Industry Average Ratios Current ratio 3.75x Fixed assets turnover Debt-to-capital ratio 19.62% Total assets turnover Times interest earned 13.90x Profit margin EBITDA coverage 13.80x Return on total assets Inventory turnover 13.18x Return on common equity Days sales outstandinga 16.07 days Return on invested capital aCalculation is based on a 365-day year. 5.59x 3.72x 10.42% 36.01% 53.26% 48.93% $14 8 19 16 $38 Balance Sheet as of December 31, 2016 (Millions of Dollars) Cash and equivalents $27 Accounts payable Accounts receivables Other current liabilities Inventories 51 Notes payable Total current assets $97 Total current liabilities Long-term debt Total liabilities Gross fixed assets 75 Common stock Less depreciation 12 Retained earnings Net fixed assets $63 Total stockholders' equity Total assets $160 Total liabilities and equity 11 $49 38 73 $111 $160 Income Statement for Year Ended December 31, 2016 (Millions of dollars) Net sales $320.0 Cost of goods sold 217.6 Gross profit $102.4 Selling expenses 32.0 EBITDA $70.4 Depreciation expense 4.2 Earnings before interest and taxes (EBIT) $66.2 Interest expense 3.0 Earnings before taxes (EBT) $63.2 Taxes (40%) 25.3 Net income $37.9 Firm X X a. Calculate the following ratios. Do not round intermediate steps. Round your answers to two decimal places. Industry Average Current ratio 3.75x Debt to total capital % 19.62% Times interest earned X 13.90x EBITDA coverage 13.80x Inventory turnover 13.18x Days sales outstanding days 16.07days Fixed assets turnover 5.59x Total assets turnover X 3.72x Profit margin % 10.42% Return on total assets % 36.01% Return on common equity % 53.26% Return on invested capital % 48.93% b. Construct a DuPont equation for the firm and the industry. Do not round intermediate steps. Round your answers to two decimal places. Firm Industry Profit margin % 10.42% Total assets turnover 3.72x Equity multiplier X C. Do the balance sheet accounts or the income statement figures seem to be primarily responsible for the low profits? -Select- I. 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. II. 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. III. 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. IV. 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. V. 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. X d. Which specific accounts seem to be most out of line relative to other firms in the industry? -Select- I. 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. II. 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. III. 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. IV. 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. V. 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. 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? -Select- I. It is more important to adjust the debt ratio than the inventory turnover ratio to account for any seasonal fluctuations. II. 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. 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 ratios, with little effect on asset management ratios. Rapid growth would not substantially affect your analysis. V. If the firm had 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? -Select- I. It is possible to correct for such problems by using average rather than end-of-period financial statement information. II. It is possible to correct for such problems by comparing the calculated ratios to the ratios of firms in a different line of business. III. 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. IV. 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. V. It is possible to correct for such problems by insuring that all firms in the same industry group are using the same accounting techniques