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Foundations of Financial Managem

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Financial Analysis

Problem 3-22 Problem 3-23

Problem 3-36 Problem 3-37

Spreadsheet Templates by Block, Hirt and Danielsen

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HAPTER 3
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Problem 3-24

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 Foundations of Financial Management
Block, Hirt and Danielsen
Problem 3-22
Objective: Overall ratio analysis

Student Name:
Course Name:
Student ID:
Course Number:

The balance sheet for Bryan Corporation is shown below. Sales for the year were $3,040,000, with 75 percent of
sales sold on credit.

BRYAN CORPORATION
Balance Sheet 201X

Assets Liabilities and Equity

Cash $50,000 Accounts payable $220,000
Accounts receivable 280,000 Accrued taxes 80,000
Inventory 240,000 Bonds payable (long term) 118,000
Plant and equipment 380,000 Common stock 100,000
Paid-in-capital 150,000
Retained earnings 282,000
Total assets $950,000 Total liabilities and equity $950,000

Compute the following ratios:

a. Current ratio.
b. Quick ratio.
c. Debt-to-total-assets ratio.
d. Asset turnover.
e. Average collection period.

Copyright © 2011 McGraw-Hill/ Irwin Spreadsheet Template by Block, Hirt and Danielsen Problem: 3-22
 Solution
Problem 3-22
Instructions
Enter formulas to calculate the following ratios. If possible, use cell references to the balance sheet.
Use a 360 day year.

a. Current ratio 1.9 times

b. Quick ratio 1.1 times

c. Debt-to-total-assets ratio 44.00%

d. Asset turnover 3.20 times

e. Average collection period 44.21 days

Copyright © 2011 McGraw-Hill/ Irwin Spreadsheet Template by Block, Hirt and Danielsen Problem: 3-22
 Foundations of Financial Management
Block, Hirt and Danielsen
Problem 3-23
Objective: Debt-utilization ratios

Student Name:
Course Name:
Student ID:
Course Number:

The Lancaster Corporation’s income statement is given below.

a. What is the times interest earned ratio?

b. What would be the fixed charge coverage ratio?

LANCASTER CORPORATION

Sales $200,000
Cost of goods sold 116,000
Gross profit 84,000
Fixed charges (other than interest) 24,000
Income before interest and taxes 60,000
Interest 12,000
Income before taxes 48,000
Taxes (35%) 16,800
Income after taxes $31,200

Copyright © 2011 McGraw-Hill/ Irwin Spreadsheet Template by Block, Hirt and Danielsen Problem: 3-23
 Solution
Problem 3-23
Instructions
Enter formulas to calculate the following ratios. If possible, use cell references to the income statement.

a. Times interest earned 5 times

b. Fixed charge coverage 2.33 times

Copyright © 2011 McGraw-Hill/ Irwin Spreadsheet Template by Block, Hirt and Danielsen Problem: 3-23
 Foundations of Financial Management
Block, Hirt and Danielsen

Problem 3-24
Objective: Debt utilization and Du Pont system of analysis

Student Name:
Course Name:
Student ID:
Course Number:

Using the income statement for J. Lo Wedding Gowns below, compute the following ratios:

a. The interest coverage.

b. The fixed charge coverage.

The total assets for this company equal $160,000. Set up the equation for the Du Pont system of ratio analysis,
and compute the answer to part c below using ratio 2 b. on page 59 in the text.

c. Return on assets (investment).

J. LO WEDDING GOWNS
Income Statement
Sales $200,000
Less: Cost of goods sold 90,000
Gross profit $110,000
Less: Selling and administrative expense 40,000
Less: Lease expense 10,000
Operating profit* $60,000
Less: Interest expense 5,000
Earnings before taxes $55,000
Less: Taxes (40%) 22,000
Earnings after taxes $33,000
*Equals income before interest and taxes.

