1.

Analysis of Financial Statements: Tying the Ratios Together

The DuPont equation shows the relationships among asset management, debt management, and -Select-liquiditymarketprofitabilityCorrect 1 of Item 1 ratios. Management can use the DuPont equation to analyze ways of improving the firm's performance. Its equation is:

ROE=Profit margin Total assets turnover Equity multiplier

Ratio analysis is important to understand and interpret financial statements; however, sound financial analysis involves more than just calculating and interpreting numbers. -Select-QuantitativeQualitativeForeignCorrect 2 of Item 1 factors also need to be considered.

Quantitative Problem: Rosnan Industries' 2020 and 2019 balance sheets and income statements are shown below.

Balance Sheets
	2020	2019
Assets
Cash and equivalents	$100	$85
Accounts receivable	275	300
Inventories	375	350
Total current assets	$750	$735
Net plant and equipment	2,000	1,490
Total assets	$2,750	$2,225
Liabilities and Equity
Accounts payable	$150	$85
Accruals	75	50
Notes payable	150	175
Total current liabilities	$375	$310
Long-term debt	450	290
Total liabilities	$825	$600
Common stock	1,225	1,225
Retained earnings	700	400
Total common equity	$1,925	$1,625
Total liabilities and equity	$2,750	$2,225

Income Statements
	2020	2019
Sales	$2,000	$1,500
Operating costs excluding depreciation and amortization	1,250	1,000
EBITDA	$750	$500
Depreciation and amortization	100	75
EBIT	$650	$425
Interest	62	45
EBT	$588	$380
Taxes (40%)	235	152
Net income	$353	$228
Dividends paid	$53	$48
Addition to retained earnings	$300	$180
Shares outstanding	100	100
Price	$25.00	$22.50
WACC	10.00%

(1)What is the firms 2020 current ratio? Do not round intermediate calculations. Round your answer to two decimal places.?.

(2)If the industry average debt-to-assets ratio is 30%, then Rosnans creditors have a (smaller/bigger) cushion than indicated by the industry average. (3)What is the firms 2020 net profit margin? Do not round intermediate calculations. Round your answer to two decimal places________%

(4)If the industry average profit margin is 12%, then Rosnans lower than average debt-to-assets ratio might be one reason for its high profit margin.(True/False)

(5)What is the firms 2020 price/earnings ratio? Do not round intermediate calculations. Round your answer to two decimal places.?

(6)Using the DuPont equation, what is the firms 2020 ROE? Do not round intermediate calculations. Round your answer to two decimal places______%