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 $1 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 2x Fixed assets turnover 6x Debt-to-capital ratio 219 Total assets turnover 4x Times interest earned 4x Profit margin 3.25% EBITDA coverage Return on total assets 13.00% Inventory turnover 15% Return on common 18,30% equity Days sales 1 days Return on invested 16.70% outstanding capital Calculation is based on a 365-day year. Balance Sheet as of December 31, 2019 (Millions of Dollars) Cash and equivalents $ 55 Accounts payable $.41 Accounts receivables 52 Other current abilities 24 Invertories 104 Notes payable 38 Total current assets $211 Total current liabilities $103 Long-term debt 21 Total liabilities Gross fixed Assets 159 Common stock 76 Less deprecation 25 Retained earnings 145 Net fixed assets 3134 Total stockholders' equity $221 Total assets Totalities and equity 5345 Income Statement for Year Ended December 31, 2019 (Millions of Dollars) Netales $ 745.00 Cost of goods sold 630.00 Gross prom $115.00 Selling expenses EBITDA 52.50 RA 10.00 Income Statement for Year Ended December 31, 2019 (Millions of Dollars) Net sales $ 745.00 Cost of goods sold 630.00 Gross profit $ 115.00 Selling expenses 62.50 EBITDA $ 52.50 Depreciation expense 10.00 Earnings before interest and taxes (EBIT) $ 42.50 Interest expense 5.50 Earnings before taxes (EBT) $ 37.00 Taxes (25%) 9.25 Net Income 27.75 a. Calculate the following ratios. Do not round intermediate calculations. Round Pour answers to two decimal places. Firm Industry Average Current ratio 2x Debt to total capital % 21% Times interest earned 4x EBITDA coverage 8x Inventory turnover 15x Days sales outstanding days 18days Fixed assets turnover X 6x Total assets turnover 4x Profit margin % 3.25% Return on total assets % 13.00% Return on common equity % 18.30% Return on invested capital 9 16.70% b. 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 96 3.25% Total assets turnover 4x X X X X b. 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 3.25% Total assets turnover x Equity multiplier c. Do the balance sheet accounts or the income statement figures seem to be primarily responsible for the low profits? 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 II. 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. III. 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. IV. 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. V. 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 Sale d. Which specific accounts seem to be most out of line relative to other firms in the industry 1. 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 II. 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 III. The accounts which seem to be most out of tine include the following ratios: Current, EBITDA Coverage, Inventory Tumover, Days Sales Outstanding, and Return on Equity IV. The accounts which seem to be most out of line include the following ratios: Debt to Total Capital Inventory Turnover, Total Amet 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, Hetum an Assets, and Return on Equity e. 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 analys? 1. It is more important to adjust the debt ratio than the inventory turnover ratio to account for any seasonal fluctuations. IL Seasonal sales patterns would most likely affect the profitability ratios, with little effect on asset management ratios Rapid growth would not substantial d. Which specific accounts seem to be most out of line relative to other firms in the industry? I. 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 ration: Inventory Turnover, Days Sales Outstanding, Total Asset Turnover, Return on Assets, and Return on Equity m. 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 TV. The accounts which seem to be most out of fine include the following ratios: Debt to Total Capital, Inventory Turnover, Total Asset Turnover, Return on Assets and Profit Margin V. The accounts which seem to be most out of line include the following ratios: Times Interest Earned, Total Asset Tumover, Profit Margin, Return on Assets, and Return on Equity e. 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? 1. It is more important to adjust the debt ratio than the inventory turdover ratio to account for any seasonal fluctuations. II Seasonal sales patterns would most likely affect the profitabisty ratios, with little effect on asset management ratios. Rapid growth would not substantially affect your analysis, III. 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 IV. Seasonal sales patterns would most likely affect the liquidity ration, with little effect on asset management ratios. Rapid growth would not substantially affect your analysis V If the firm had sharp seasonal sales patterns, or if it grew rapidly during the year, many ratios would most likely be distorted. How might you correct for such potential problems? 1. It is possible to correct for such problems by comparing the calculated ratios to the ratio of firm in the same industry group over an extended period. IL There is no need to correct for these potential problems since you are comparing the calculated ratios to the ratio of firms in the same industry groun III. It is possible to correct for such problems by Insuring that all firms in the same industry group are using the same accounting techniques IV. I posunie to correct for such problems by using average rather than end of period financial statement information VII possible to correct for such problems by comparing the calculated ratios to the ratio of firms in a different line of business