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Exam 4: Profitability Analysis

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Question 21

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Raleigh Manufacturing reported net income (amounts in millions) of $1,166 on sales of $5,520 during Year 4. Interest expense totaled $75. The income tax rate was 30 percent. Average total assets were $7,135, and average common shareholders' equity was $3,405. The firm did not have preferred stock outstanding or minority interest in its equity. REQUIRED: a. Compute the rate of ROA. Disaggregate ROA into profit margin for ROA and assets turnover components. b. Compute the rate of ROCE. Disaggregate ROCE into profit margin for ROCE, assets turnover, and capital structure leverage ratio components. c. Calculate the amount of net income to common shareholders derived from the excess return on creditors' capital and the amount from the return on common shareholders' capital.

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a. Rate of Return on Assets: [$1,166 + (...

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Question 22

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Net Devices Inc. The following balance sheets and income statements are for Net Devices Inc., a manufacturer of small electronic devices, including calculators, personal digital assistants and mp3 players. For purposes of these questions assume that the company has an effective tax rate of 35%. $\text { INCOME STATEMENTS ( } \$ \text { in thousands) }$ $\begin{array}{c}\begin{array}{lll} \text { Fiscal year end}\\ \text { Net sales}\\ \text { Cost of Goods Sold}\\ \text { Gross profit}\\\\ \text { Selling, general \& admin. Exp.}\\ \text { Income before deprec. \& amort.}\\\\ \text { Depreciation \& amortization}\\ \text { Interest expense}\\\\ \text { Income before tax}\\ \text { Provision for income taxes}\\ \text { Minority interest}\\\\ \text { Net income}\\\\ \text { Outstanding shares (in thousands) }\\ \text { Preferred Dividends (in thousands) }\end{array}\begin{array}{l}2011 \\\$ 11,455,500 \\\underline{(8.026 .450) }\\{3,429,050} \\\\\underline{(1.836 .400) }\\{1,592,650} \\\\(785,250) \\\underline{(46.195) } \\\\761,205 \\(157,725) \\\underline{\quad\quad-}\\\\\underline{\$603.480} \\\\308,515 \\\$ 85000 \\ \end{array}\begin{array}{l}2010 \\\$ 11,082,100 \\\underline{(7.940 .065) }\\{3,142,035} \\\\\underline{(1,789,200) }\\{1,352,835} \\\\(757,250) \\\underline{(43,340) }\\\\552,245 \\(112,290) \\\underline{\quad\quad-}\\\\\underline{ \$ 439.955} \\\\ 303,095 \\\$ 85,000 \end{array}\end{array}$ - Refer to the information for Net Devices Inc. What is the rate of return on assets for Net Devices for 2011?

A) 11.64%
B) 14.50%
C) 12.60%
D) 13.88%

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Question 23

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All else being equal, firms with high levels of ________________________________________ incur more risk in their operations and should earn higher rates of return.

Carl Industries has condensed balance sheets as shown: $\begin{array}{|l|l|l|l|}\hline & 2011 & 2010 & 2009 \\\hline \text { Assets: } & & & \\\hline \text { Curent assets } & \$ 55,000 & \$ 56,500 & \$ 70,000 \\\hline \text { Plant \& equipment net } & 495,000 & 410,000 & 440,000 \\\hline \text { Intangible assets, net } & 20,000 & 27,500 & 40,000 \\\hline \text { Total assets }& \$ 570,000 & \$ 494,000 & \$ 550,000 \\\hline & & & \\\hline \text { Liabilities \& Stckckolders' Equity: } & & & \\\hline \text { Curent liabilities } & \$ 40,000 & \$ 35,000 & \$ 32,500 \\\hline \text { Long term liabilities } & 395,000 & 310,000 & 375,000 \\\hline \text { Stoclcholders' equity } & 135,000 & 149,000 & 142,500 \\\hline\text { Total liabilities \& equity }& \$ 570,000 & \$ 494,000 & \$ 550,000 \\\hline & & &\end{array}$ - Refer to the information for Carl Industries. In a common size balance sheet for 2009, total liabilities and equity are expressed as

The ability of a firm to manage the level of investment in assets for a particular level of sales is measured by the ______________________________.

Sustainable earnings represent

Below is financial information for two sporting goods retailers. Extreme Sports Company operates a retail business and franchising business. At the end 2011, Extreme Sports had 263 Company-owned and 120 franchise-operated retail stores. Extreme's stores are located in suburban, strip mall and regional mall locations, the company operates in 32 states. All Sports Corporation sells sporting goods and related products at over 2,500 Company-operated retail stores. Selected Data for All Sports and Extreme Sports (amounts in millions) $\begin{array}{c}\begin{array}{lll}\\\text {Sales}\\\text {Cost of Goods Sold}\\\text {Interest Expense}\\\text {Net Income}\\\text {Average A ccounts Receivable}\\\text {Average Inventory}\\\text {Average Fixed Assets}\\\text {Average Total Assets}\\\text {Average T ax Rate}\end{array}\begin{array}{l}\text { All Sports }\\\$ 5,320 \\3,897 \\138 \\212 \\114 \\998 \\1,163 \\2,472 \\40 \%\end{array}\begin{array}{l}\text { Extreine Sport}\\ \$ 1,344 \\887\\43\\33\\18\\286\\130\\662\\40 \% \end{array}\end{array}$ Calculate the following ratios for All Sports and Extreme Sports: a. Return on assets b. Profit margin for ROA c. Assets turnover d. Accounts receivable turnover e. Inventory turnover f. Fixed asset turnover

