LG1-LG5 3-35 Ratio Analysis Use the following information to complete the balance sheet below; assume all
sales are credit sales.
Current ratio = 2.2 times
Credit sales = $1,200m
Average collection period = 60 days
Inventory turnover = 1.50 times
Total asset turnover = 0.75 times
Debt ratio = 60 percent
Cash $
Accounts receivable Current liabilities $500m
Inventory Long-term debt
Current assets $ Total debt $
Fixed assets Stockholders’ equity
Total assets $ Total liabilities & equity $
LG6 3-36 DuPont Analysis Last year, K9 WebbWear, Inc., reported an ROE of 20 percent. The firm’s
debt ratio was 55 percent, sales were $20 million, and the capital intensity was 1.25 times. Calculate
the net income and profit margin for K9 WebbWear last year. This year, K9 WebbWear plans to
increase its debt ratio to 60 percent. The change will not affect sales or total assets, however, it will
reduce the firm’s profit margin to 11 percent. By how much will the change in K9 WebbWear’s debt
ratio affect its ROE?
LG6 3-37 DuPont Analysis You are considering investing in Dakota’s Security Services. You have been
able to locate the following information on the firm: total assets are $32 million, accounts receivable
are $4.4 million, ACP is 25 days, net income is $4.66 million, and debt-to-equity is 1.2 times. All
sales are on credit. Dakota’s is considering loosening its credit policy such that ACP will increase to
30 days. The change is expected to increase credit sales by 5 percent. Any change in accounts
receivable will be offset with a change in debt. No other balance sheet changes are expected.
Dakota’s profit margin will remain unchanged. How will this change in accounts receivable policy
affect Dakota’s net income, total asset turnover, equity multiplier, ROA, and ROE?
=> ROE = $4.893m / $14.545m = 33.64 percent or = 7.25 percent x 2.0351 x 2.2786 = 33.64 percent
LG6 3-38 Internal Growth Rate Last year, Marly Brown, Inc., reported an ROE of 20 percent. The firm’s
debt-to-equity was 1.50 times, sales were $20 million, the capital intensity was 1.25 times, and
dividends paid to common stockholders were $1,000,000. The firm has no preferred stock
outstanding. This year, Marly Brown plans to decrease its debt-to-equity ratio to 1.20 times. The
change will not affect sales, total assets, or dividends paid, however, it will reduce the firm’s profit
margin to 9.85 percent. Use the DuPont equation to determine how the change in Marly Brown’s debt
ratio will affect its internal growth rate.
Last year: Capital intensity = 1.25 => Total asset turnover = 1 / 1.25 = 0.80
LG6 3-39 Sustainable Growth Rate You are considering investing in Annie’s Eatery. You have been able
to locate the following information on the firm: total assets are $40 million, accounts receivable are
$6.0 million, ACP is 30 days, net income is $4.75 million, debt-to-equity is 1.5 times, and dividend
payout ratio is 45 percent. All sales are on credit. Annie’s is considering loosening its credit policy
such that ACP will increase to 35 days. The change is expected to increase credit sales by 5 percent.
Any change in accounts receivable will be offset with a change in debt. No other balance sheet
changes are expected. Annie’s profit margin and dividend payout ratio will remain unchanged. Use
the DuPont equation to determine how this change in accounts receivable policy will affect Annie’s
sustainable growth rate.
research it! Analyzing Financial Statements
Go the website of Wal-Mart Stores, Inc. at www.walmartstores.com and get the latest financial
statements from the annual report using the following steps.
Click on “Investors.” Click on “Financial Information.” Click on “Annual Reports.” Click on
the most recent date. This will bring the file onto your computer that contains the relevant data.
Using the most recent balance sheet and income statement, calculate the financial ratios for the
firm, including the internal and sustainable growth rates.
integrated mini-case: Working with Financial Statements
Listed are the 2015 financial statements for Garners’ Platoon Mental Health Care, Inc. Spread the
balance sheet and income statement. Calculate the financial ratios for the firm, including the internal
and sustainable growth rates. Using the DuPont system of analysis and the industry ratios reported as
follows, evaluate the performance of the firm.
Garners’ Platoon Mental Health Care, Inc.
Balance Sheet as of December 31, 2015
(in millions of dollars)
Assets Liabilities and Equity
Current assets: Current liabilities :
Cash and marketable Accrued wages and
securities $ 421 taxes $ 316
Accounts receivable 1,109 Accounts payable 867
Other long-term assets 892 (200 million shares)
Total $5,864 Retained earnings 3,312
Total $4,009
Total assets $9,154
Total liabilities and equity $9,154
Garners’ Platoon Mental Health Care, Inc.
Income Statement for Year Ending December 31, 2015
Earnings before interest and taxes (EBIT) $2,409
Less: Interest 315
Earnings before taxes (EBT) $2,094
Less: Taxes 767
Net income $1,327
Less: Preferred stock dividends $ 60
Net income available to common stockholders $1,267
Less: Common stock dividends 395
Addition to retained earnings $ 872
Per (common) share data:
Earnings per share (EPS) $ 6.335
Dividends per share (DPS) $ 1.975
Book value per share (BVPS) $19.745
Market value (price) per share (MVPS) $26.850
Garners’ Platoon Mental Health Care, Inc. .
Industry
Current ratio 2.00 times
Quick ratio 1.20 times
Cash ratio 0.25 times
Inventory turnover 2.50 times
Days’ sales in inventory 146.00 days
Average collection period 91.00 days
Average payment period 100.00 days
Fixed asset turnover 1.25 times
Market-to-book ratio 1.30 times
PE ratio 4.10 times
SOLUTION:
Spreading the financial statements
Spread the balance sheet:
Garners’ Platoon Mental Health Care, Inc.
Balance Sheet as of December 31, 2015
(in millions of dollars)
Assets Liabilities and Equity
Current assets: Current liabilities:
Cash and marketable Accrued wages and
Spreading the income statement:
Garners’ Platoon Mental Health Care, Inc.
Income Statement for Years Ending December 31, 2015
(in millions of dollars)
Net sales (all credit) 100.00%
Garners’ Platoon Mental Health Care, Inc.
Industry
Current ratio 1.60 times 2.00 times
Dividend payout 31.18% 35.00%
Market-to-book ratio 1.36 times 1.30 times
PE ratio 4.24 times 4.10 times
The ROA and ROE DuPont equations for Garners’ are calculated as follows:
As we see from these ratios, Garners’ Platoon Mental Health Care, Inc. is more profitable than the average