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14.10. PROBLEMS

  1. The Robinson Company has the following current assets and current liabilities for these two years:

     20112012
    Cash and marketable securities$50,000$50,000
    Accounts receivable300,000350,000
    Inventories350,000500,000
    Total current assets$700,000$900,000
    Accounts payable$200,000$250,000
    Bank loan0150,000
    Accruals150,000200,000
    Total current liabilities$350,000$600,000


    1. Compare the current ratios between the two years.

    2. Compare the acid-test ratios between 2011 and 2012. Comment on your findings.

  2. The Robinson Company had a cost of goods sold of $1,000,000 in 2011 and $1,200,000 in 2012.

    1. Calculate the inventory turnover for each year. Comment on your findings.

    2. What would have been the amount of inventories in 2012 if the 2011 turnover ratio had been maintained?

  3. The Dayco Manufacturing Company had the following financial statement results for last year. Net sales were $1.2 million with net income of $90,000. Total assets at year end amounted to $900,000.

    1. Calculate Dayco's asset turnover ratio and its profit margin.

    2. Show how the two ratios in Part (a) can be used to determine Dayco's rate of return on assets.

    3. Dayco operates industry average ratios are these: Return on assets: 11 percent; Asset turnover: 2.5 times; Net profit margin: 3.6 percent. Compare Dayco's performance against the industry averages.

  4. Next year, Allgreens expects its sales to reach $33,000 with an investment in total assets of $10,750. Net income of $1,225 is anticipated. This year, sales were $30,000, total assets were $9,900, and net income was $1,000. Last year, these figures were $28,000, $9,000, and $750 respectively.

    1. Use the Du Pont system to compare Allgreens' anticipated performance against its prior year results. Comment on your findings.

    2. How would Allgreens compare with the industry if it oper- ates in the same industry as Dayco (see Problem 3) and if the industry average ratios remain the same over time?

  5. Following are selected financial data in thousands of dollars for the Hunter Corporation.

     20122011
    Current assets$ 500$400
    Fixed assets, net700600
    Total assets1,2001,000
    Current liabilities300200
    Long-term debt200200
    Common equity700600
    Total liabilities and equity$1,200$1,000
    Net sales$1,500$1,200
    Total expenses–1,390–1,100
    Net income110100.


    1. Calculate Hunter's rate of return on total assets in 2012 and in 2011. Did the ratio improve or worsen?

    2. Diagram the expanded Du Pont system for Hunter for 2012. Insert the appropriate dollar amounts wherever possible.

    3. Use the Du Pont system to calculate the return on assets for the two years, and determine why they changed.

  6. Following are financial statements for the Genatron Manufacturing Corporation for 2012 and 2011.

    GENATRON MANUFACTURING CORPORATION

    BALANCE SHEET20122011
    ASSETS  
    Cash$40,000$50,000
    Accts. receivable260,000200,000
    Inventory500,000450,000
    Total current assets800,000700,000
    Fixed assets, net400,000300,000
    Total assets$1,200,000$1,000,000
    LIABILITIES AND EQUITY  
    Accts. Payable$170,000$130,000
    Bank loan90,00090,000
    Accruals70,00050,000
    Total current liabilities330,000270,000
    Long-term debt, 12%400,000300,000
    Common stock, $10 par300,000300,000
    Capital surplus50,00050,000
    Retained earnings120,00080,000
    Total liabilities & equity$1,200,000$1,000,000


    INCOME STATEMENT20122011
    Net sales$1,500,000$1,300,000
    Cost of goods sold900,000780,000
    Gross profit600,000520,000
    Expenses: general and administrative150,000150,000
    Marketing150,000130,000
    Depreciation53,00040,000
    Interest57,00045,000
    Earnings before taxes190,000155,000
    Income taxes76,00062,000
    Net income$114,000$93,000


    1. Apply Du Pont analysis to both the 2012 and 2011 financial statements' data.

    2. Explain how financial performance differed between 2012 and 2011.

  7. This problem uses the financial statements for the Genatron Manufacturing Corporation for the years 2012 and 2011 from Problem 6.

    1. Calculate Genatron's dollar amount of net working capital in each year.

    2. Calculate the current ratio and the acid-test ratio in each year.

    3. Calculate the average collection period and the inventory-turnover ratio in each year.

    4. What changes in the management of Genatron's current assets seem to have occurred between the two years?

  8. Genatron Manufacturing expects its sales to increase by 10 percent in 2013. Estimate the firm's external financing needs by using the percent-of-sales method for the 2012 data. Assume that no excess capacity exists and that one-half of the 2012 net income will be retained in the business.

