1. Calculating Liquidity Ratios SDJ, Inc.

has net working capital of $2,170, current liabilities of

$4,590, and inventory of $3,860. What is the current ratio? What is the quick ratio?
Using the formula for NWC, we get:
NWC = CA – CL
CA = CL + NWC
CA = $4,590 + 2,170
CA = $6,760
So, the current ratio is:
Current ratio = CA/CL
Current ratio = $6,760/$4,590
Current ratio = 1.47 times
And the quick ratio is:
Quick ratio = (CA – Inventory)/CL
Quick ratio = ($6,760 – 3,860)/$4,590
Quick ratio = .63 times

2. Calculating Profitability Ratios DTO inc. has sales of $16.7 million, total assets of $12.9 million,
and total debt of $5.7 million. If the profit margin in 5 percent, what is net income? What is ROA?
What is ROE?
We need to find net income first. So:
Profit margin = Net income/Sales
Net income = Profit margin(Sales)
Net income = .05($16,700,000)
Net income = $835,000
ROA = Net income/TA
ROA = $835,000/$12,900,000
ROA = .0647, or 6.47%
To find ROE, we need to find total equity. Since TL & OE equals TA:
TA = TD + TE
TE = TA – TD
TE = $12,900,000 – 5,700,000
TE = $7,200,000
ROE = Net income/TE
ROE = $835,000/$7,200,000
ROE = .1160, or 11.60%

3. Calculating the Average Collection Period Twist Corp. has a current accounts receivable balance
of $537,810. Credit sales for the year just ended were $5,473,640. What is the receivables turnover?
The days’ sales in receivables? How long did it take on average for credit customers to pay off their
accounts during the past year?
Receivables turnover = Sales/Receivables
Receivables turnover = $5,473,640/$537,810
Receivables turnover = 10.18 times
Days’ sales in receivables = 365 days/Receivables turnover
Days’ sales in receivables = 365/10.18
Days’ sales in receivables = 35.86 days
On average, the company’s customers paid off their accounts in 35.86 days.

4. Calculating Inventory Turnover The King Corporation has ending inventory of $386,735, and cost
of goods sold for the year just ended was $4,891,315. What is the inventory turnover? The days’ sales
in inventory? How long on average did a unit of inventory sit on the shelf before it was sold?
Inventory turnover = COGS/Inventory
Inventory turnover = $4,981,315/$386,735
Inventory turnover = 12.88 times
Days’ sales in inventory = 365 days/Inventory turnover
Days’ sales in inventory = 365/12.88
Days’ sales in inventory = 28.34 days
On average, a unit of inventory sat on the shelf 28.34 days before it was sold.

5. Calculating Leverage Ratios Queen, Inc. has a total debt ratio of 0.46. What is the debt-equity
ratio? What is its equity multiplier?
Total debt ratio = .46 = TD/TA
Substituting total debt plus total equity for total assets, we get:
.46 = TD/(TD + TE)
Solving this equation yields:
.46(TE) = .54(TD)
Debt-equity ratio = TD/TE = .46/.54 = .85
Equity multiplier = 1 + D/E = 1.85

6. Calculating Market Value Ratios Makers Corp. had additions to retained earnings for the year just
ended of $415,000. The firm paid out $220,000 in cash dividends, and it has ending total equity of
$5.6 million. If the company currently has 170,000 shares of common stock outstanding, what are
earnings per share? Dividends per share? Book Value per share? If the stock currently sells for $65
per share, what is the market-to-book ratio? The price-earnings ratio? If the company had sales of
$7.45 million, what is the price-sales ratio?
Net income = Addition to RE + Dividends = $415,000 + 220,000 = $635,000
Earnings per share = NI/Shares = $635,000/170,000 = $3.74 per share
Dividends per share = Dividends/Shares = $220,000/170,000 = $1.29 per share
Book value per share = TE/Shares = $5,600,000/170,000 = $32.94 per share
Market-to-book ratio = Share price/BVPS = $65/$32.94 = 1.97 times
PE ratio = Share price/EPS = $65/$3.74 = 17.40 times
Sales per share = Sales/Shares = $7,450,000/170,000 = $43.82
P/S ratio = Share price/Sales per share = $65/$43.82 = 1.48 times