Copyright © 2011 McGraw-Hill/ Irwin Spreadsheet Template by Block, Hirt and Danielsen Problem: 3-24
 Solution
Problem 3-24
Instructions

Enter formulas to calculate the following ratios. If possible, use cell references to the income statement.

a. Times interest earned 12 times

b. Fixed charge coverage 4.67 times

c. Return on assets :
Profit Margin 16.50%
x
Total assets turnover 1.25
20.63%

Copyright © 2011 McGraw-Hill/ Irwin Spreadsheet Template by Block, Hirt and Danielsen Problem: 3-24
 Foundations of Financial Management
Block, Hirt and Danielsen

Problem 3-36
Objective: Comparing all the ratios

Student Name:
Course Name:
Student ID:
Course Number:

Using the financial statements for the Snider Corporation, calculate the 13 basic ratios
found in the chapter.

SNIDER CORPORATION
Balance Sheet
December 31, 2010

Assets
Current assets:
Cash $50,000
Marketable securities 20,000
Accounts receivable (net) 160,000
Inventory 200,000
Total current assets $430,000
Investments 60,000
Plant and equipment 600,000
Less: Accumulated depreciation (190,000)
Net plant and equipment 410,000
Total assets $900,000

Liabilities and Stockholders' Equity

Current liabilities:
Accounts payable $90,000
Notes payable 70,000
Accrued taxes 10,000
Total current liabilities 170,000
Long-term liabilities:
Bonds payable 150,000
Total liabilities $320,000

Copyright © 2011 McGraw-Hill/ Irwin Spreadsheet Template by Block, Hirt and Danielsen Problem: 3-36
Stockholders' equity:
Preferred stock, $50 par value 100,000
Common stock, $1 par value 80,000
Capital paid in excess of par 190,000
Retained earnings 210,000
Total stockholders' equity 580,000
Total liabilities and stockholders' equity $900,000

SNIDER CORPORATION
Income Statement
For the Year Ending December 31, 2010

Sales (on credit) $1,980,000

Less: Cost of goods sold 1,280,000
Gross profit 700,000
Less: Selling and administrative expenses 475,000 *
Operating profit (EBIT) 225,000
Less: Interest expense 25,000
Earnings before taxes (EBT) 200,000
Less: Taxes 80,000
Earnings after taxes (EAT) $120,000

*Includes $35,000 in lease payments.

Copyright © 2011 McGraw-Hill/ Irwin Spreadsheet Template by Block, Hirt and Danielsen Problem: 3-36
 Solution
Problem 3-36
Instructions
Enter formulas to calculate the following ratios.
Use a 360 day year.

Profitability ratios
Profit margin 6.06%
Return on assets (investment) 13.3%
Return on equity 21%

Assets utilization ratios

Receivable turnover 12.38
Average collection period 29.09
Inventory turnover 9.90
Fixed asset turnover 4.83
Total asset turnover 2.20

Liquidity ratios
Current ratio 2.53
Quick ratio 1.35

Debt utilization ratios

Debt to total assets 35.56%
Times interest earned 9.00
Fixed charge coverage 4.33

Copyright © 2011 McGraw-Hill/ Irwin Spreadsheet Template by Block, Hirt and Danielsen Problem: 3-36
 Foundations of Financial Management
Block, Hirt and Danielsen

Problem 3-37
Objective: Ratio computation and analysis

Student Name:
Course Name:
Student ID:
Course Number:

Given the financial statements for Jones Corporation and Smith Corporation:

a. To which company would you, as credit manager for a supplier, approve the extension of (short-term) trade
credit? Why? Compute all ratios before answering.
b. In which one would you buy stock? Why?

