Calculate Zumwalt’s net profit margin and debt ratio. Earth’s Best Company has sales of $200,000, a net income of $15,000, and the following balance sheet: Cash $10,000 Receivable 50,000 Inventories 150,000 Net fixed assets 90,000 Total assets $300,000 Account payable $30,000 Other current liabolities 20,000 Long-term debt 50,000 Common equity 200,000 Total liabilities and equity $300,000 a. The company’s new owner thinks that inventories are excessive and can be lowered to the point where the current ratio is equal to the industry average, 2.5, without affecting either sales or net income. If inventories are sold off and not replaced so as to reduce the current ratio to 2.5, if the funds generated are used to reduce common equity (stock can be repurchased at book value), and if no other changes occur, by how much will the ROE change? b. Now suppose we wanted to take this problem and modify it for use on an exam—that is, to create a new problem that you have not seen to test your knowledge of this type of problem. How would your answer change if we made the following changes: (1) We doubled all of the dollar amounts? (2) We stated that the target current ratio was 3.0? (3) We said that the company had 10,000 shares of stock outstanding, and we asked how much the change in part (a) would increase EPS? (4) What would your answer to (3) be if we changed the original problem to state that the stock was selling for twice the book value, so common equity would not be reduced on a dollar-for-dollar basis?
Calculate Zumwalt’s net profit margin and debt ratio. Earth’s Best Company has sales of $200,000, a net income of $15,000, and the following balance sheet:
Cash $10,000
Receivable 50,000
Inventories 150,000
Net fixed assets 90,000
Total assets $300,000
Account payable $30,000
Other current liabolities 20,000
Long-term debt 50,000
Common equity 200,000
Total liabilities and equity $300,000
a. The company’s new owner thinks that inventories are excessive and can be lowered to the point where the
b. Now suppose we wanted to take this problem and modify it for use on an exam—that is, to create a new problem that you have not seen to test your knowledge of this type of problem. How would your answer change if we made the following changes: (1) We doubled all of the dollar amounts? (2) We stated that the target current ratio was 3.0? (3) We said that the company had 10,000 shares of stock outstanding, and we asked how much the change in part (a) would increase EPS? (4) What would your answer to (3) be if we changed the original problem to state that the stock was selling for twice the book value, so common equity would not be reduced on a dollar-for-dollar basis?
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