Chapter 3: Working With Financial Statements [PDF]

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Chapter 3: Working with Financial Statements Some recent financial statements for Smolira Golf Corp. follow. Use this information to work Problems 26 through 30: SMOLIRA GOLF CORP. 2008 and 2009 Balance Sheets Assets 2008 Current Assets Cash $ 21,860 A/R 11,316 Inventory 23,084 Total Current Assets $ 56,260 Fixed Assets Net PP&E $234,068



Total Assets



$290,328



2009 $ 22,050 13,850 24,650 $ 60,550 $260,525



$321,075



Liabilities and Owners’ Equity 2008 Current Liabilities A/P $ 19,320 Notes Payable 10,000 Other 9,643 Total Current Liabs $ 38,963 Long-Term Debt $ 75,000 Owners’ Equity Common Stock $ 25,000 Retained Earnings 151,365 Total Owners’ Equity $176,365 Total Liabs and OE $290,328



2009 $ 22,850 9,000 11,385 $ 43,235 $ 85,000 $ 25,000 167,840 $192,840 $321,075



SMOLIRA GOLF CORP. 2009 Income Statement Sales Cost of Goods Sold Depreciation Earnings Before Interest and Taxes (EBIT) Interest Expense Earnings Before Taxes (EBT) Taxes (35%) Net Income



$305,830 210,935 26,850 $ 68,045 11,930 $ 56,115 19,640 $ 36,475



Dividends $20,000 Transferred to Retained Earnings $16,475 $36,475



26.



Calculating Financial Ratios: Find the following financial ratios for Smolira Gold Corp. (use year-end figures rather than average values where appropriate):



Short-Term Solvency Ratios: 2008 1.4439



a. Current Ratio



2009 1.4005



The current ratio is current assets divided by current liabilities: CurrentRatio 



CurrentAssets CurrentLiabilities



CurrentRatio2008 



$56,260  1.44393399 $38,963



CurrentRatio2009 



$60,550  1.40048572 $43,235



2008 0.8515



b. Quick Ratio



2009 0.8303



The quick ratio is current assets minus inventory divided by current liabilities: QuickRatio 



CurrentAssets  Inventory CurrentLiabilities



QuickRatio2008 



$56,260  $23,084  0.85147448 $38,963



QuickRatio2009 



$60,550  $24,650  0.83034578 $43,235



2008 0.5610



c. Cash Ratio



2009 0.5100



The cash ratio is cash divided by current liabilities: CashRatio 



Cash CurrentLiabilities



CashRatio2008 



$21,860  0.56104509 $38,963



CashRatio 2009 



$22,050  0.51000347 $43,235



Asset Utilization Ratios: 2009 0.9525X



d. Total Asset Turnover (TAT)



The TAT ratio is net sales divided by total assets: TATRatio 



NetSales TotalAssets



TATRatio2009 



$305,830  0.95251888 $321,075



2009 8.5572X



e. Inventory Turnover



The inventory turnover ratio is cost of goods sold divided by inventory: InventoryTurnoverRatio 



CostOfGoodsSold Inventory



InventoryTurnoverRatio2009 



$210,935  8.55720081 $24,650



f. Accounts Receivables (A/R) Turnover



2009 22.0816X



The A/R turnover ratio is net sales divided by accounts receivable: A / RTurnoverRatio 



A / RRatio 2009 



NetSales A/ R



$305,830  22.08158845 $13,850



Long-Term Solvency Ratios: 2008 0.3925



g. Total Debt Ratio



2009 0.3994



The total debt ratio is total debt (total assets minus total equity) divided by total assets: TotalDebtRatio 



TotalDebt TotalAssets  TotalEquity  TotalAssets TotalAssets



TotalDebtRatio2008 



$38,963  $75,000 $290,328  $176,365   0.39253190 $290,328 $290,328



TotalDebtRatio2009 



$43,235  $85,000 $321,075  $192,840   0.39939267 $321,075 $321,075



2008 0.6462



h. Debt-Equity Ratio



2009 0.6650



The debt-equity ratio is total debt divided by total equity: DebtEquityRatio 



TotalDebt TotalEquity



DebtEquityRatio2008 



$38,963  $75,000  0.64617696 $176,365



DebtEquityRatio2009 



$43,235  $85,000  0.66498133 $192,840



i. Equity Multiplier Ratio Leverage Multiplier Ratio



2008 1.6462



2009 1.6650



1.6462



1.6650



The equity multiplier ratio is 1 plus the debt-equity ratio: EquityMultiplierRati o  1 



TotalDebt TotalEquity



EquityMultiplierRati o2008  1  0.64617696  1.64617696



EquityMultiplierRati o2009  1  0.66498133  1.66498133



The leverage multiplier ratio is total assets divided by total equity: LeverageMultiplierRa tio 



TotalAssets TotalEquity



LeverageMultiplierRa tio2008 



$290,328  1.64617696 $176,365



LeverageMultiplierRa tio2009 



$321,075  1.66498133 $192,840



j. Times Interest Earned (TIE) Ratio



2009 5.7037X



The TIE ratio is EBIT divided by interest: TIERatio 



EBIT Interest



TIERatio2009 



$68,045  5.70368818 $11,930



2009 7.9543X



k. Cash Coverage Ratio



The cash coverage ratio is EBIT plus depreciation divided by interest: CashCoverageRatio 



EBIT  Depreciati onExpense Interest



CashCoverageRatio2009 



$68,045  $26,850  7.95431685 $11,930



Profitability Ratios: l. Net Profit Margin (NPM) Ratio



2009 11.9266%



The NPM ratio is net income divided by net sales: NPMRatio 



NetIncome NetSales



NPMRatio2009 



$36,475  11.926561% $305,830



m. Return On Assets (ROA)



2009 11.3603%



The ROA ratio is net income divided by total assets: ROA 



NetIncome TotalAssets



ROA2009 



$36,475  11.360274% $321,075



n. Return On Equity (ROE)



2009 18.9146%



The ROE ratio is net income divided by total equity: ROE 



NetIncome TotalEquity



ROE 2009 



$36,475  18.914644% $192,840



27.