JONES CORPORATION

Current Assets Liabilities

Cash $20,000 Accounts payable $100,000
Accounts receivable 80,000 Bonds payable (long-term) 80,000
Inventory 50,000

Long-Term Assets Stockholders' Equity

Fixed Assets $500,000 Common stock $150,000
Less: Accumulated Depreciation (150,000) Paid-in capital 70,000
Net fixed assets* 350,000 Retained earnings 100,000
Total assets $500,000 Total liabilities and equity $500,000

Sales (on credit) $1,250,000

Cost of goods sold 750,000
Gross profit 500,000
Selling and Administrative expense† 257,000
Less: Depreciation expense 50,000
Operating Profit 193,000
Interest expense 8,000
Earnings before taxes 185,000
Tax expense 92,500
Net Income $92,500

* Use net fixed assets in computing fixed asset turnover.

† Includes $7,000 in lease payments.

SMITH CORPORATION

Current Assets Liabilities

Copyright © 2011 McGraw-Hill/ Irwin Spreadsheet Template by Block, Hirt and Danielsen Problem: 3-37
Cash $35,000 Accounts payable $75,000
Marketable securities 7,500 Bonds payable (long-term) 210,000
Accounts receivable 70,000
Inventory 75,000

Long-Term Assets Stockholders' Equity

Fixed Assets $500,000 Common stock $75,000
Less: Accumulated Depreciation (250,000) Paid-in capital 30,000
Net fixed assets* 250,000 Retained earnings 47,500
Total assets $437,500 Total liabilities and equity $437,500

Sales (on credit) $1,000,000

Cost of goods sold 600,000
Gross profit 400,000
Selling and Administrative expense† 224,000
Less: Depreciation expense 50,000
Operating Profit 126,000
Interest expense 21,000
Earnings before taxes 105,000
Tax expense 52,500
Net Income $52,500

* Use net fixed assets in computing fixed asset turnover.

† Includes $7,000 in lease payments.

Copyright © 2011 McGraw-Hill/ Irwin Spreadsheet Template by Block, Hirt and Danielsen Problem: 3-37
 Solution
Problem 3-37
Instructions
Enter formulas to calculate the following ratios. If possible, use cell references to the financial statements.
Use a 360 day year.
Jones and Smith Comparison
One way of analyzing the situation for each company is to compare the respective ratios for each, On examining
those ratios which would be most important to a supplier or short-term lender and a stockholder.

Jones Corp. Smith Corp.

Profit margin 7.40% 5.25%
Return on assets 18.50% 12.00%
Return on equity 28.91% 34.43%
Receivable turnover 15.63 times 14.29 times
Average collection period 23.04 days 25.20 days
Inventory turnover 25.00 times 13.33 times
Fixed asset turnover 3.57 times 4.00 times
Total asset turnover 2.50 times 2.29 times
Current ratio 1.50 times 2.50 times
Quick ratio 1.00 times 1.50 times
Debt to total assets 36.00% 65.14%
Times interest earned 24.13 times 6.00 times
Fixed charge coverage 13.33 times 4.75 times

a. To which company would you, as credit manager for a supplier, approve the extension of (short-term) trade
credit? Why?
Since suppliers and short-term lenders are most concerned with liquidity ratios, Smith Corporation would get the
nod as having the best ratios in this category. One could argue, however, that Smith had benefited from having its
debt primarily long term rather than short term. Nevertheless, it appears to have better liquidity ratios.

b. In which one would you buy stock? Why?

Stockholders are most concerned with profitability. In this category, Jones has much better ratios than Smith.
Smith does have a higher return on equity than Jones, but this is due to its much larger use of debt. Its return on
equity is higher than Jones' because it has taken more financial risk. In terms of the other ratios, Jones has its
interest and fixed charges well covered and in general its long-term ratios and outlook are better than Smith's.
Jones has asset utilization ratios equal to or better than Smith and its lower liquidity ratios could reflect better
short-term asset management, and that point was covered in part a.

Note: Remember that to make actual financial decisions more than one year's comparative data is usually required.
Industry comparisons should also be made.

Copyright © 2011 McGraw-Hill/ Irwin Spreadsheet Template by Block, Hirt and Danielsen Problem: 3-37