Using the data in the following table for a number of firms in the same industry, do the following:
a. Compute the total asset turnover, the net profit margin, the equity multiplier, and the return on equity for each firm.
b. Evaluate each firm's performance by comparing the firms with one another. Which firm or firms appear to be having problems? What corrective action would you suggest the poorer performing firms take? Finally, what additional data would you want to have on hand when conducting your analyses?
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|
Firm
|
|
in millions of dollars
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A
|
B
|
C
|
D
|
|
Sales
|
$20
|
$10
|
$15
|
$ 25
|
|
Net income after tax
|
3
|
0.5
|
2.25
|
3
|
|
Total assets
|
15
|
7.5
|
15
|
24
|
|
Stockholder's equity
|
10
|
5.0
|
14
|
10
|
Q6
Tarheel Furniture Company is planning to establish a wholly owned subsidiary to manufacture upholstery fabrics. Tarheel expects to earn $1 million after taxes on the venture during the first year. The president of Tarheel wants to know what the subsidiary's balance sheet would look like. The president believes that it would be advisable to begin the new venture with ratios that are similar to the industry average.
Tarheel plans to make all sales on credit. All calculations assume a 365-day year. In your computations, you should round all numbers to the nearest $1,000.
Based upon the industry average financial ratios presented here, complete the projected balance sheet for Tarheel's upholstery subsidiary.
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Industry Averages
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Current Ratio
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2:1
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Quick Ratio
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1:1
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|
Net profit margin ratio
|
5%
|
|
Average collection period
|
20 days
|
|
Debt ratio
|
40%
|
|
Total asset turnover ratio
|
2 times
|
|
Current liabilities/stockholder's equity
|
20%
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