7.26 b.
continued.
d. Short-Term Liquidity Risk
The current and quick ratios of Bullseye vary inversely with
changes in the accounts receivable and inventory turnovers.
Solutions7-22
e. Long-Term Solvency Risk
The debt ratios declined between 2011 and 2012 and
increased between 2012 and 2013, as Part b. discusses. The
cash flow from operations to total liabilities declined between
7.26 b.
continued.
7.26(Cartoo, Taggle, and Wilmet; profitability and risk analysis in a
cross- section setting.)
a. Wilmet’s advantage over Taggle Corporation on ROA is a
higher total assets turnover that more than ofsets a lower
profit margin.
Profit Margin: Taggle Corporation’s advantage on the profit
margin results from a higher other revenues to sales
7-23Solutions
•
Lower Cost of Goods Sold to Sales Percentage for Taggle
Corporation: Taggle sells a higher proportion of brand
name and trend merchandise than Wilmet, enabling higher
markups on cost when setting selling prices. Wilmet’s size
•
Higher selling and administrative expenses to sales
percentage for Taggle Corporation: Several factors might
•
Higher advertising expense to sales percentage for
Solutions7-24
•
Higher tax burden for Taggle Corporation: We measure tax
burden by relating income tax expense to income before
income taxes.
Taggl
e:
2011: 3.2%/(5.3% + 3.2%) =
38.4%Wilmet:
Total Assets Turnover: Wilmet’s advantage on total assets
turnover results from faster accounts receivable, inventory,
and fixed assets turnovers. Explanations for the faster asset
turnovers are as follows:
7.26 b.
•
Faster fixed asset turnover for Wilmet: Wilmet has
7-25Solutions
.26 continued.
b. Wilmet’s advantage over Cartoo on ROA is a higher profit
margin for
ROA and a higher total assets
turnover.
Profit Margin: Wilmet’s advantage on profit margin results
from a lower cost of goods sold to sales percentage and a
lower advertising expense to sales percentage ofset by a
lower other revenues to sales percentage, a higher selling and
administrative expense to sales percentage, and a higher
income tax burden. Possible explanations for diferences in
these revenue and expense percentages are as follows:
Solutions7-26
Carto
o:
Wilmet:
7-27Solutions
•
Smaller inventory turnover for Wilmet: Wilmet may
have a smaller percentage of grocery products in its
•
Similar fixed asset turnovers for Wilmet and Cartoo. The
cost per square foot of store space is significantly larger for
•
Other assets comprise a lower percentage of total
assets for Wilmet. Both firms have grown by acquiring
c. Cartoo is the most risky, with Taggle Corporation and
Wilmet showing low levels of risk.
Short-term Liquidity Risk: Cartoo has the lowest current
ratios, and those ratios are significantly less than 1.0. Its
cash flow from operations to current liabilities ratios are
smaller than the desired
Solutions7-28
7.26 b.
continued.
7.26 c. continued.
Long-Term Liquidity Risk: Cartoo’s ratios are not at healthy
levels. Its debt levels are the highest of the three firms.
Although Cartoo reduced its debt levels during the three-year
7.27 (Gappo Group and Limito Brands; calculating and interpretin
g profitability and risk ratios.)
The financial statement ratios on pages 7-31, 7-32, and 7-33
form the basis for the responses to the questions raised.
a. Limito has a higher ROA in the fiscal year ended August 31,
2013, the result of a higher profit margin, ofset by a lower
total assets turnover. The higher profit margin results from a
d. Short-Term Liquidity Risk
The current and quick ratios of Bullseye vary inversely with
changes in the accounts receivable and inventory turnovers.
Solutions7-22
e. Long-Term Solvency Risk
The debt ratios declined between 2011 and 2012 and
increased between 2012 and 2013, as Part b. discusses. The
cash flow from operations to total liabilities declined between
7.26 b.
continued.
7.26(Cartoo, Taggle, and Wilmet; profitability and risk analysis in a
cross- section setting.)
a. Wilmet’s advantage over Taggle Corporation on ROA is a
higher total assets turnover that more than ofsets a lower
profit margin.
Profit Margin: Taggle Corporation’s advantage on the profit
margin results from a higher other revenues to sales
7-23Solutions
•
Lower Cost of Goods Sold to Sales Percentage for Taggle
Corporation: Taggle sells a higher proportion of brand
name and trend merchandise than Wilmet, enabling higher
markups on cost when setting selling prices. Wilmet’s size
•
Higher selling and administrative expenses to sales
percentage for Taggle Corporation: Several factors might
•
Higher advertising expense to sales percentage for
Solutions7-24
•
Higher tax burden for Taggle Corporation: We measure tax
burden by relating income tax expense to income before
income taxes.
Taggl
e:
2011: 3.2%/(5.3% + 3.2%) =
38.4%Wilmet:
Total Assets Turnover: Wilmet’s advantage on total assets
turnover results from faster accounts receivable, inventory,
and fixed assets turnovers. Explanations for the faster asset
turnovers are as follows:
7.26 b.
•
Faster fixed asset turnover for Wilmet: Wilmet has
7-25Solutions
.26 continued.
b. Wilmet’s advantage over Cartoo on ROA is a higher profit
margin for
ROA and a higher total assets
turnover.
Profit Margin: Wilmet’s advantage on profit margin results
from a lower cost of goods sold to sales percentage and a
lower advertising expense to sales percentage ofset by a
lower other revenues to sales percentage, a higher selling and
administrative expense to sales percentage, and a higher
income tax burden. Possible explanations for diferences in
these revenue and expense percentages are as follows:
Solutions7-26
Carto
o:
Wilmet:
7-27Solutions
•
Smaller inventory turnover for Wilmet: Wilmet may
have a smaller percentage of grocery products in its
•
Similar fixed asset turnovers for Wilmet and Cartoo. The
cost per square foot of store space is significantly larger for
•
Other assets comprise a lower percentage of total
assets for Wilmet. Both firms have grown by acquiring
c. Cartoo is the most risky, with Taggle Corporation and
Wilmet showing low levels of risk.
Short-term Liquidity Risk: Cartoo has the lowest current
ratios, and those ratios are significantly less than 1.0. Its
cash flow from operations to current liabilities ratios are
smaller than the desired
Solutions7-28
7.26 b.
continued.
7.26 c. continued.
Long-Term Liquidity Risk: Cartoo’s ratios are not at healthy
levels. Its debt levels are the highest of the three firms.
Although Cartoo reduced its debt levels during the three-year
7.27 (Gappo Group and Limito Brands; calculating and interpretin
g profitability and risk ratios.)
The financial statement ratios on pages 7-31, 7-32, and 7-33
form the basis for the responses to the questions raised.
a. Limito has a higher ROA in the fiscal year ended August 31,
2013, the result of a higher profit margin, ofset by a lower
total assets turnover. The higher profit margin results from a