7. DuPont Identity If Roten Rooters, Inc. has an equity multiplier of 1.27, total asset turnover of 2.10,
and a profit margin of 6.1% what is the ROE?
ROE = (PM)(TAT)(EM)
ROE = (.061)(2.10)(1.27)
ROE = .1627, or 16.27%

8. DuPont Identity Jack Corp. has a profit margin of 6.4%, total asset turnover of 1.77, and ROE of
15.84%. What is the firm’s debt-equity ratio?
This question gives all of the necessary ratios for the DuPont Identity except the equity multiplier,
so, using the DuPont Identity:
ROE = (PM)(TAT)(EM)
ROE = .1584 = (.064)(1.77)(EM)
EM = .1584/(.064)(1.77)
EM = 1.40
D/E = EM – 1
D/E = 1.40 – 1
D/E = .40
9. Sources and Uses of Cash [LO1] Based only on the following information for Thrice Corp., did
cash go up or down? By how much? Classify each event as a source or use of cash.

10. Calculating Average Payables Period Heritage Inc., had a cost of goods sold of $68,314. At the
end of year, the accounts payable balance was $15,486. How long on average did it take the company
to pay off its suppliers during the year? What might a large value for this ratio imply?
The average time to pay suppliers is the days’ sales in payables, so:
Payables turnover = COGS/Accounts payable
Payables turnover = $68,314/$15,486
Payables turnover = 4.41 times
Days’ sales in payables = 365 days/Payables turnover
Days’ sales in payables = 365/4.41
Days’ sales in payables = 82.74 days
The company left its bills to suppliers outstanding for 82.74 days on average. A large value for this
ratio could imply that either (1) the company is having liquidity problems, making it difficult to
pay off its short-term obligations, or (2) that the company has successfully negotiated lenient
credit terms from its suppliers.

11. Enterprise Value-EBITDA Multiple The market value of the equity of Hudgins, Inc. is $645,000.
The balance sheet shows $53,000 in cash and $215,000 in debt, while the income statement has EBIT
of $91,000 and a total of $157,000 in depreciation and amortization. What is the enterprise value-
EBITDA multiple for this company?
First, we need the enterprise value, which is:
Enterprise value = Market capitalization + Debt – Cash
Enterprise value = $645,000 + 215,000 – 53,000
Enterprise value = $807,000
And EBITDA is:
EBITDA = EBIT + Depreciation & Amortization
EBITDA = $91,000 + 157,000
EBITDA = $248,000
So, the enterprise value-EBITDA multiple is:
Enterprise value-EBITDA multiple = $807,000/$248,000
Enterprise value-EBITDA multiple = 3.25 times

12. Equity Multiplier and Return on Equity SME Company has a debt-equity ratio of 0.57. Return on
assets in 7.9%, and total equity is $620,000. What is the equity multiplier? Return on equity? Net
income?
The equity multiplier is:
EM = 1 + D/E
EM = 1 + .57
EM = 1.57
One formula to calculate return on equity is:
ROE = ROA(EM)
ROE = .079(1.57)
ROE = .1240, or 12.40%
ROE can also be calculated as:
ROE = NI/TE
So, net income is:
Net income = ROE(TE)
Net income = .1240($620,000)
Net income = $76,898.60

