Statement of Cash Flows
For 2009
Cash, beginning of the year
Operating activities
Net income
Plus:
Depreciation
Increase in accounts payable
Increase in other current liabilities
Less:
Increase in accounts receivable
Increase in inventory

$ 21,860

$ 36,475
$ 26,850
3,530
1,742
$ (2,534)
(1,566)

Net cash from operating activities

$ 64,497

Investment activities
Fixed asset acquisition
Net cash from investment activities

$(53,307)
$(53,307)

Financing activities
Increase in notes payable
Dividends paid
Increase in long-term debt
Net cash from financing activities

$ (1,000)
(20,000)
10,000
$(11,000)

Net increase in cash

Cash, end of year

$ 22,050

29. Earnings per share

Earnings per share

190

= Net income / Shares

= $36,475 / 25,000 = $1.46 per share

P/E ratio
P/E ratio

= Shares price / Earnings per share

= $43 / $1.46 = 29.47 times

Dividends per share

Dividends per share

= Dividends / Shares
= $20,000 / 25,000 = $0.80 per share

Book value per share

Book value per share

= Total equity / Shares

= $192,840 / 25,000 shares = $7.71 per share

Market-to-book ratio
Market-to-book ratio

= Share price / Book value per share

= $43 / $7.71 = 5.57 times

PEG ratio
PEG ratio

= P/E ratio / Growth rate

= 29.47 / 9 = 3.27 times

30. First, we will find the market value of the companys equity, which is:
Market value of equity = Shares Share price
Market value of equity = 25,000($43) = $1,075,000
The total book value of the companys debt is:
Total debt = Current liabilities + Long-term debt
Total debt = $43,235 + 85,000 = $128,235
Now we can calculate Tobins Q, which is:
Tobins Q = (Market value of equity + Book value of debt) / Book value of assets
Tobins Q = ($1,075,000 + 128,235) / $321,075
Tobins Q = 3.75