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Needing some help here. Please answer all the questions (1-5) and please show your work. If using pen and paper or Word, please upload screenshots.
Needing some help here. Please answer all the questions (1-5) and please show your work. If using pen and paper or Word, please upload screenshots. Thanks!
4-24: DuPONT ANALYSIS: A firm has been experiencing low profitability in recent years. Perform an analysis of the firms financial position using the DuPont equation. The firm has no lease payments but has a $2 million sinking fund payment on its debt. The most recent industry average ratios and the firms financial statements are as follows:
Industry Average Ratios | |||
Current ratio | 3x | Fixed assets turnover | 6x |
Debt-to-capital ratio | 20% | Total assets turnover | 3x |
Times interest earned | 7x | Profit margin | 3% |
EBITDA coverage | 9x | Return on total assets | 9% |
Inventory turnover | 10x | Return on common equity | 12.86% |
Days sales outstanding | 24 days | Return on invested capital | 11.50% |
- Calculate the ratios you think would be useful in this analysis.
- Construct a DuPont equation, and compare the companys ratios to the industry average ratios.
- Do the balance sheet accounts or the income statement figures seem to be primarily responsible for the low profits?
- Which specific accounts seem to be most out of line relative to other firms in the industry?
- 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? How might you correct for such potential problems?
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