a) Calculate the ratios that you think would be useful in this analysis. b) Construct an extended DU Pont equation for Ferri, and compare the company's ratios to the industry average ratios. c) Do the balance sheets or the income statement figures seem to be primarily responsible for the low profits? d) Which specific amounts can seem to be most out of line in relation to other firms in the industry? e) If Ferri had pronounced a seasonal sales pattern or if it grew rapidly during the year, how might that affect the validity of your ratio analysis. How might you correct for such potential problems? f) In part (b) above interpret the differences in the companys ratios with those of the industry averages. What do those differences convey?

The Ferri Furniture Company, a manufacturer and wholesaler of high-quality home furnish- ings, has been experiencing low profitability in recent years. As a result, the board of directors has replaced the president of the firm with a new president, Helen Adams, who has asked you to make an analysis of the firm's financial position using the Du Pont chart. The most recent in- dustry average ratios, and Ferri's financial statements, are as follows: INDUSTRY AVERAGE RATIOS Current ratio Debt/total assets Times-interest-earned EBITDA coverage Sales/inventory Days sales outstanding 2x 30% 7x 9x 10x 24 days Sales/fixed assets Sales/total assets Profit margin on sales Return on total assets Return on common equity 6X 3x 3% 9% 12.9% "Calculation is based on a 360-day year. Ferri Furniture Company: Balance Sheet as of December 31, 2001 (Millions of Dollars) Cash Marketable securities Net receivables Inventories Total current assets $ 45 33 66 159 $303 Accounts payable Notes payable Other current liabilities Total current liabilities Long-term debt Total liabilities $ 45 45 21 $111 24 $135 Gross fixed assets Less depreciation Net fixed assets 225 78 $147 Common stock Retained earnings Total stockholders' equity Total liabilities and equity 114 201 $315 $450 Total assets $450 Ferri Furniture Company: Income Statement for Year Ended December 31, 2001 (Millions of Dollars) Net sales Cost of goods sold Gross profit Selling expenses Depreciation expense Earnings before interest and taxes Interest expense Earnings before taxes (EBT) Taxes (40%) Net income $ 795.0 660.0 $135.0 73.5 12.0 $ 49.5 4.5 45.0 18.0 $ 27.0