Sales

$5,234,198

Cost of Goods Sold

3,659,135

Gross Profit

1,575,063

Selling Expense

227,295

General & Administrative

626,000

Depreciation

176,000

Bank Interest on Loan

147,500

Total Operating Expense

1,176,795

Operating Profit

398,268

Less Income Tax (25%)

99,567

Net Profit

298,701

Dividends Paid (100k shares)

100,000

BALANCE SHEET

Cash

$165,852

Accounts Payable

$496,231

Accounts Receivable

589,367

Long-Term Debt

2,950,000

Inventory

1,765,129

Plant & Equipment

5,500,000

Common Stock

2,000,000

Less Depreciation

1,100,000

Retained Earnings

1,474,117

Net Plant & Equipment

4,400,000

Total Equity

3,474,117

Total Assets

$6,920,348

Total Liability & Equity

$6,920,348

Current Share price for 100,000 shares issued: $25

1.Use the financial statements above to calculate the following measures:

Measure

Formula

Value

1. Current Ratio

Current assets / current liabilities

2. Debt to Equity Ratio

Total debt / total equity

3. Gross Margin

Gross profit / sales

4. Return on Sales (ROS)

Net profit / sales

5. Return on Equity (ROE)

Net profit / total equity

6. Earnings per Share (EPS)

Net profit / shares outstanding

7. Price Earnings Ratio

Share Price / EPS

2.Calculate the value of this business using the following simplified (rule of thumb) measures:

Measure

Formula

Value

1. Cash Flow

3 x (Net Profit + Depreciation + Bank Interest)

2. Earnings Multiplier

5 x EPS x Shares Outstanding

3. Market Value

Share price x Shares Outstanding

4. Book Value

Assets - Liabilities

How can you explain the differences in the valuation of the business? Which makes the most sense to you?