Module 5 Homework Answer Key

Ross Book
Module 5
CH 2 Q 1
CH 3 Q 1, 3, 4, 5, 6, 7, 9, 24, 25, 26, 27

Ch 2 .
1. The balance sheet for the company will look like this:

  Balance sheet
  Current assets $2,030   Current liabilities $1,640
  Net fixed assets 9,780   Long-term debt 4,490
      Owners’ equity 5,680
     
Total liabilities and owners’
  Total assets $11,810   equity $11,810

The owners’ equity is a plug variable. We know that total assets must equal total liabilities
and owners’ equity. Total liabilities and owners’ equity is the sum of all debt and equity, so
if we subtract debt from total liabilities and owners’ equity, the remainder must be the
equity balance, so:

Owners’ equity = Total liabilities and owners’ equity – Current liabilities – Long-term debt
Owners’ equity = $11,810 – 1,640 – 4,490
Owners’ equity = $5,680

Net working capital is current assets minus current liabilities, so:

NWC = Current assets – Current liabilities

NWC = $2,030 – 1,640
NWC = $390

Ch 3.
1. To find the current assets, we must use the net working capital equation. Doing so, we find:

NWC = Current assets – Current liabilities

$1,965 = Current assets – $5,460
Current assets = $7,425

Now, use this number to calculate the current ratio and the quick ratio. The current ratio is:

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 Current ratio = Current assets / Current liabilities
Current ratio = $7,425 / $5,460
Current ratio = 1.36 times

And the quick ratio is:

Quick ratio = (Current assets – Inventory) / Current liabilities

Quick ratio = ($7,425 – 2,170) / $5,460
Quick ratio = .96 times

3. The receivables turnover for the company was:

Receivables turnover = Credit sales / Receivables

Receivables turnover = $6,787,626 / $583,174
Receivables turnover = 11.64 times

Using the receivables turnover, we can calculate the days’ sales in receivables as:

Days’ sales in receivables = 365 days / Receivables turnover

Days’ sales in receivables = 365 days / 11.64
Days’ sales in receivables = 31.36 days

The average collection period, which is the same as the days’ sales in receivables, was 31.36
days.

4. The inventory turnover for the company was:

Inventory turnover = COGS / Inventory

Inventory turnover = $8,543,132 / $527,156
Inventory turnover = 16.21 times

Using the inventory turnover, we can calculate the days’ sales in inventory as:

Days’ sales in inventory = 365 days / Inventory turnover

Days’ sales in inventory = 365 days / 16.21
Days’ sales in inventory = 22.52 days

On average, a unit of inventory sat on the shelf 22.52 days before it was sold.

5. To find the debt–equity ratio using the total debt ratio, we need to rearrange the total debt
ratio equation. We must realize that the total assets are equal to total debt plus total equity.
Doing so, we find:

Total debt ratio = Total debt / Total assets

.19 = Total debt / (Total debt + Total equity)

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 .81(Total debt) = .19(Total equity)
Total debt / Total equity = .19 / .81
Debt–equity ratio = .23

And the equity multiplier is one plus the debt–equity ratio, so:

Equity multiplier = 1 + D/E

Equity multiplier = 1 + .23
Equity multiplier = 1.23

6. We need to calculate the net income before we calculate the earnings per share. The sum of
dividends and addition to retained earnings must equal net income, so net income must have
been:

Net income = Addition to retained earnings + Dividends

Net income = $534,000 + 185,000
Net income = $719,000

So, the earnings per share were:

EPS = Net income / Shares outstanding

EPS = $719,000 / 365,000
EPS = $1.97 per share

The dividends per share were:

Dividends per share = Total dividends / Shares outstanding

Dividends per share = $185,000 / 365,000
Dividends per share = $.51 per share

The book value per share was:

Book value per share = Total equity / Shares outstanding

Book value per share = $7,450,000 / 365,000
Book value per share = $20.41 per share

The market-to-book ratio is:

