FIN 220 , Ch 3 selected problems

3. Profitability ratios (LO2) Polly Esther Dress Shops, Inc., can open a new store that will do an annual
sales volume of $960,000. It will turn over its assets 2.4 times per year. The profit margin on sales will
be 7 percent. What would net income and return on assets (investment) be for the year?

14. Du Pont system of analysis (LO3) The King Card Company has a return-on-assets (investment) ratio
of 12 percent.
a. If the debt-to-total-assets ratio is 40 percent, what is the return on equity?
b. If the firm had no debt, what would the return-on-equity ratio be?

15. Du Pont system of analysis (LO3) Using the Du Pont method, evaluate the effects of the following
relationships for the Lollar Corporation.
a. Lollar Corporation has a profit margin of 5 percent and its return on assets (investment) is 13.5
percent. What is its assets turnover ratio?
b. If the Lollar Corporation has a debt-to-total-assets ratio of 60 percent, what would the firm’s
return on equity be?
c. What would happen to return on equity if the debt-to-total-assets ratio decreased to 40 percent?

18. Average collection period (LO2) A firm has sales of $1.2 million, and 10 percent of the sales are
for cash. The year-end accounts receivable balance is $180,000. What is the average collection period?
(Use a 360-day year.)

19. Average daily sales (LO2) The Chamberlain Corporation has an accounts receivable turnover equal to
12 times. If accounts receivable are equal to $90,000, what is the value for average daily credit sales?

27. Trend analysis (LO4) Jodie Foster Care Homes, Inc., shows the following data:

Year Net Income Total Assets Stockholders’ Equity Total Debt

2007 $118,000 $1,900,000 $ 700,000 $1,200,000
2008 131,000 1,950,000 950,000 1,000,000
2009 148,000 2,010,000 1,100,000 910,000
2010 175,700 2,050,000 1,420,000 630,000

a. Compute the ratio of net income to total assets for each year and comment on the trend.
b. Compute the ratio of net income to stockholders’ equity and comment on the trend. Explain why
there may be a difference in the trends between parts a and b.

35. Using ratios to construct financial statements (LO2) The following information is from Harrelson,
Inc.’s, financial statements. Sales (all credit) were $20 million for 2010.
Sales to total assets......................................... 2 times
Total debt to total assets ................................. 30%
Current ratio ................................................... 3.0 times
Inventory turnover ......................................... 5.0 times
Average collection period .............................. 18 days
Fixed asset turnover ....................................... 5.0 times

Fill in the balance sheet:

1
Yusra Noorwali
 Cash..................................... ______ Current debt .......................................... ______
Accounts receivable ............ ______ Long-term debt...................................... ______
Inventory ............................. ______ Total debt ............................................ ______
Total current assets ........... ______ Equity .................................................... ______
Fixed assets ......................... ______ Total debt and equity .......................... ______
Total assets........................ ______

36. Comparing all the ratios (LO2) 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
Account 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
Stockholders’ equity
Preferred stock, $50 per 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

2
Yusra Noorwali
 DER 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.

3
Yusra Noorwali