Worksheet for Test 1 of Financial Management

Following is a balance sheet and income statement for Gunderson Manufacturing. Use this information to answer the questions below.

Income Statement

Sales $1,000,000

COGS (400,000)

Gross Profit 600,000

Operating Exp.(includes $80,000 in depr. exp.) (300,000)

EBIT 300,000

Interest Expense (150,000)

EBT 150,000

Income Taxes (50,000)

EAT $100,000

Balance Sheet

Cash $50,000

Accounts Receivable 100,000

Marketable Securities 40,000

Inventory 120,000

Current Assets 310,000

Net Property, Plant and Equipment 490,000

Total Assets $800,000

Accounts Payable $60,000

Notes Payable 100,000

Current Liabilities 160,000

Bonds Payable 240,000

Total Liabilities 400,000

Common Stock 75,000

Capital Paid in Excess of Par 225,000

Retained Earnings 100,000

Total Stockholders Equity 400,000

Total Liabilities and Stockholders Equity $800,000

Additional Information

There is lease expense equal to $10,000 annually.

Following are selected ratios for the industry Gunderson is in:

Current ratio 2X

Quick Ratio 1X

Receivables Turnover 7.3X

Average Collection Period 50 days

Inventory Turnover 3X

Fixed Asset Turnover 1.9X

Total Asset Turnover 1.8X

Debt to Total Assets 40%

Leverage Ratio 1.67X

Times Interest Earned 2X

Fixed Charge Coverage Ratio 1.9X

Net Profit Margin 8%

Return on Assets 14.4%

Return on Equity 24%

a. Compute all of the ratios listed above for Gunderson Manufacturing.

b. Explain why Gunderson has a higher net profit margin than the industry yet it has a lower ROA. Also explain why Gundersons ROE is higher than the industry given that their ROA is lower.