X X Net income $ 27.75 2. Calculate the following ratios. Do not round intermediate calculations. Round your answers to two decimal places. Firm Industry Average Current ratio 2x Debt to total capital 21% Times Interest earned EBITDA coverage 8x Inventory turnover 15x Days sales days 18days outstanding Fixed assets 6x turnover Total assets turnover Profit margin 3.25% Return on total 13.00% assets Return on comman % 18.30% equity Return on invested 16.70% capital b. Construct a DuPont equation for the firm and the industry. Da not round intermediate calculations. Round your answers to two decimal places. Firm Industry 3.25% Total assets 4x turnover Equity multiplier c. Do the balance sheet accounts or the income statement figures seem to be primarily responsible for the low profits? I. Analysis of the extended Du Pont equation and the set of ratios shows that the turnover ratio of sales to assets is quite law; 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. II. 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. III. 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. IV. 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. V. Analysis of the extended Du Pont equation and the set of ratios shows that the turnaver ratio of sales to assets is quite law; 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. -Select- d. Which specific accounts seem to be most out of line relative to other firms in the industry? I. The accounts which seem to be most out or line include the following ratios: Inventory Turnover, Days Sales Outstanding, Fixed Asset Turnover, Profit Margin, and Return on Equity. II. 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. III. The accounts which seem to be most out of line include the following ratias: Current, EBITDA Coverage, Inventory Tumaver, Days Sales Outstanding, and Return on Equity IV. The accounts which seem to be most out of line include the following ratias: Debt to Tatal Capital, Inventory Turnover, Total Asset Turnover, Return an Assets, and Profit Margin. V. The accounts which seem to be most out of line include the following ratios: Times Interest Earned, Total Asset Turnover, Profit Margin, Retum on Assets, and Retum on Equity. -Select- c. 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 ratia analysis? I. It is more important to adtust the debt ratio than the Inventorv turnover ratio to account for any seasonal fluctuations, Profit margin 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? 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 sharp seasonal sales patterns, or if it grew rapidly during the year, many ratios would most likely be distorted. -Select- How might you correct for such potential problems? I. 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. II. 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. III. It is possible to correct for such problems by insuring that all firms in the same industry group are using the same accounting techniques. IV. It is possible to correct for such problems by using average rather than end-of-period financial statement information. V. It is possible to correct for such problems by comparing the calculated ratios to the ratios of firms in a different line of business. -Select- Data for Barry Computer Co. and its industry averages follow. The firm's debt is priced at par, so the market value of its debt equals its book value. Since dollars are in thousands, number of shares are shown in thousands too. Barry Computer Company: Balance Sheet as of December 31, 2019 (In Thousands) Cash $ 124,250 Accounts payable $ 136,675 Receivables 335,475 Other current liabilities 136,675 Inventories 335,475 Notes payable to bank 111,825 Total current assets $ 795,200 Total current liabilities $ 385,175 Long-term debt 248,500 Net fixed assets 447,300 Common equity (60,882.5 shares) 608,825 Total assets $1,242,500 Total liabilities and equity $1,242,500 Barry Computer Company: Income Statement for Year Ended December 31, 2019 (In Thousands) Sales $1,750,000 Cost of goods sold Materials $770,000 Labor 437,500 Heat, light, and power 122,500 Indirect labor 140,000 Depreciation 87,500 1,557,500 Gross profit $ 192,500 Selling expenses 87,500 General and administrative expenses 35,000 Earnings before interest and taxes (EBIT 120.000 Ch 04: End-of-Chapter Problems - Analysis of Financial Statements General and administrative expenses 35,000 Earnings before interest and taxes (EBIT) $ 70,000 Interest expense 19,880 Earnings before taxes (EBT) $ 50,120 Federal and state income taxes (25%) 12,530 Net Income $ 37,590 Earnings per share $ 0.6174 Price per share on December 31, 2019 $ 14.00 X X X a. Calculate the indicated ratios for Barry. Do not round Intermediate calculations. Round your answers to two decimal places. Ratio Barry Industry Average Current 1.99x Quick 1.24x Days sales outstanding days 33 days Inventory turnover 5.70 x Total assets turnover x 1.59x Profit margin % 2.01% ROA % 3.18% ROE % 6.57% ROIC % 7.30% TIE x 3.55x Debt/Total capital 96 35.88% M/B 4.40 P/E 25.23 EV/EBITDA 9.16 P/E 25.23 EV/EBITDA 9.16 *Calculation is based on a 365-day year. b. Construct the DuPont equation for both Barry and the industry. Do not round intermediate calculations. Round your answers to two decimal places. FIRM INDUSTRY Profit margin % 2.01% Total assets turnover 1.59x Equity multiplier x C. Select the correct option based on Barry's strengths and weaknesses as revealed by your analysis. 