Which of the following scenarios is consistent with a increasing cost of goods sold to sales percentage and increasing inventory turnover

EPS is an ambiguous measure of profitability because it reflects operating performance in the numerator and ________________________________________ in the denominator.

Firms with simple capital structures can have which of the following?

Which of the following is the primary objective in most financial statement analysis?

Which of the following might an analyst not want to eliminate from past earnings when using past earnings to forecast future earnings?

Ramos Company included the following information in its annual report: $\begin{array}{|l|l|l|l|}\hline & 2011 & 2010 & 2009 \\\hline \text { Sales } & \$ 178,400 & \$ 162,500 & \$ 155,500 \\\hline\text { Cost of goods sold } & 115,000 & 102,500 & 100,000 \\\hline\text { Operating expenses } & 50,000 & 50,000 & 45,000 \\\hline\text { Net incoume } & 13,400 & 10,000 & 10,500 \\\hline \end{array}$ - Refer to the information for Ramos Company. In a percentage change income statement over the period of 2009 to 2011, what is the change in net income?

Critics of EPS as a measure of profitability point out that it does not consider:

Extreme Sports Company and All Sports Corporation. Below is financial information for two sporting goods retailers. Extreme Sports Company operates a retail business and franchising business. At the end 2011, Extreme Sports had 263 Company-owned and 120 franchise-operated retail stores. Extreme's stores are located in suburban, strip mall and regional mall locations, the company operates in 32 states. All Sports Corporation sells sporting goods and related products at over 2,500 Company-operated retail stores. Selected Data for All Sports and Extreme Sports (amounts in millions) $\begin{array}{lll}&\text { All Sports }&\text { Extreine Sport }\\\text { Sales } & \$ 5,320 & \$ 1,344 \\\text { Cost of GoodsSold } & 3,897 & 887 \\\text { Interest Expense } & 138 & 43 \\\text { Net Income } & 212 & 33 \\\text { Average Inventory } & 998 & 286 \\\text { Average Fixed Assets } & 1,163 & 130 \\\text { Average Total Assets } & 2,472 & 662 \\\text { Average Tax Rate } & 40 \% & 40 \%\end{array}$ Refer to the information for Extreme Sports Company and All Sports Corporation. Compute the return on assets for Extreme Sports

Orca Industries Below are the two most recent balance sheets and most recent income statement for Orca Industries. The company has an effective tax rate of 35%. $\begin{array}{llcc}\text { Balance Sheet }&2011&2010 \\ \text { Assets: } &\\ \text { Cash} &\$10,000&\$6,000\\ \text { Accounts Receivable (net) } &6,000&1,500\\ \text { Inventory } &8,000&10,000\\ \text { Long-lived assets} &12,000&11,000\\ \text { Less: Accumulated depreciation } &\underline{(4,000) }&\underline{(2,000) } \\ \text { Total assets } &\underline{\$32,000}&\underline{\$26,500}\\\\ \text { Liabilities and Stockholders' Equity: } &\\ \text {Accounts payable } &\$5,000&\$6,000\\ \text { Deferred revenues } &1,000&2,000\\ \text { Long-term note payable } &10,000&10,000\\ \text { Less: Discount on note payable} & (800) &(1,000) \\ \text {Common stock } &12,000&6,000\\ \text { Retained earnings} &\underline{4,800}&\underline{\$3,500}\\ \text {Total liabilities and stockholders' equity } &\underline{\$32,000}&\underline{\$26,500}\\\\ \text { Income Statement} &\\ \text { For the year ended December 31, 2011 } &\\ \text { Revenues} &&\$42,000\\ \text { Cost of goods sold } &&(24,000) \\ \text { Depreciation expense} &&(2,000) \\ \text { Interest expense } &&(3,000) \\ \text { Bad debt expense} &&(2,000) \\ \text { Other expense (including income taxes) }& &\underline{(9,000) }\\ \text { Net income } &&\underline{\$2,000}\\\end{array}$ - Refer to the information for Orca Industries. Orca's asset turnover is