  9. Rework Problem 8 assuming that Genatron Manufacturing expects its sales to increase by 20 percent in 2013. What is the amount of external financing needed?

  10. Genatron wants to estimate what will happen to its income before interest and taxes if its net sales change from the 2012 level of $1,500,000. Refer to Genatron's 2012 income statement, shown in Problem 6, where the income before interest and taxes is $247,000 (EBT of $190,000 plus Interest of $57,000). Assume that the cost of goods sold are variable expenses and that the other operating expenses are fixed.

    1. Calculate the expected amount of income before interest and taxes for both a 10 percent decrease and a 10 percent increase in net sales for next year.

    2. Determine the percentage change in income before interest and taxes given your calculations in Part a, and determine the degree of operating leverage.

  11. Challenge Problem Using the information in Tables 14.1 and 14.2, compute the financial ratios we discussed in this chapter for Walgreens using the 2007 and 2006 data.

  12. Challenge Problem Below are financial statements for Global Manufacturing. After computing the ratios we discussed in this chapter, discuss strong and weak points of Global's performance.

    DECEMBER 31201220112010
    ASSETS   
    Cash and marketable securities$ 25,000$ 20,000$ 16,000
    Accounts receivable100,00080,00056,000
    Inventories125,000100,00080,000
    Total current assets250,000200,000152,000
    Gross plant and equipment300,000225,000200,000
    Less: accumulated depreciation– 100,000– 75,000– 50,000
    Net plant and equipment200,000150,000150,000
    Land50,00050,00050,000
    Total fixed assets250,000200,000200,000
    Total assets$500,000$400,000$352,000
    LIABILITIES AND EQUITY   
    Accounts payable$ 78,000$ 65,000$ 58,000
    Notes payable34,00010,00010,000
    Accrued liabilities30,00025,00025,000
    Total current liabilities142,000100,00093,000
    Long-term debt140,000100,00071,000
    Total liabilities$282,000$200,000$164,000
    Common stock   
    ($1 par, 50,000 shares)$ 50,000$ 50,000$ 50,000
    Paid-in capital100,000100,000100,000
    Retained earnings68,00050,00038,000
    Total stockholders' equity218,000200,000188,000
    Total liabilities and equity$500,000$400,000$352,000


    YEARS ENDED DECEMBER 31201220112010
    Net revenues or sales$700,000$600,000$540,000
    Cost of goods sold450,000375,000338,000
    Gross profit250,000225,000202,000
    Operating expenses:   
    General and administrative95,00095,00095,000
    Selling and marketing56,00050,00045,000
    Depreciation25,00020,00015,000
    Operating income74,00060,00047,000
    Interest14,00010,0007,000
    Income before taxes60,00050,00040,000
    Income taxes (40%)24,00020,00016,000
    Net income$ 36,000$ 30,000$ 24,000
    Number of shares outstanding50,00050,00050,000
    Earnings per share$0.72$0.60$0.48


  13. Below are the consolidated financial statements for Global Manufacturing's industry. Use Du Pont Analysis on the industry financial statements to determine why industry return on equity changed from year to year.

    Balance Sheets for INDUSTRY:

    DECEMBER 31201220112010
    ASSETS   
    Cash and marketable securities$ 30,000$ 25,000$ 20,000
    Accounts receivable110,00090,00060,000
    Inventories100,00080,00080,000
    Total current assets240,000195,000160,000
    Gross plant and equipment250,000220,000200,000
    Less: accumulated depreciation– 100,000– 65,000– 50,000
    Net plant and equipment150,000155,000150,000
    Land50,00050,00050,000
    Total fixed assets200,000205,000200,000
    Total assets$440,000$400,000$360,000
    LIABILITIES AND EQUITY   
    Accounts payable$ 58,000$ 50,000$ 45,000
    Notes payable50,00050,00050,000
    Accrued liabilities000
    Total current liabilities108,000100,00095,000
    Long-term debt32,00020,00015,000
    Total liabilities$140,000$120,000$110,000
    Total stockholders' equity300,000280,000250,000
    Total liabilities and equity$440,000$400,000$360,000


    INCOME STATEMENTS FOR INDUSTRY: YEARS ENDED DECEMBER 31201220112010
    Net revenues or sales$1,100,000$1,000,000$900,000
    Cost of goods sold700,000650,000600,000
    Gross profit$ 400,000$ 350,000$300,000
    Operating expenses:   
    General and administrative143,000135,000130,000
    Selling and marketing88,00080,00070,000
    Depreciation44,00040,00036,000
    Operating income125,00095,00064,000
    Interest15,00015,00014,000
    Income before taxes110,00080,00050,000
    Income taxes (40%)44,00032,00020,000
    Net income$ 66,000$ 48,000$ 30,000


  14. Compare the reasons for the changes in return on equity for Global Manufacturing and its industry.

  15. Challenge Problem Compute the financial ratios for Global Manufacturing's industry. Using Global's ratios from problem 12, graph the firm's and industry ratios as we've done in this chapter. Analyze Global's performance in comparison to its industry.