1. The firm's days sales outstanding ratio is more than twice as long as the industry average, indicating that the firm should loosen credit or apply a less stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets increased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity, assets, and invested capital. However, the company seems to be in an average liquidity position and financial leverage is similar to others in the industry. II. The firm's days sales outstanding ratio is less than the industry average, indicating that the firm should tighten credit or enforce a more stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets decreased, or both. While the company's profit margin is lower than the industry average, its other profitability ratios are high compared to the industry - net income should be higher given the amount of equity, assets, and invested capital. However, the company seems to be in an average liquidity position and financial leverage is similar to others in the industry. III. The firm's days sales outstanding ratio is more than the industry average, indicating that the firm should tighten credit or enforce a more stringent collection policy. The total assets turnover ratio is well above the industry average so sales should be increased, assets increased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity, assets, and invested capital. However, the company seems to be in an above average liquidity position and financial leverage is similar to others in the industry, IV. The firm's days sales outstanding ratio is comparable to the industry average, indicating that the firm should neither tighten credit nor enforce a more stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be Increased, assets increased, or both. While the company's profit margin is higher than the industry average, its other profitability Increased, assets increased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity, assets, and invested capital. However, the company seems to be in a below average liquidity position and floancial leverage is similar to others in the industry. V. The firm's days sales outstanding ratio is more than twice as long as the industry average, indicating that the firm should tighten credit or enforce a more stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets decreased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity, assets, and invested capital. Finally, it's market value ratios are also below industry averages. However, the company seems to be in an average liquidity position and financial leverage is similar to others in the industry, -Select- d. Suppose Barry had doubled its sales as well as its inventories, accounts receivable, and common equity during 2019. 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.) 1. If 2019 represents a period of normal growth for the firm, ratios based on this year will be accurate and a comparison between them and industry averages will have substantial meaning. Potential investors who look only at 2019 ratios will be misled, and a return to supernormal conditions in 2020 could hurt the firm's stock price. 11. If 2019 represents a period of supernormal growth for the firm, ratios based on this year will be distorted and a comparison between them and industry averages will have substantial meaning. Potential investors who look only at 2019 ratios will be well informed, and a return to normal conditions in 2020 could hurt the firm's stock price. III. If 2019 represents a period of supernormal growth for the firm, ratios based on this year will be distorted and a comparison between them and industry averages will have little meaning. Potential investors who look only at 2019 ratios will be misled, and a return to normal conditions in 2020 could hurt the firm's stock price. IV. 18 2019 represents a period of supernormal growth for the firm, ratios based on this year will be accurate and a comparison between them and industry averages will have substantial meaning, Potential investors need only look at 2019 ratios to be well Informed, and a return to normal conditions in 2020 could help the firm's stock price. V. If 2019 represents a period of normal growth for the firm, ratios based on this year will be distorted and a comparison between them and industry averages will have little meaning. Potential investors who look only at 2019 ratios will be misled, and a continuation of normal conditions in 2020 could hurt the firm's stock price. -Select- X