A firm has been experiencing low profitability in recent years Perform an analysis of the firm's financial position using the DuPont equation The firm has no lease payments but has a $3 million sinking fund payment on its debt The most recent industry average ratios and the firm's financial statements are as follows Industry Average Ratios Current ratio 3 21x Fixed assets turnover 5 38x Debt to capital ratio 19 99 Total assets turnover 2 87x Times interest earned 2 92x Profit margin 2 07 EBITDA coverage 4 03x Return on total assets 6 08 Inventory turnover 10 40x Return on common equity 9 33 Days sales outstanding a 31 66 days Return on invested capital 9 09 a Calculation is based on a 365 day year Balance Sheet as of December 31, 2018 (Millions of Dollars) Cash and equivalents $66 Accounts payable $31 Accounts receivables 66 Other current liabilities 23 Inventories 125 Notes payable 47 Total current assets $257 Total current liabilities $101 Long term debt 20 Total liabilities $121 Gross fixed assets 187 Common stock 98 Less depreciation 54 Retained earnings 171 Net fixed assets $133 Total stockholders' equity $269 Total assets $390 Total liabilities and equity $390 Income Statement for Year Ended December 31, 2018 (Millions of Dollars) Net sales $650 0 Cost of goods sold 539 5 Gross profit $110 5 Selling expenses 71 5 EBITDA $39 0 Depreciation expense 7 1 Earnings before interest and taxes (EBIT) $31 8 Interest expense 6 0 Earnings before taxes (EBT) $25 8 Taxes (40 ) 10 3 Net income $15 5 Calculate the following ratios Do not round intermediate calculations Round your answers to two decimal places Firm Industry Average Current ratio x 3 21x Debt to total capital 19 99 Times interest earned x 2 92x EBITDA coverage x 4 03x Inventory turnover x 10 40x Days sales outstanding days 31 66 days Fixed assets turnover x 5 38x Total assets turnover x 2 87x Profit margin 2 07 Return on total assets 6 08 Return on common equity 9 33 Return on invested capital 9 09 Construct a DuPont equation for the firm and the industry Do not round intermediate calculations Round your answers to two decimal places Firm Industry Profit margin 2 07 Total assets turnover x 2 87x Equity multiplier x x Do the balance sheet accounts or the income statement figures seem to be primarily responsible for the low profits Select IIIIIIIVVItem 17 Analysis of the extended Du Pont equation and the set of ratios shows that the turnover ratio of sales to assets is quite low however, its profit margin compares favorably with the industry average Either sales should be lower given the present level of assets, or the firm is carrying less assets than it needs to support its sales Analysis of the extended Du Pont equation and the set of ratios shows that most of the Asset Management ratios are below the averages Either assets should be higher given the present level of sales, or the firm is carrying less assets than it needs to support its sales The low ROE for the firm is due to the fact that the firm is utilizing more debt than the average firm in the industry and the low ROA is mainly a result of an excess investment in assets The low ROE for the firm is due to the fact that the firm is utilizing less debt than the average firm in the industry and the low ROA is mainly a result of an lower than average investment in assets Analysis of the extended Du Pont equation and the set of ratios shows that the turnover ratio of sales to assets is quite low however, its profit margin compares favorably with the industry average Either sales should be higher given the present level of assets, or the firm is carrying more assets than it needs to support its sales Which specific accounts seem to be most out of line relative to other firms in the industry Select IIIIIIIVVItem 18 The accounts which seem to be most out of line include the following ratios Debt to Total Capital, Inventory Turnover, Total Asset Turnover, Return on Assets, and Profit Margin The accounts which seem to be most out of line include the following ratios Times Interest Earned, Total Asset Turnover, Profit Margin, Return on Assets, and Return on Equity The accounts which seem to be most out of line include the following ratios Inventory Turnover, Days Sales Outstanding, Fixed Asset Turnover, Profit Margin, and Return on Equity The accounts which seem to be most out of line include the following ratios Inventory Turnover, Days Sales Outstanding, Total Asset Turnover, Return on Assets, and Return on Equity The accounts which seem to be most out of line include the following ratios Current, EBITDA Coverage, Inventory Turnover, Days Sales Outstanding, and Return on Equity If the firm had a pronounced seasonal sales pattern or if it grew rapidly during the year, how might that affect the validity of your ratio analysis Select IIIIIIIVVItem 19 Rapid growth would most likely affect the coverage ratios, with little effect on asset management ratios Seasonal sales patterns would not substantially affect your analysis Seasonal sales patterns would most likely affect the liquidity ratios, with little effect on asset management ratios Rapid growth would not substantially affect your analysis If the firm had sharp seasonal sales patterns, or if it grew rapidly during the year, many ratios would most likely be distorted It is more important to adjust the debt ratio than the inventory turnover ratio to account for any seasonal fluctuations Seasonal sales patterns would most likely affect the profitability ratios, with little effect on asset management ratios Rapid growth would not substantially affect your analysis How might you correct for such potential problems Select IIIIIIIVVItem 20 It is possible to correct for such problems by insuring that all firms in the same industry group are using the same accounting techniques It is possible to correct for such problems by using average rather than end of period financial statement information It is possible to correct for such problems by comparing the calculated ratios to the ratios of firms in a different line of business It is possible to correct for such problems by comparing the calculated ratios to the ratios of firms in the same industry group over an extended period There is no need to correct for these potential problems since you are comparing the calculated ratios to the ratios of firms in the same industry group

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A firm has been experiencing low profitability in recent years. Perform an analysis of the firm's financial position using the DuPont equation. The firm has

A firm has been experiencing low profitability in recent years. Perform an analysis of the firm's financial position using the DuPont equation. The firm has no lease payments but has a $3 million sinking fund payment on its debt. The most recent industry average ratios and the firm's financial statements are as follows:

Industry Average Ratios

Current ratio	3.21x	Fixed assets turnover	5.38x
Debt-to-capital ratio	19.99%	Total assets turnover	2.87x
Times interest earned	2.92x	Profit margin	2.07%
EBITDA coverage	4.03x	Return on total assets	6.08%
Inventory turnover	10.40x	Return on common equity	9.33%
Days sales outstanding^a	31.66 days	Return on invested capital	9.09%

^aCalculation is based on a 365-day year.