Market-to-book ratio = Share price / Book value per share

Market-to-book ratio = $49 / $20.41
Market-to-book ratio = 2.40 times

The PE ratio is:

PE ratio = Share price / EPS

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 PE ratio = $49 / $1.97
PE ratio = 24.87 times

Sales per share are:

Sales per share = Total sales / Shares outstanding

Sales per share = $15,400,000 / 365,000
Sales per share = $42.19

The P/S ratio is:

P/S ratio = Share price / Sales per share

P/S ratio = $49 / $42.19
P/S ratio = 1.16 times

7. With the information given, we must use the Du Pont identity to calculate return on
equity. Doing so, we find:

ROE = (Profit margin)(Total asset turnover)(Equity multiplier)

ROE = (.052)(1.65)(1.83)
ROE = .1570, or 15.70%

9. To find the days’ sales in payables, we first need to find the payables turnover. The payables
turnover was:

Payables turnover = Cost of goods sold / Payables balance

Payables turnover = $87,386 / $19,472
Payables turnover = 4.49 times

Now, we can use the payables turnover to find the days’ sales in payables as:

Days’ sales in payables = 365 days / Payables turnover

Days’ sales in payables = 365 days / 4.49
Days’ sales in payables = 81.33 days

The company left its bills to suppliers outstanding for 81.33 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.

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24. The earnings per share are:

EPS = Net income / Shares

EPS = $8,400,000 / 4,600,000
EPS = $1.83

The price–earnings ratio is:

PE = Price / EPS
PE = $58 / $1.83
PE = 31.76 times

The sales per share are:

Sales per share = Sales / Shares

Sales per share = $52,800,000 / 4,600,000
Sales per share = $11.48

The price–sales ratio is:

P/S = Price / Sales per share

P/S = $58 / $11.48
P/S = 5.05 times

The book value per share is:

Book value per share = Book value of equity / Shares

Book value per share = $25,300,000 / 4,600,000
Book value per share = $5.50 per share

And the market-to-book ratio is:

Market-to-book = Market value per share / Book value per share

Market-to-book = $58 / $5.50
Market-to-book = 10.55 times

25. To find the profit margin, we need the net income and sales. We can use the total asset
turnover to find the sales and the return on assets to find the net income. Beginning with the total
asset turnover, we find sales are:

Total asset turnover = Sales / Total assets

1.80 = Sales / $7,450,000
Sales = $13,410,000

And the net income is:

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 ROA = Net income / Total assets
.0825 = Net income / $7,450,000
Net income = $614,625

Now we can find the profit margin, which is:

Profit margin = Net income / Sales

Profit margin = $614,625 / $13,410,000
Profit margin = .0458, or 4.58%

26. First, we need the enterprise value, which is:

Enterprise value = Market capitalization + Debt – Cash

Enterprise value = $635,000 + 215,000 – 39,000
Enterprise value = $811,000

And EBITDA is:

EBITDA = EBIT + Depreciation & Amortization

EBITDA = $96,400 + 168,000
EBITDA = $264,400

So, the enterprise value–EBITDA multiple is:

Enterprise value–EBITDA multiple = $811,000 / $264,400

Enterprise value–EBITDA multiple = 3.07 times

Intermediate

27. We can rearrange the Du Pont identity to calculate the profit margin. So, we need the equity
multiplier and the total asset turnover. The equity multiplier is:

Equity multiplier = 1 + Debt–equity ratio

Equity multiplier = 1 + .25
Equity multiplier = 1.25

And the total asset turnover is:

Total asset turnover = Sales / Total assets

Total asset turnover = $10,570 / $4,670
Total asset turnover = 2.26 times

Now, we can use the Du Pont identity to find total sales as:

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ROE = (Profit margin)(Total asset turnover)(Equity multiplier)
.15 = (PM)(2.26)(1.25)
Profit margin = .0530, or 5.30%

Rearranging the profit margin ratio, we can find the net income, which is:

Profit margin = Net income / Sales

.0530 = Net income / $10,570
Net income = $560.40