Fundamentals of Corporate Finance
Fundamentals of Corporate Finance
10th Edition
ISBN: 9781260703931
Author: BREALEY, Richard
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Chapter 4, Problem 7QP

a.

Summary Introduction

To compute: Return on equity (ROE)

a.

Expert Solution
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Explanation of Solution

The formula to calculate return on equity is as follows:

Return on equity=Net income(shareholders equity at the end of the year+share holders equity at thestart of the year2)

The calculation of return on equity is as follows:

Return on equity =1223(9724+91212)=0.129796=13%

Hence, the ROE is 13%

b.

Summary Introduction

To compute: Return on assets (ROA)

b.

Expert Solution
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Explanation of Solution

The formula to calculate return on asset is as follows:

Return on asset=Net income+Interest expense(1Tax rate)(Total assets at the start of the year+Total assets at the end of the year2)

The calculation of return on capital is as follows:

    Return on assets=1,223+685×(1.35)(27,714+27,5032)=0.0604=6.04%

Hence, the ROA is 6.04%

c.

Summary Introduction

To compute: Return on capital (ROC)

c.

Expert Solution
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Explanation of Solution

The formula to calculate return on capital is as follows:

Return on capital=Net income+Interest expense×(1Tax rate)([Long term debt and leases at the start of the year +shareholders equity at the end of the year]+[Long term debt and leases at the end of theyear+shareholders equity at the end of theyear]2)

The calculation of return on equity is as follows:

Return on capital=1,223+685×(1.35)[(7,018+9,724)+(6,833+9,121)]2=0.1020=10.20%

Hence, the ROC is 10.20%

d.

Summary Introduction

To compute: Days in inventory.

d.

Expert Solution
Check Mark

Explanation of Solution

The formula to calculate days in inventory is as follows:

Days in inventory=Inventory in the start of the year(Cost of goods sold365)

.

The calculation of days in inventory is as follows:

 Days in inventory==238(4,060365)=21.40 days

Hence, the days in inventory is 21.40 days

e.

Summary Introduction

To compute: Inventory turn over

e.

Expert Solution
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Explanation of Solution

The formula to calculate inventory turnover is as follows:

Inventory turnover=Cost of goods soldInventory at start of year

The calculation of inventory turnover is as follows:

Inventory turnover==4,060(187+238)2=19.11

Hence, the inventory turnover is 19.11

f.

Summary Introduction

To compute: Average collection period(ACP)

f.

Expert Solution
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Explanation of Solution

The formula to calculate average collection period is as follows:

Average collection period =Receivables at start of yearAverage daily sales

The calculation of average collection period is as follows:

     Average collection period=2,490(13,193365)=68.89 days

Hence, the ACP is 68.89 days.

g.

Summary Introduction

To compute: Operating profit margin (OPM)

g.

Expert Solution
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Explanation of Solution

The formula to calculate operating profit margin is as follows:

Operating profit margin==Net income  + After-tax  interestSales

The calculation of operating profit margin is as follows:

Operating profit margin=1,223+685×(1.35)13,193=0.1264=12.64%

Hence, the OPM is 12.64%

h.

Summary Introduction

To compute: Long term debt ratio

h.

Expert Solution
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Explanation of Solution

The formula to calculate operating profit margin is as follows:

Long term debt ratio=Long term debt and leases at the end of the year(long term debt and leases at the end of the year +shareholders equity at the end of the year)

The calculation of long term debt ratio is as follows:

  Long-term debt ratio=7,0187,018+9,724=0.42

Hence the long term debt ratio is 0.42

i.

Summary Introduction

To compute: Total debt ratio

i.

Expert Solution
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Explanation of Solution

The formula to calculate total debt ratio is as follows:

Total debt ratio=(Total current liabilities at the end of the year+Long term debt and leases at the end of the year+Other long term liabilities at the end of the yearTotal assets at the end of the year)

The calculation of total debt ratio is as follows:

    Total debt ratio=4,794+7,018+6,17827,714=0.65

Hence the total debt ratio is 0.65

j.

Summary Introduction

To compute: Times interest earned

j.

Expert Solution
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Explanation of Solution

The formula to calculate times interest earned is as follows:

Times interest earned=EBITInterest expense

The calculation of times interest earned is as follows:

Times interest earned=2,566685=3.75

Hence the time interest earned is 3.75

k.

Summary Introduction

To compute: Cash coverage ratio

k.

Expert Solution
Check Mark

Explanation of Solution

The formula to calculate cash coverage ratio is as follows:

Cash coverage ratio=(EBIT+Depreciation)Interest expense

The calculation of cash coverage ratio is as follows:

   Cash coverage ratio==2,566+2,518685=7.42

Hence the cash coverage ratio is 7.42

l.

Summary Introduction

To compute: Current ratio

l.

Expert Solution
Check Mark

Explanation of Solution

The formula to calculate current ratio is as follows:

Current ratio=Current assetsCurrent liabilities

The calculation of current ratio is as follows:

     Current ratio=3,5254,794=0.74

Hence the current ratio is 0.74

m.

Summary Introduction

To compute: Quick ratio

m.

Expert Solution
Check Mark

Explanation of Solution

The formula to calculate quick ratio is as follows:

Quick ratio=Cash + Marketable securities + ReceivablesCurrent liabilities

The calculation of quick ratio is as follows:

     Quick ratio=89+2,3824,794=0.52

Hence the quick ratio is 0.52

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Financial ratio analysis; Author: The Finance Storyteller;https://www.youtube.com/watch?v=MTq7HuvoGck;License: Standard Youtube License