DuPont Identity: Construct the DuPont identity for Smolira Gold Corp. The DuPont identity is:



ROE  NPM  TAT  EM ROE 



NetIncome NetSales TotalDebt  1  NetSales TotalAssets TotalEquity



ROE 



$36,475 $305,830 $43,235  $85,000  1   18.914644% $305,830 $321,075 $192,840



ROE  NPM  TAT  LM ROE 



NetIncome NetSales TotalAssets   NetSales TotalAssets TotalEquity



ROE 



$36,475 $305,830 $321,075    18.914644% $305,830 $321,075 $192,840



28.



Statement of Cash Flow: Prepare the 2009 statement of cash flows for Smolira Golf Corp. SMOLIRA GOLF CORP. 2009 Statement of Cash Flows Cash: Beginning of 20091 Operating Activities Net Income Plus: Depreciation Increase in A/P2 Increase in Other Current Liabilities3 Less: Increase in A/R4 Increase in Inventory5 Net Cash from Operating Activities



$ 21,8601 $ 36,475 26,850 3,5302 1,7423 (2,534)4 (1,566)5 $ 64,497



Investment Activities Fixed Asset Acquisition6 Net Cash from Investment Activities



$(53,307)6 $(53,307)



Financing Activities Decrease in Notes Payable7 Dividends Paid Increase in Long-Term Debt8 Net Cash from Financing Activities



$ (1,000)7 (20,000) 10,0008 $(11,000)



Net Increase (Decrease) in Cash



$



Cash: End of 20099



$ 22,0509



1



Cash: Beginning of 2009 is the same as ending cash for 2008



2



Increase in A/P:



190



A / P  A / P2009  A / P2008  $22,850  $19,320  $3,530 3



Increase in Other Current Liabilities: OtherCL  OtherCL2009  OtherCL2008  $11,385  $9,643  $1,742



4



Increase in A/R: A / R  A / R2008  A / R2009  $11,316  $13,850  $(2,534)



5



Increase in Inventory: Inventory  Inventory2008  Inventory2009  $23,084  $24,650  $(1,566)



6



Increase in Fixed Assets: NFA  NFA2008  ( DepreciationExpense2009  NFA2009) NFA  $234,068  ($26,850  $260,525)  $(53,307)



7



Decrease in Notes Payable: NP  NP2009  NP2008  $9,000  $10,000  ($1,000)



8



Increase in Long-Term Debt: LTD  LTD2009  LTD2008  $85,000  $75,000  $10,000



9



Cash: End of Year: Cash  Cash2009  Cash2008  $22,050  $21,860  $190 Cash2009  $21,860  $64,497  $(53,307)  $(11,000)  $22,050 Cash2009  $21,860  $190  $22,050



29.



Market Value Ratios: Smolira Golf Corp. has 25,000 shares of common stock outstanding, and the market price for a share of stock at the end of 2009 was $43. What is the price-earnings ratio? What are the dividends per share? What is the market-to-book ratio at the end of 2009? If the company’s growth is 9 percent, what is the PEG ratio? The price-earnings (PE) ratio is: PERatio 



Pr icePerShare EarningsPerShare



Earnings per share (EPS) are: EPS 



NetIncome $36,475   $1.459 SharesOuts tan ding 25,000Shares



PERatio 



Pr icePerShare $43.00   29.47224126 X EarningsPerShare $1.459



Dividends per share are: DPS 



Dividends $20,000   $0.80 SharesOuts tan ding 25,000Shares



Market-to-Book ratio is:



MarketToBookRatio 



Market Pr icePerShare BookValuePerShare



BookValuePerShare 



TotalEquity $192,840   $7.7136 SharesOuts tan ding 25,000Shares



MarketToBookRatio 



$43.00  5.57456959 X $7.7136



The PE-to-Growth (PEG) ratio is: PEGRatio 



PERatio 29.47224126   3.27469347 X GrowthRate 9



The PEG ratio is a valuation metric for determining the relative trade-off between the price of a stock, the earnings generated per share, and the company’s expected growth rate. Since the PE ratio is generally higher for a company with higher growth, dividing the PE ratio by the firm’s growth rate enables the evaluation of firm’s with different growth rates. 30.



Tobin’s Q: What is Tobin’s Q for Smolira Golf? What assumptions are you making about the book value of assets and the market value of assets? Are these assumptions realistic? Why or why not? Tobin’s Q is: Tobin ' sQ 



MarketValueOfEquity  BookValueOfDebt BookValueOfAssets



Market Value of Equity is: MarketValueOfEquity  Pr icePerShare  SharesOuts tan ding MarketValueOfEquity  $43.00  25,000Shares  $1,075,000



Book Value of Debt is: BookValueOfDebt  CurrentLiabs  LongTermLiabs BookValueOfDebt  $43,235  $85,000  $128,235



Tobin ' sQ 



MarketValueOfEquity  BookValueOfDebt BookValueOfAssets



Tobin ' sQ 



$1,075,000  $128,235  3.74752005 $321,075