X Net income $ 27.75 2. Calculate the following ratios. Do not round intermediate calculations. Round your answers to two decimal places. Firm Industry Average Current ratio 2x Debt to total capital 21% Times Interest earned EBITDA coverage 8x Inventory turnover 15x Days sales days 18days outstanding Fixed assets 6x turnover Total assets turnover Profit margin 3.25% Return on total 13.00% assets Return on comman % 18.30% equity Return on invested 16.70% capital b. Construct a DuPont equation for the firm and the industry. Da not round intermediate calculations. Round your answers to two decimal places. Firm Industry 3.25% Total assets 4x turnover Equity multiplier c. Do the balance sheet accounts or the income statement figures seem to be primarily responsible for the low profits? I. Analysis of the extended Du Pont equation and the set of ratios shows that the turnover ratio of sales to assets is quite law; 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. II. 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. III. 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. IV. 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. V. Analysis of the extended Du Pont equation and the set of ratios shows that the turnaver ratio of sales to assets is quite law; 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. -Select- d. Which specific accounts seem to be most out of line relative to other firms in the industry? I. The accounts which seem to be most out or line include the following ratios: Inventory Turnover, Days Sales Outstanding, Fixed Asset Turnover, Profit Margin, and Return on Equity. II. 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. III. The accounts which seem to be most out of line include the following ratias: Current, EBITDA Coverage, Inventory Tumaver, Days Sales Outstanding, and Return on Equity IV. The accounts which seem to be most out of line include the following ratias: Debt to Tatal Capital, Inventory Turnover, Total Asset Turnover, Return an Assets, and Profit Margin. V. The accounts which seem to be most out of line include the following ratios: Times Interest Earned, Total Asset Turnover, Profit Margin, Retum on Assets, and Retum on Equity. -Select- c. 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 ratia analysis? I. It is more important to adtust the debt ratio than the Inventorv turnover ratio to account for any seasonal fluctuations, Profit margin 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? 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 sharp seasonal sales patterns, or if it grew rapidly during the year, many ratios would most likely be distorted. -Select- How might you correct for such potential problems? I. 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. II. 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. III. It is possible to correct for such problems by insuring that all firms in the same industry group are using the same accounting techniques. IV. It is possible to correct for such problems by using average rather than end-of-period financial statement information. V. It is possible to correct for such problems by comparing the calculated ratios to the ratios of firms in a different line of business. -Select- Data for Barry Computer Co. and its industry averages follow. The firm's debt is priced at par, so the market value of its debt equals its book value. Since dollars are in thousands, number of shares are shown in thousands too. Barry Computer Company: Balance Sheet as of December 31, 2019 (In Thousands) Cash $ 124,250 Accounts payable $ 136,675 Receivables 335,475 Other current liabilities 136,675 Inventories 335,475 Notes payable to bank 111,825 Total current assets $ 795,200 Total current liabilities $ 385,175 Long-term debt 248,500 Net fixed assets 447,300 Common equity (60,882.5 shares) 608,825 Total assets $1,242,500 Total liabilities and equity $1,242,500 Barry Computer Company: Income Statement for Year Ended December 31, 2019 (In Thousands) Sales $1,750,000 Cost of goods sold Materials $770,000 Labor 437,500 Heat, light, and power 122,500 Indirect labor 140,000 Depreciation 87,500 1,557,500 Gross profit $ 192,500 Selling expenses 87,500 General and administrative expenses 35,000 Earnings before interest and taxes (EBIT 120.000 Ch 04: End-of-Chapter Problems - Analysis of Financial Statements General and administrative expenses 35,000 Earnings before interest and taxes (EBIT) $ 70,000 Interest expense 19,880 Earnings before taxes (EBT) $ 50,120 Federal and state income taxes (25%) 12,530 Net Income $ 37,590 Earnings per share $ 0.6174 Price per share on December 31, 2019 $ 14.00 X X X a. Calculate the indicated ratios for Barry. Do not round Intermediate calculations. Round your answers to two decimal places. Ratio Barry Industry Average Current 1.99x Quick 1.24x Days sales outstanding days 33 days Inventory turnover 5.70 x Total assets turnover x 1.59x Profit margin % 2.01% ROA % 3.18% ROE % 6.57% ROIC % 7.30% TIE x 3.55x Debt/Total capital 96 35.88% M/B 4.40 P/E 25.23 EV/EBITDA 9.16 P/E 25.23 EV/EBITDA 9.16 *Calculation is based on a 365-day year. b. Construct the DuPont equation for both Barry and the industry. Do not round intermediate calculations. Round your answers to two decimal places. FIRM INDUSTRY Profit margin % 2.01% Total assets turnover 1.59x Equity multiplier x C. Select the correct option based on Barry's strengths and weaknesses as revealed by your analysis. 