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:

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.

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Quantitative Problem: Rosnan Industries' 2018 and 2017 balance sheets and income statements are shown below.

Balance Sheets:
	2018	2017
Cash and equivalents	$110	$95
Accounts receivable	275	300
Inventories	375	350
Total current assets	$760	$745
Net plant and equipment	2,000	1,490
Total assets	$2,760	$2,235
Accounts payable	$150	$85
Accruals	75	50
Notes payable	160	185
Total current liabilities	$385	$320
Long-term debt	450	290
Common stock	1,225	1,225
Retained earnings	700	400
Total liabilities and equity	$2,760	$2,235

Income Statements:
	2018	2017
Sales	$2,000	$1,500
Operating costs excluding depreciation	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%

What is the firms 2018 current ratio? Round your answer to two decimal places.

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Incorrect

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Review the current ratio definition and equation.

Realize that information will come from firms balance sheet.

Make sure that you use 2018 data and not 2017 data.

If the industry average debt-to-total-assets ratio is 30%, then Rosnans creditors have a -Select-smallerbiggerCorrect 1 of Item 3 cushion than indicated by the industry average. What is the firms 2018 net profit margin? Round your answer to four decimal places. %

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Partially Correct

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Review the profit margin definition and equation.

Realize that information will come from the firms income statement.

Make sure that you use 2018 data and not 2017 data.

Make sure that you include the correct type of income in the numerator.

If the industry average profit margin is 12%, then Rosnans lower than average debt-to-total-assets ratio might be one reason for its high profit margin. -Select-TrueFalseCorrect 1 of Item 4

What is the firms 2018 price/earnings ratio? Round your answer to two decimal places.

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Review the price/earnings ratio definition and equation.

Realize that information will come from the firms income statement.

Make sure that you use 2018 data and not 2017 data.

Make sure that you calculate earnings per share correctly.

Using the DuPont equation, what is the firms 2018 ROE? Round your answer to two decimal places. %