Orca Industries Below are the two most recent balance sheets and most recent income statement for Orca Industries. The company has an effective tax rate of 35%. $\begin{array}{llcc}\text { Balance Sheet }&2011&2010 \\ \text { Assets: } &\\ \text { Cash} &\$10,000&\$6,000\\ \text { Accounts Receivable (net) } &6,000&1,500\\ \text { Inventory } &8,000&10,000\\ \text { Long-lived assets} &12,000&11,000\\ \text { Less: Accumulated depreciation } &\underline{(4,000) }&\underline{(2,000) } \\ \text { Total assets } &\underline{\$32,000}&\underline{\$26,500}\\\\ \text { Liabilities and Stockholders' Equity: } &\\ \text {Accounts payable } &\$5,000&\$6,000\\ \text { Deferred revenues } &1,000&2,000\\ \text { Long-term note payable } &10,000&10,000\\ \text { Less: Discount on note payable} & (800) &(1,000) \\ \text {Common stock } &12,000&6,000\\ \text { Retained earnings} &\underline{4,800}&\underline{\$3,500}\\ \text {Total liabilities and stockholders' equity } &\underline{\$32,000}&\underline{\$26,500}\\\\ \text { Income Statement} &\\ \text { For the year ended December 31, 2011 } &\\ \text { Revenues} &&\$42,000\\ \text { Cost of goods sold } &&(24,000) \\ \text { Depreciation expense} &&(2,000) \\ \text { Interest expense } &&(3,000) \\ \text { Bad debt expense} &&(2,000) \\ \text { Other expense (including income taxes) }& &\underline{(9,000) }\\ \text { Net income } &&\underline{\$2,000}\\\end{array}$ - Refer to the information for Orca Industries. Orca's inventory turnover is

Time-series analysis helps answer all of the following questions except:

Orca Industries Below are the two most recent balance sheets and most recent income statement for Orca Industries. The company has an effective tax rate of 35% $\begin{array}{llcc}\text { Balance Sheet }&2011&2010 \\ \text { Assets: } &\\ \text { Cash} &\$10,000&\$6,000\\ \text { Accounts Receivable (net) } &6,000&1,500\\ \text { Inventory } &8,000&10,000\\ \text { Long-lived assets} &12,000&11,000\\ \text { Less: Accumulated depreciation } &\underline{(4,000) }&\underline{(2,000) } \\ \text { Total assets } &\underline{\$32,000}&\underline{\$26,500}\\\\ \text { Liabilities and Stockholders' Equity: } &\\ \text {Accounts payable } &\$5,000&\$6,000\\ \text { Deferred revenues } &1,000&2,000\\ \text { Long-term note payable } &10,000&10,000\\ \text { Less: Discount on note payable} & (800) &(1,000) \\ \text {Common stock } &12,000&6,000\\ \text { Retained earnings} &\underline{4,800}&\underline{\$3,500}\\ \text {Total liabilities and stockholders' equity } &\underline{\$32,000}&\underline{\$26,500}\\\\ \text { Income Statement} &\\ \text { For the year ended December 31, 2011 } &\\ \text { Revenues} &&\$42,000\\ \text { Cost of goods sold } &&(24,000) \\ \text { Depreciation expense} &&(2,000) \\ \text { Interest expense } &&(3,000) \\ \text { Bad debt expense} &&(2,000) \\ \text { Other expense (including income taxes) }& &\underline{(9,000) }\\ \text { Net income } &&\underline{\$2,000}\\\end{array}$ - Refer to the information for Orca Industries. The return on common shareholders' equity for Orca Industries is

Net Devices Inc. The following balance sheets and income statements are for Net Devices Inc., a manufacturer of small electronic devices, including calculators, personal digital assistants and mp3 players. For purposes of these questions assume that the company has an effective tax rate of 35%. $\text { INCOME STATEMENTS ( } \$ \text { in thousands) }$ $\begin{array}{c}\begin{array}{lll} \text { Fiscal year end}\\ \text { Net sales}\\ \text { Cost of Goods Sold}\\ \text { Gross profit}\\\\ \text { Selling, general \& admin. Exp.}\\ \text { Income before deprec. \& amort.}\\\\ \text { Depreciation \& amortization}\\ \text { Interest expense}\\\\ \text { Income before tax}\\ \text { Provision for income taxes}\\ \text { Minority interest}\\\\ \text { Net income}\\\\ \text { Outstanding shares (in thousands) }\\ \text { Preferred Dividends (in thousands) }\end{array}\begin{array}{l}2011 \\\$ 11,455,500 \\\underline{(8.026 .450) }\\{3,429,050} \\\\\underline{(1.836 .400) }\\{1,592,650} \\\\(785,250) \\\underline{(46.195) } \\\\761,205 \\(157,725) \\\underline{\quad\quad-}\\\\\underline{\$603.480} \\\\308,515 \\\$ 85000 \\ \end{array}\begin{array}{l}2010 \\\$ 11,082,100 \\\underline{(7.940 .065) }\\{3,142,035} \\\\\underline{(1,789,200) }\\{1,352,835} \\\\(757,250) \\\underline{(43,340) }\\\\552,245 \\(112,290) \\\underline{\quad\quad-}\\\\\underline{ \$ 439.955} \\\\ 303,095 \\\$ 85,000 \end{array}\end{array}$ - Refer to the information for Net Devices Inc. What is the accounts receivable turnover ratio for Net Devices for 2011?