Chapter 3 Problem 13 Morton Chip Company : Balance Sheet as of Dec. 31, 2010 (Thousands of Dollars) Cash: $77,500 Accounts Payable: $129,000 Receivables: 336,000 Notes Payable: 84,000 Inventories: 241,500 Other Current Liabilities: 117,000 ________________ ___________ Total Current Assets: $655,000 Total Current Liabilities: $330,000 Net Fixed Assets: 292,500 Long-term debt: 256,000 _______________________ Common Equity: 361,000 Total Assets: $947,500 __________ ___________________ Total liabilities and equity: $947,500 ____________________ ___________ ___________ Morton Chip Company: Income Statement for Year Ended December 31, 2010 (Thousands of Dollars) Sales $1,607,500 Cost of Goods Sold 1,392,500 Selling, general, and administrative expenses: 145,000 ________ Earnings before interest and taxes (EBIT) $70,000 Interest Expense 24,500 ___________ Earnings before taxes (EBT) $45,500 Federal and state income taxes (40%) 18,200 ____________ Net Income $27,300 ____________ _____________ Ratio Morton Industry Average ___________________________________________________________________________ Current assets/Current liabilities ? 2.0 Days sales outstanding (based on 365-day year) ? 35.0 days Sales/Inventory ? 6.7 Sales/Fixed assets ? 12.1 Sales/Total assets ? 3.0 Net Income/Sales ? 1.2% Net income/Total assets ? 3.6% Net income/Common equity ? 9.0% Total debt/Total assets ? 60.0% Questions: a. Calculate the indicated ratios for Morton. b. Construct the extended Du Pont equation for both Morton and the industry. c. Outline Morton's strengths and weaknesses as revealed by your analysis. d. Suppose Morton had doubled its sales as well as its inventories, accounts receivable, and common equity during 2010. How would that information affect the validity of your ratio analysis? (Hint: Think about averages and the effects of rapid growth on ratios if averages are not used. No calculations are needed.)