Balance Sheet as of December 31, 2018 (Millions of Dollars)

Cash and equivalents	$66	Accounts payable	$31
Accounts receivables	66	Other current liabilities	23
Inventories	125	Notes payable	47
Total current assets	$257	Total current liabilities	$101
		Long-term debt	20
		Total liabilities	$121
Gross fixed assets	187	Common stock	98
Less depreciation	54	Retained earnings	171
Net fixed assets	$133	Total stockholders' equity	$269
Total assets	$390	Total liabilities and equity	$390

Income Statement for Year Ended December 31, 2018 (Millions of Dollars)

Net sales	$650.0
Cost of goods sold	539.5
Gross profit	$110.5
Selling expenses	71.5
EBITDA	$39.0
Depreciation expense	7.1
Earnings before interest and taxes (EBIT)	$31.8
Interest expense	6.0
Earnings before taxes (EBT)	$25.8
Taxes (40%)	10.3
Net income	$15.5

Calculate the following ratios. Do not round intermediate calculations. Round your answers to two decimal places.

	Firm	Industry Average
Current ratio	x	3.21x
Debt to total capital	%	19.99%
Times interest earned	x	2.92x
EBITDA coverage	x	4.03x
Inventory turnover	x	10.40x
Days sales outstanding	days	31.66 days
Fixed assets turnover	x	5.38x
Total assets turnover	x	2.87x
Profit margin	%	2.07%
Return on total assets	%	6.08%
Return on common equity	%	9.33%
Return on invested capital	%	9.09%

Construct a DuPont equation for the firm and the industry. Do not round intermediate calculations. Round your answers to two decimal places.

Firm Industry

Profit margin % 2.07%

Total assets turnover x 2.87x

Equity multiplier x x
Do the balance sheet accounts or the income statement figures seem to be primarily responsible for the low profits? -Select-IIIIIIIVVItem 17
1. Analysis of the extended Du Pont equation and the set of ratios shows that the turnover ratio of sales to assets is quite low; however, its profit margin compares favorably with the industry average. Either sales should be lower given the present level of assets, or the firm is carrying less assets than it needs to support its sales.
2. Analysis of the extended Du Pont equation and the set of ratios shows that most of the Asset Management ratios are below the averages. Either assets should be higher given the present level of sales, or the firm is carrying less assets than it needs to support its sales.
3. The low ROE for the firm is due to the fact that the firm is utilizing more debt than the average firm in the industry and the low ROA is mainly a result of an excess investment in assets.
4. The low ROE for the firm is due to the fact that the firm is utilizing less debt than the average firm in the industry and the low ROA is mainly a result of an lower than average investment in assets.
5. Analysis of the extended Du Pont equation and the set of ratios shows that the turnover ratio of sales to assets is quite low; however, its profit margin compares favorably with the industry average. Either sales should be higher given the present level of assets, or the firm is carrying more assets than it needs to support its sales.
Which specific accounts seem to be most out of line relative to other firms in the industry? -Select-IIIIIIIVVItem 18
1. The accounts which seem to be most out of line include the following ratios: Debt to Total Capital, Inventory Turnover, Total Asset Turnover, Return on Assets, and Profit Margin.
2. The accounts which seem to be most out of line include the following ratios: Times Interest Earned, Total Asset Turnover, Profit Margin, Return on Assets, and Return on Equity.
3. The accounts which seem to be most out of line include the following ratios: Inventory Turnover, Days Sales Outstanding, Fixed Asset Turnover, Profit Margin, and Return on Equity.
4. The accounts which seem to be most out of line include the following ratios: Inventory Turnover, Days Sales Outstanding, Total Asset Turnover, Return on Assets, and Return on Equity.
5. The accounts which seem to be most out of line include the following ratios: Current, EBITDA Coverage, Inventory Turnover, Days Sales Outstanding, and Return on Equity.
If the firm had a pronounced seasonal sales pattern or if it grew rapidly during the year, how might that affect the validity of your ratio analysis? -Select-IIIIIIIVVItem 19
1. Rapid growth would most likely affect the coverage ratios, with little effect on asset management ratios. Seasonal sales patterns would not substantially affect your analysis.
2. Seasonal sales patterns would most likely affect the liquidity ratios, with little effect on asset management ratios. Rapid growth would not substantially affect your analysis.
3. If the firm had sharp seasonal sales patterns, or if it grew rapidly during the year, many ratios would most likely be distorted.
4. It is more important to adjust the debt ratio than the inventory turnover ratio to account for any seasonal fluctuations.
5. Seasonal sales patterns would most likely affect the profitability ratios, with little effect on asset management ratios. Rapid growth would not substantially affect your analysis.
How might you correct for such potential problems? -Select-IIIIIIIVVItem 20
1. It is possible to correct for such problems by insuring that all firms in the same industry group are using the same accounting techniques.
2. It is possible to correct for such problems by using average rather than end-of-period financial statement information.
3. It is possible to correct for such problems by comparing the calculated ratios to the ratios of firms in a different line of business.
4. It is possible to correct for such problems by comparing the calculated ratios to the ratios of firms in the same industry group over an extended period.
5. There is no need to correct for these potential problems since you are comparing the calculated ratios to the ratios of firms in the same industry group.