1. The firm's days sales outstanding ratio is more than twice as long as the industry average, indicating that the firm should loosen credit or apply a less stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets increased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity, assets, and invested capital. However, the company seems to be in an average liquidity position and financial leverage is similar to others in the industry. II. The firm's days sales outstanding ratio is less than the industry average, indicating that the firm should tighten credit or enforce a more stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets decreased, or both. While the company's profit margin is lower than the industry average, its other profitability ratios are high compared to the industry - net income should be higher given the amount of equity, assets, and invested capital. However, the company seems to be in an average liquidity position and financial leverage is similar to others in the industry. III. The firm's days sales outstanding ratio is more than the industry average, indicating that the firm should tighten credit or enforce a more stringent collection policy. The total assets turnover ratio is well above the industry average so sales should be increased, assets increased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity, assets, and invested capital. However, the company seems to be in an above average liquidity position and financial leverage is similar to others in the industry, IV. The firm's days sales outstanding ratio is comparable to the industry average, indicating that the firm should neither tighten credit nor enforce a more stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be Increased, assets increased, or both. While the company's profit margin is higher than the industry average, its other profitability Increased, assets increased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity, assets, and invested capital. However, the company seems to be in a below average liquidity position and floancial leverage is similar to others in the industry. V. The firm's days sales outstanding ratio is more than twice as long as the industry average, indicating that the firm should tighten credit or enforce a more stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets decreased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity, assets, and invested capital. Finally, it's market value ratios are also below industry averages. However, the company seems to be in an average liquidity position and financial leverage is similar to others in the industry, -Select- d. Suppose Barry had doubled its sales as well as its inventories, accounts receivable, and common equity during 2019. 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.) 1. If 2019 represents a period of normal growth for the firm, ratios based on this year will be accurate and a comparison between them and industry averages will have substantial meaning. Potential investors who look only at 2019 ratios will be misled, and a return to supernormal conditions in 2020 could hurt the firm's stock price. 11. If 2019 represents a period of supernormal growth for the firm, ratios based on this year will be distorted and a comparison between them and industry averages will have substantial meaning. Potential investors who look only at 2019 ratios will be well informed, and a return to normal conditions in 2020 could hurt the firm's stock price. III. If 2019 represents a period of supernormal growth for the firm, ratios based on this year will be distorted and a comparison between them and industry averages will have little meaning. Potential investors who look only at 2019 ratios will be misled, and a return to normal conditions in 2020 could hurt the firm's stock price. IV. 18 2019 represents a period of supernormal growth for the firm, ratios based on this year will be accurate and a comparison between them and industry averages will have substantial meaning, Potential investors need only look at 2019 ratios to be well Informed, and a return to normal conditions in 2020 could help the firm's stock price. V. If 2019 represents a period of normal growth for the firm, ratios based on this year will be distorted and a comparison between them and industry averages will have little meaning. Potential investors who look only at 2019 ratios will be misled, and a continuation of normal conditions in 2020 could hurt the firm's stock price. -Select