Problem 1-1

In assessing the performance of both Kampa Company and Arbor

Company we can see as time progresses the companies are starting to do
better. Since Arbor started six years later than Kampa, the numbers should
be smaller in Arbors case. Both companies are remaining rather stagnant
with a small upturn in sales and asset turnover going into 2006. Since the
asset turnover ratio is increasing over time both companies are efficiently
using their assets in gaining a larger profit. They are able to increase sales
while keeping the amount of total assets relatively the same. Since both
companies paid the 7% interest on their debt to creditors and since the return
on total assests has remained level over the years analyzed, the financial
leverage of the company seems to be in good shape. It seems that given a
steady return on total assets and with a rise in sales, the amount of net
income seems to be steady enough for them to use their debt to increase the
profit that the company may attain.

Problem 1-5
Foxx Company
Balance Sheet
As of December 31
Assets

Current Assets
Cash
Receivables
Inventory

10,250
46,000
86,250

Total Current Assets

142,500
Noncurrent Assets

280,000

Total Assets

422,500

57,000
27,500

Liabilities and Shareholders Equity

Current Liabilities
Noncurrent Liabilities
Total Debt

84,500

Shareholders Equity
338,000
Total Debt and Shareholders Equity
422,500

Problem 1-9

Current Ratio = Current Assets/Current Liabilities

13,570,000/5,900,000 = 2.3

Acid-Test Ratio = (Cash + Marketable Securities +

Receivables)/Current Liabilities
(1,610,000 + 510,000 + 4,075,000)/5,900,000 = 1.05

Book Value per Common Share

11,875,000 + (50,000 * 100) = Common Stockholders Equity =
16,875,000
16,875,000/550,000 = $30.68

Gross Profit Margin Ratio = (Sales Cost of Sales)/Sales

(48,400,000 31,460,000)/48,400,000 = .35 or 35%

Days to sell Inventory

[(7,250,000 + 7,050,000)/2]/(31,460,000/360) = 81.8 days

Times Interest Earned

(2,360,000 +2,315,000 +275,000)/275,000 = 18

Common Stock Price-to-Earnings Ratio

Market Price/Earnings per Share
73.50/[(3,075,000 50,000)/550000] = 13.36

Gross CAPEX
9,280,000 9,471,000 + 375,000 = $184,000

Case 1-4

This is a probable yes and no answer. You could say yes since the
companys overall liquidity seems to be getting better by looking at
the current ratio, but there is still the fact of the acid-test ratio
going down.
I believe that it is not becoming easier for the company to meet its
current because the acid-test ratio is below one stating that there is
less means of paying in comparison to the total assets.

No I do not believe that they are collecting receivables more rapidly.

If you look at the trends in accounts receivable turnover and the
sales index-number, you will see that the former is decreasing as
the latter increases. If sales are increasing that would mean that
the amount in accounts receivable would also have to increase as
well to have a decrease in the turnover.

No: pretty much the same answer as part b

**Again a tough question to answer. By looking at the trends in

sales-index, selling expenses to net sales, and merchandise
inventory turnover, I would say that yes the dollars invested in
inventory are increasing. Since sales is increasing that would
suggest an increase in cost of sales as well, unless there was some
sort of difference in price due to different buying points. If this is
true that would mean that the amount in inventory would also have
to be increasing to account for the decreasing trend in inventory
turnover.
However, there could be an extenuating circumstance where even
though inventory is increasing, the prices for the said inventory
could be decreasing there in mind making the amount of dollars
decrease. I am still going to keep my answer assuming no change
in inventory prices.

Since sales are increasing and the sales to plant assets ratio is
increasing, we can assume that the investment in plant assets is
increasing as well. If we look at the total asset for the past two
years in the problem we see that it stays the same. For this to stay
true with the increase in sales, that would also need the amount of
plant assets to also increase.

No the owners investment is not becoming more profitable due to

the fact that both the net income margin and the return on owners
equity are both decreasing as the company progresses.

No the company is not using its assets efficiently due to the fact
that its return on total assets is decreasing as the company moves
from 2004 to 2006.

Yes, because even though our sales are increasing, the selling
expenses to net sales ratio is decreasing providing the notion that
the expenses are decreasing. If we sell more we would expect the

expenses to go up, but since the ratio is decreasing that would

assume less expenses.