ACT 5001 - Worksheet 5

Module 4

Holbrook Company had the following financial information for years 2017 and 2018. Refer to this information to answer the required and the bonus problem below.

Income Statement

2018

2017

Sales Revenue

$180,000

$165,000

Cost of Goods Sold

110,000

100,000

Gross Profit

70,000

65,000

Operating expenses

53,300

50,400

Interest expense

2,700

2,600

Income before income tax

14,000

12,000

Income tax expense

4,000

3,000

Net Income

$10,000

$9,000

Balance Sheet

2018

2017

Cash

$22,000

$16,000

Accounts Receivable (net)

19,000

17,000

Investments (short-term)

3,000

5,000

Inventory

34,000

30,000

Prepaid Expenses

2,000

4,000

Property, plant and equipment (net)

45,000

38,000

$125,000

$110,000

Accounts Payable

$19,000

$15,000

Interest Payable

800

600

Accrued expenses

3,200

2,400

Unearned revenue

3,000

2,000

Notes Payable (long-term)

40,000

45,000

Common Stock ($5)

30,000

20,000

Retained Earnings

$29,000

$25,000

$125,000

$110,000

Required:

1.Compute the following ratios for Holbrook Company for year 2018:

a.Return on Equity (ROE)

b.Return on Assets (ROA)

c.Financial Leverage (FL)

d.Asset Turnover (AT)

e.Profit Margin (PM)

2.Which of the two ratios from part (1) are used in the disaggregation of ROA? Show your calculations to confirm that the product of these two ratios equals the ROA that you calculated in part 1. (There will be slight differences due to rounding.)

3.Which of the of three ratios from part (1) are used in the full DuPont disaggregation of ROE? Show your calculations to confirm that the product of these three ratios equals the ROE that you calculated in part 1. (There will be slight differences due to rounding.)

4.Which of the three ratios in the ROE calculation appear to be driving the overall ROE figure? (By this, I mean, which portion of the calculation appears to have the most influence on the overall ROE figure). How did you determine your answer?

5.From a management perspective, what is the benefit of the DuPont disaggregation method over the straightforward ROE calculation method? (Your book has a few paragraphs on this. Please be sure to use your OWN words when answering the question).

6.Compute the following ratios for Holbrook Company for years 2017 and 2018:

a.Current ratio

b.Debt-to-Equity Ratio

c.Times Interest Earned Ratio

7.Based on the ratios in part (6), is the company more or less liquid in 2018 than it was in 2017? Is it more or less solvent?Explain which ratios you used and how you interpreted them to determine your answers.

8.Based on your ratio analysis, provide a brief summary of the company's performance for the year 2018. In your summary, be sure to focus on the company's use of debt and whether or not they are using it to their advantage.

Bonus Question(20 points total)

1.What is the definition of NET assets? (3 points)

2.What is the difference between operating and non-operating assets, liabilities, revenues and expenses? (3 points)

3.From the problem above, identify which ones are operating assets, operating liabilities, operating revenues and operating expenses. (Your book provides a break-down of this in Module 4.) (10 points)

4.Compute the Return on Net Operating Assets for year 2018 using the formula from Page 4-25 of your book. You MUST show your formula and your calculations in order to receive credit for this part of the problem.(4 points)