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Chapter 24: 6E_a (page 1449)

Edna Millay Inc. is a manufacturer of electronic components and accessories with total assets of $20,000,000. Selected financial ratios for Millay and the industry averages for firms of similar size are presented below.

Edna Millay

2017 Industry

2015

2016

2017

Averages

Current ratio

2.09

2.27

2.51

2.24

Quick ratio

1.15

1.12

1.19

1.22

Inventory turnover

2.40

2.18

2.02

3.50

Net sales to stockholders鈥� equity

2.71

2.80

2.99

2.85

Return on common stockholders鈥� equity

0.14

0.15

0.17

0.11

Total liabilities to stockholders鈥� equity

1.41

1.37

1.44

0.95

Millay is being reviewed by several entities whose interests vary, and the company鈥檚 financial ratios are a part of the data being considered. Each of the parties listed below must recommend an action based on its evaluation of Millay鈥檚 financial position.

Archibald MacLeish Bank. The bank is processing Millay鈥檚 application for a new 5-year term note. Archibald MacLeish has been Millay鈥檚 banker for several years but must reevaluate the company鈥檚 financial position for each major transaction.

Robert Penn Warren. A brokerage firm specializing in the stock of electronics firms that are sold over-the-counter, Robert Penn Warren must decide if it will include Millay in a new fund being established for sale to Robert Penn Warren鈥檚 clients.

Working Capital Management Committee. This is a committee of Millay鈥檚 management personnel chaired by the chief operating officer. The committee is charged with the responsibility of periodically reviewing the company鈥檚 working capital position, comparing actual data against budgets, and recommending changes in strategy as needed.

Instructions

a) Describe the analytical use of each of the six ratios presented above.

Short Answer

Expert verified

Ratios are useful for examining performance patterns over a lengthy period of time. They can also be used to compare a company's financial results to those of its competitors.

Step by step solution

01

Meaning of Financial Ratios

A financial ratio is a tool for comparing a company's financial status or output to those of competitors. It might be a tool that financial specialists use to study and collect data about a company's financial history or the whole trade division.

02

Describing the analytical use of each of the six ratios

The current ratio is a measurement of a company's total short-term liquidity as well as its ability to repay short-term debt.

The quick ratiomoreover could be a measure of short-term liquidity. In any case, it may be a measure of more prompt liquidity than the current proportion and is a pointer of a firm鈥檚 capacity to pay all of its immediate debts from cash or near-cash assets. The quick ratio is additionally a pointer of the degree of inventories in its current resources when compared to the current ratio.

Inventory turnover is a marker of the number of times a firm offers its normal inventory level amid the year. A low inventory turnover may show intemperate inventory amassing or out-of-date inventory.

The activity percentage of net sales to shareholders' value measures the number of times the stockholders' value was turned over in sales volume. This ratio can also be referred to as a net asset turnover ratio, which gauges net asset management. As a result, it might be a measure of operational efficiency. This percentage is in comparison to asset turnover.

Return on common stockholders鈥� equity may be a benefit ratio. It measures the return on stockholders鈥� speculation and is utilized to assess the company鈥檚 success in creating income for the advantage of its stockholders

The ratio of total liabilities to shareholders'equity compares the sum of creditors' assets to stockholders' resources. This approach assesses or judges the degree of financial hazard by measuring the degree of use within the company's financial structure. This proportion is compared to the debt-to-equity ratio.

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Most popular questions from this chapter

What are the major types of subsequent events? Indicate how each of the following 鈥渟ubsequent events鈥� would be reported.

a) Collection of a note written off in a prior period.

b) Issuance of a large preferred stock offering.

c) Acquisition of a company in a different industry.

e) Destruction of a major plant in a flood.

f) Death of the company鈥檚 chief executive officer (CEO).

g) Additional wage costs associated with settlement of a four-week strike.

h) Settlement of a federal income tax case at considerably more tax than anticipated at year-end.

Change in the product mix from consumer goods to industrial goods.

An article in the financial press entitled 鈥淚mportant Information in Annual Reports This Year鈥� noted that annual reports include a management鈥檚 discussion and analysis section. What would this section contain?

(Dividend Policy Analysis) Matheny Inc. went public 3 years ago. The board of directors will be meeting shortly after the end of the year to decide on a dividend policy. In the past, growth has been financed primarily through the retention of earnings. A stock or a cash dividend has never been declared. Presented below is a brief financial summary of Matheny Inc.鈥檚 operations.

(\(000 omitted)

2018

2017

2016

2015

2014

Sales revenue

\)20,000

\(16,000

\)14,000

\(6,000

\)4,000

Net income

2,400

14,000

800

700

250

Average total assets

22,000

19,000

11,500

4,200

3,000

Current assets

8,000

6,000

3,000

1,200

1,000

Working capital

3,600

3,200

1,200

500

400

Common shares:

Number of shares

Outstanding (000)

Average market price

2,000

\(9

2,000

\)6

2,000

$4

20

-

20

-

Instructions

  1. Compute the return on assets, profit margin on sales, earnings per share, price-earnings ratio, and current ratio for each of the 5 years for Matheny Inc.

Heartland Company鈥檚 budgeted sales and budgeted cost of goods sold for the coming year are \(144,000,000 and \)99,000,000, respectively. Short-term interest rates are expected to average 10%. If Heartland can increase inventory turnover from its present level of 9 times a year to a level of 12 times per year, compute its expected cost savings for the coming year.

Answer each of the questions in the following unrelated situations.

d) A company has current assets of \(600,000 and current liabilities of \)240,000. The board of directors declares a cash dividend of $180,000. What is the current ratio after the declaration but before payment? What is the current ratio after the payment of the dividend?
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