17. Calculating Financial Ratios Based on the balance sheets given for Just Dew It, calculate the
following financial ratios for each year:
a. Current Ratio
b. Quick Ratio
c. Cash Ratio
d. NWC to total assets ratio
e. Debt-equity ratio and equity multiplier
f. Total debt ratio and long-term debt ratio
a. Current ratio = Current assets/Current liabilities
Current ratio 2017 = $96,171/$64,628 = 1.49 times
Current ratio 2018 = $104,124/$69,060 = 1.51 times
b. Quick ratio = (Current assets – Inventory)/Current liabilities
Quick ratio 2017 = ($96,171 – 54,632)/$64,628 = .64 times
Quick ratio 2018 = ($104,124 – 57,204)/$69,060 = .68 times
c. Cash ratio = Cash/Current liabilities
Cash ratio 2017 = $12,157/$64,628 = .19 times
Cash ratio 2018 = $14,105/$69,060 = .20 times
d. NWC ratio = NWC/Total assets
NWC ratio 2017 = ($96,171 – 64,628)/$463,412 = .0681, or 6.81%
NWC ratio 2018 = ($104,124 – 69,060)/$479,954 = .0731, or 7.31%
e. Debt-equity ratio = Total debt/Total equity
Debt-equity ratio 2017 = ($64,628 + 49,000)/$349,784 = .32 times
Debt-equity ratio 2018 = ($69,060 + 45,000)/$365,894 = .31 times
Equity multiplier = 1 + D/E
Equity multiplier 2017 = 1 + .32 = 1.32
Equity multiplier 2018 = 1 + .31 = 1.31
f. Total debt ratio = (Total assets – Total equity)/Total assets
Total debt ratio 2017 = ($463,412 – 349,784)/$463,412 = .25 times
Total debt ratio 2018 = ($479,954 – 365,894)/$479,954 = .24 times
Long-term debt ratio = Long-term debt/(Long-term debt + Total equity)
Long-term debt ratio 2017 = $49,000/($49,000 + 349,784) = .12 times
Long-term debt ratio 2018 = $45,000/($45,000 + 365,894) = .11 times
19. Days’ Sales in Receivables A company has net income of $196,500, a profit margin of 6.8%, and
an accounts receivable balance of $119,630. Assuming 65% of sales are on credit, what is the
company’s days’ sales in receivables?
This is a multistep problem involving several ratios. It is often easier to look backward to
determine where to start. We need receivables turnover to find days’ sales in receivables. To
calculate receivables turnover, we need credit sales, and to find credit sales, we need total sales.
Since we are given the profit margin and net income, we can use these to calculate total sales as:
PM = .068 = NI/Sales
PM = $196,500/Sales
Sales = $2,889,706
Credit sales are 65 percent of total sales, so:
Credit sales = .65($2,889,706)
Credit sales = $1,878,309
Now we can find receivables turnover by:
Receivables turnover = Credit sales/Accounts receivable
Receivables turnover = $1,878,309/$119,630
Receivables turnover = 15.70 times
Days’ sales in receivables = 365 days/Receivables turnover
Days’ sales in receivables = 365/15.70
Days’ sales in receivables = 23.25 days

20. Ratios and Fixed Assets The Maurer Company has a long-term debt ratio of 0.35 and a current
ratio of 1.30. Current liabilities are $955, sales are $7,210, profit margin is 8.3%, and ROE is 17.5%.
What is the amount of the firm’s net fixed assets?
The solution to this problem requires a number of steps. First, remember that Current assets +
Net fixed assets = Total assets. So, if we find the current assets and the total assets, we can solve for
net fixed assets. Using the numbers given for the current ratio and the current liabilities, we solve
for current assets:
Current ratio = Current assets/Current liabilities
Current assets = Current ratio(Current liabilities)
Current assets = 1.30($955)
Current assets = $1,241.50
To find the total assets, we must first find the total debt and equity from the information given. So,
we find the net income using the profit margin:
Profit margin = Net income/Sales
Net income = Profit margin(Sales)
Net income = .083($7,210)
Net income = $598.43
We now use the net income figure as an input into ROE to find the total equity:
ROE = Net income/Total equity
Total equity = Net income/ROE
Total equity = $598.43/.175
Total equity = $3,419.60
Next, we need to find the long-term debt. The long-term debt ratio is:
Long-term debt ratio = .35 = LTD/(LTD + Total equity)
Inverting both sides gives:
1/.35 = (LTD + Total equity)/LTD = 1 + (Total equity/LTD)
Substituting the total equity into the equation and solving for long-term debt gives the following:
2.857 = 1 + ($3,419.60/LTD)
LTD = $3,419.60/1.857
LTD = $1,841.32
Now, we can find the total debt of the company:
Total debt = Current liabilities + LTD
Total debt = $955 + 1,841.32
Total debt = $2,796.32
And, with the total debt, we can find the TD&E, which is equal to TA:
Total assets = Total debt + Total equity
Total assets = $2,796.32 + 3,419.60
Total assets = $6,215.92
And finally, we are ready to solve the balance sheet identity as:
Net fixed assets = Total assets – Current assets
Net fixed assets = $6,215.92 – 1,241.50
Net fixed assets = $4,974.42