  16. Challenge Problem Evaluate the performance of Johnson & Johnson in comparison to its industry.

     JOHNSON & JOHNSONINDUSTRY
    RATIOYEAR 1YEAR 2YEAR 1YEAR 2
    Current Ratio1.621.571.541.68
    Quick Ratio0.800.781.011.01
    Total Asset Turnover1.151.000.860.90
    Fixed Asset Turnover2.011.752.593.27
    Average Collection Period53.6560.3367.1375.62
    Inventory Turnover2.792.452.162.05
    Total Debt to Total Assets0.550.550.530.51
    Equity Multiplier2.202.202.132.02
    Interest Coverage19.5114.8616.9014.40
    Net Profit Margin12.6%12.7%14.2%14.2%
    Return on Assets14.6%12.8%12.2%11.7%
    Return on Equity32.1%28.2%26.1%25.8%
    Price/Earnings16.3817.5521.4522.03
    Price/Book5.184.943.933.78


  17. Associated Containers Company is planning to manufacture and sell plastic pencil holders. Direct labor and raw materials will be $2.28 per unit. Fixed costs are $15,300 and the expected selling price is $3.49 per unit.

    1. Determine the break-even point (where operating profit is zero) in units and dollars.

    2. How much profit or loss before interest and taxes will there be if 10,825 units are sold?

    3. What will the selling price per unit have to be if 13,650 units are sold in order to break even?

    4. How much will variable costs per unit have to be in order to break even if only 9,500 units are expected to be sold and the selling price is $3.49?

  18. Challenge Problem Graph the revenue and cost lines to estimate the break-even point for the following data. Compute the break-even point mathematically.

    1. price = $12.95; variable cost/unit = $6.89; fixed costs = $10,000

    2. price = $23, 995; variable cost/unit = $16,545; fixed costs = $40 million

    3. price = $249; variable cost/unit = $50; fixed costs = $800,000

  19. This problem uses the two years of financial statements data provided in Problem 6 for the Genatron Manufacturing Corporation.

    1. Calculate and compare each current assets account as a percentage of total assets for that year.

    2. Calculate and compare each current liabilities account as a percentage of total liabilities and equities for that year.

    3. Calculate the current ratio and the acid-test ratio for each year. Describe the changes in liquidity, if any, that occurred between the two years.

  20. The Jackman Company had sales of $1,000,000 and net income of $50,000 last year. Sales are expected to increase by 20 percent next year. Selected year-end balance sheet items were:

    Current assets$400,000
    Fixed assets$500,000
    Total assets$900,000
    Current liabilities$200,000
    Long-term debt$200,000
    Owners' equity$500,000
    Total liabilities and equity$900,000


    1. Express each balance sheet item as a percent of this year's sales.

    2. Estimate the new asset investment requirement for next year, assuming no excess production capacity.

    3. Estimate the amount of internally generated funds for next year, assuming that all profits will be retained in the firm.

    4. If all current liabilities are expected to change spontaneously with sales, what will be their dollar increase next year?

    5. Estimate Jackman's external financing requirements for next year.

  21. Using the data in the chapter, estimate Walgreen's external financing needs if a 20-percent growth rate is expected.

  22. Using Global Manufacturing's financial statements in problem 12, estimate their external financing needs if 10-percent growth in sales is expected and the firm pays out half of its earnings as dividends.

  23. Using the financial statements presented in problem 12, determine Global Manufacturing's degree of operating leverage in each of the years presented. Assume the cost of goods sold is variable and all other costs are fixed.

  24. Using your estimate for the degree of operating leverage for Global in 2012, estimate the level of operating income if the following year's sales (a) rise by 5 percent or (b) fall by 12 percent.

  25. Using the financial statements presented in problem 6, determine Genatron's degree of operating leverage in each of the years presented. Assume the cost of goods sold and marketing expenses are variable costs and all other costs are fixed.

  26. Using your estimate for the degree of operating leverage for Genatron in 2012 from problem 25, estimate the level of operating income if the following year's sales (a) rise by 5 percent or (b) fall by 12 percent.


  

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