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Tutorial 5 Solutions

This document provides the solutions to tutorial 5 questions. It calculates various financial ratios for a company in 2016 and 2017, including current ratios, quick ratios, cash ratios, asset turnover ratios, debt ratios, profitability ratios, and returns on equity, assets, and investments using the DuPont identity. It then works through an example calculating all elements of the DuPont identity.

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merita homasi
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Download as PDF, TXT or read online on Scribd
44 views

Tutorial 5 Solutions

This document provides the solutions to tutorial 5 questions. It calculates various financial ratios for a company in 2016 and 2017, including current ratios, quick ratios, cash ratios, asset turnover ratios, debt ratios, profitability ratios, and returns on equity, assets, and investments using the DuPont identity. It then works through an example calculating all elements of the DuPont identity.

Uploaded by

merita homasi
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Tutorial 5 (Week 6) Solutions

Ch03 – Ross et al.


Solutions
35. Here, we need to calculate several ratios given the financial statements. The ratios are:
Short-term solvency ratios:
Current ratio = Current assets / Current liabilities
Current ratio2016 = $28 666 / $6319
Current ratio2016 = 4.54 times
Current ratio2017 = $32 409 / $7427
Current ratio2017 = 4.36 times
Quick ratio = (Current assets – Inventory) / Current liabilities
Quick ratio2016 = ($28 666 – 17 357) / $6319
Quick ratio2016 = 1.79 times
Quick ratio2017 = ($32 409 – 19 350) / $7 427
Quick ratio2017 = 1.76 times
Cash ratio = Cash / Current liabilities
Cash ratio2016 = $4607 / $6319
Cash ratio2016 = 0.73 times
Cash ratio2017 = $4910 / $7427
Cash ratio2017 = 0.66 times
Asset utilization ratios:
Total asset turnover = Sales / Total assets
Total asset turnover = $205 227 / $109 219
Total asset turnover = 1.88 times
Inventory turnover = COGS / Inventory
Inventory turnover = $138 383 / $19 350
Inventory turnover = 7.15 times
Receivables turnover = Sales / Receivables
Receivables turnover = $205 227 / $8149
Receivables turnover = 25.18 times
Long-term solvency ratios:
Total debt ratio = (Current liabilities + Long-term debt) / Total assets
Total debt ratio2016 = ($6319 + 22 500) / $87 354
Total debt ratio2016 = 0.33 times
Total debt ratio2017 = ($7427 + 19 000) / $109 219
Total debt ratio2017 = 0.24 times
Debt–equity ratio = (Current liabilities + Long-term debt) / Total equity
Debt–equity ratio2016 = ($6319 + 22 500) / $58 535
Debt–equity ratio2016 = 0.49 times
Debt–equity ratio2017 = ($7427 + 19 000) / $82 792
Debt–equity ratio2017 = 0.32 times
Equity multiplier = 1 + D/E ratio
Equity multiplier2016 = 1 + 0.49
Equity multiplier2016 = 1.49 times
Equity multiplier2017 = 1 + 0.32
Equity multiplier2017 = 1.32 times
Times interest earned = EBIT / Interest
Times interest earned = $60 934 / $1617
Times interest earned = 37.68 times
Cash coverage ratio = (EBIT + Depreciation) / Interest
Cash coverage ratio = ($60 934 + 5910) / $1617
Cash coverage ratio = 41.34 times
Profitability ratios:
Profit margin = Net income / Sales
Profit margin = $38 557 / $205 227
Profit margin = 0.1879, or 18.79%
Return on assets = Net income / Total assets
Return on assets = $38 557 / $109 219
Return on assets = 0.3530, or 35.30%
Return on equity = Net income / Total equity
Return on equity = $38 557 / $82 792
Return on equity = 0.4657, or 46.57%

36. The Du Pont identity is:


ROE = (PM)(Total asset turnover)(Equity multiplier)
ROE = (Net income / Sales)(Sales / Total assets)(Total assets / Total equity)
ROE = ($38 557 / $205 227)($205 227 / $109 219)($109 219 / $82 792)
ROE = 0.4657, or 46.57%
46. Return on
equity
19.31%

Return on multiplied Equity


assets By multiplier
8.47% 2.28

Profit margin multiplied by Total asset turnover


3.53% 2.40

Net income divided by Sales Sales divided by Total assets


$2146 $60 868 $60 868 $25 337

subtracted from
Total costs Sales Fixed assets plus Current assets
$58 722 $60 868 $17 676 $7661

Cash
Cost of goods sold Depreciation $1333
$41 180 $598
Accounts rec. Inventory
Other expenses Interest $584 $4872
$15 732 $282
Other
$872
Taxes
$930

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