Week Five Exercise Assignment
Financial Ratios
- 1. Liquidity ratios. Edison, Stagg, and Thornton have the following financial information at the close of business on July 10:
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Edison |
Stagg |
Thornton |
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Cash |
$6,000 |
$5,000 |
$4,000 |
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Short-term investments |
3,000 |
2,500 |
2,000 |
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Accounts receivable |
2,000 |
2,500 |
3,000 |
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Inventory |
1,000 |
2,500 |
4,000 |
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Prepaid expenses |
800 |
800 |
800 |
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Accounts payable |
200 |
200 |
200 |
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Notes payable: short-term |
3,100 |
3,100 |
3,100 |
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Accrued payables |
300 |
300 |
300 |
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Long-term liabilities |
3,800 |
3,800 |
3,800 |
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- Compute the current and quick ratios for each of the three companies. (Round calculations to two decimal places.) Which firm is the most liquid? Why?
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2. Computation and evaluation of activity ratios. The following data relate to Alaska Products, Inc: |
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20X5 |
20X4 |
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Net credit sales |
$832,000 |
$760,000 |
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Cost of goods sold |
530,000 |
400,000 |
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Cash, Dec. 31 |
125,000 |
110,000 |
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Average Accounts receivable |
205,000 |
156,000 |
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Average Inventory |
70,000 |
50,000 |
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Accounts payable, Dec. 31 |
115,000 |
108,000 |
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Instructions
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3. Profitability ratios, trading on the equity. Digital Relay has both preferred and common stock outstanding. The company reported the following information for 20X7:
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Net sales |
$1,750,000 |
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Interest expense |
120,000 |
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Income tax expense |
80,000 |
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Preferred dividends |
25,000 |
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Net income |
130,000 |
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Average assets |
1,200,000 |
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Average common stockholders’ equity |
500,000 |
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- Compute the profit margin on sales ratio, the return on equity and the return on assets, rounding calculations to two decimal places.
- Does the firm have positive or negative financial leverage? Briefly explain.
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4. Horizontal analysis. Mary Lynn Corporation has been operating for several years. Selected data from the 20X1 and 20X2 financial statements follow. |
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20X2 |
20X1 |
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Current Assets |
$86,000 |
$80,000 |
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Property, Plant, and Equipment (net) |
99,000 |
90,000 |
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Intangibles |
25,000 |
50,000 |
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Current Liabilities |
40,800 |
48,000 |
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Long-Term Liabilities |
153,000 |
160,000 |
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Stockholders’ Equity |
16,200 |
12,000 |
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Net Sales |
500,000 |
500,000 |
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Cost of Goods Sold |
322,500 |
350,000 |
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Operating Expenses |
93,500 |
85,000 |
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5.Vertical analysis. Mary Lynn Corporation has been operating for several years. Selected data from the 20X1 and 20X2 financial statements follow.
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20X2 |
20X1 |
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Current Assets |
$86,000 |
$80,000 |
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Property, Plant, and Equipment (net) |
99,000 |
80,000 |
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Intangibles |
25,000 |
50,000 |
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Current Liabilities |
40,800 |
48,000 |
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Long-Term Liabilities |
153,000 |
150,000 |
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Stockholders’ Equity |
16,200 |
12,000 |
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Net Sales |
500,000 |
500,000 |
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Cost of Goods Sold |
322,500 |
350,000 |
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Operating Expenses |
93,500 |
85,000 |
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- Prepare a vertical analysis for 20X1 and 20X2. Briefly comment on the results of your work.
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