Dear Sir/Maam,
Please provide a summary of the Higgins Chapter 3 Problems Questions No. 1, 3, 5 and 11.
Q 1 (This question is on page no. 100 of the e-book attached) – The Board of Directors of Collins Entertainment, Inc. has been pressuring its CEO to boost ROE. During a recent interview on CNBC, he announces his plan to improve the firms financial performance. He will raise prices on all of the companys products by 10 percent. He justifies the plan by observing that ROE can be decomposed into the product of profit margin, asset turnover, and financial leverage. By raising prices, he will increase the profit margin and thus ROE. Does this plan make sense to you? Why or why not?
Q3 (This question is on page no. 100 of the e-book attached) –
3. True or false?
a. A companys assets-to-equity ratio always equals one plus its liabilities to-equity ratio.
b. A companys return on equity will always equal or exceed its return on assets.
c. A companys collection period should always be less than its
payables period.
d. A companys current ratio must always be larger than its acid test ratio.
e. All else equal, a firm would prefer to have a higher asset turnover ratio.
f. Two firms can have the same earnings yield but different price-to earnings ratios.
g. Ignoring taxes and transactions costs, unrealized paper gains are less valuable than realized cash earnings.
Q5 (This question is on page no. 101 of the e-book attached) –
Financial data for Industrial Inc follows: ($ in thousands)
Year 1 Year 2
Sales $ 271,161 $ 457,977
Cost of goods sold 249,181 341,204
Net income (155,034) (403,509)
Cash flow from operations (58,405) (20,437)
Balance Sheet
Cash 341,180 268,872
Marketable securities 341,762 36,900
Accounts receivable 21,011 35,298
Inventories 6,473 72,106
Total current assets $ 710,427 $ 413,176
Accounts payable $ 28,908 $ 22,758
Accrued liabilities 44,310 124,851
Total current liabilities $ 73,218 $ 147,610
a. Calculate the current and quick ratio at the end of each year.
How has the companys short-term liquidity changed over this
period?
b. Assuming a 365-day year for all calculations, compute the following:
i. The collection period each year based on sales.
ii. The inventory turnover, and the payables period each year
based on cost of goods sold.
iii. The days sales in cash each year.
iv. The gross margin and profit margin each year.
c. What do these calculations suggest about the companys performance?
Q11 (This question is on page no. 103 of the e-book attached) –
11. Given the following information, complete the balance sheet shown
next.
Collection period 71 days
Days sales in cash 34 days
Current ratio 2.6
Inventory turnover 5 times
Liabilities to assets 75%
Payables period 36 days
(All sales are on credit. All calculations assume a 365-day year.
Payables period is based on cost of goods sold.)
Assets
Current:
Cash $1,100,000
Accounts receivable
Inventory 1,900,000
Total current assets
Net fixed assets
Total assets 8,000,000
Liabilities and shareholders equity
Current liabilities:
Accounts payable
Short-term debt
Total current liabilities
Long-term debt
Shareholders equity
Total liabilities and equity
