JUNE 1 EXERCISE 6

1. Using the Du Pont method, evaluate the effects of the following relationships for the Lollar
Corporation.

a. Lollar Corporation has a profit margin of 5percent and its return on assets (investment) is
13.5 percent. What is its assets turnover ratio?

b. If the Lollar Corporation has a debt-to-total-assets ratio of 60 percent, what would firm’s
return on equity be?

c. What would happen to return on equity if debt-to-total-assets ratio decreased to 40

percent?

2. Jerry Rice and Grain Stores has P4,000,000 in yearly sales. The firm earns 3.5 percent
on each dollar sales and turn over its assets 2.5 times per year. It has P100,000 in
current liabilities and P300,000 in long-term liabilities.
a.
b. What is its return on stockholder’s equity?
c. If the asset base remains the same as computed in part a, but total asset turnover
goes up to 3, what will be the new return on stockholders’ equity? Assume that the
profit margin stays the same as do current and long-term liabilities.
3. Assume the following data for Cable Corporation and Multi-Media, Inc.:
Cable Corporation Multi-Media, Inc.
Net Income ………………. P 30,000 P100,000
Sales ……………………… 300,000 2,000,000
Total Assets ……………… 400,000 900,000
Total Debt………………... 150,000 450,000
Stockholder’s Equity ……. 250,000 450,000
a. Compute return on stockholders’ equity for both firms . Which firm has the higher
return?
b. Compute the following additional ratios for both firms:
Net Income/Sales
Net Income/Total Assets
Sales/Total Assets
Debt/Total Assets
c. Discuss the factors from par b that added or detracted from one having a higher return
on stockholders’ equity than the other firm as computed in part a.
4. A firm has sales of $1.2 million, and 10 percent of the sales are for cash. The year-
end accounts receivable balance is P180,000. What is the average collection period?
(use a 360-day year)
5. The Chamberlain Corporation has an accounts receivable turnover equal to 12 times.
If accounts receivable are equal to P90,000, what is the value for average daily credit
sales?
6. The balance sheet for the Bryan Corporation is shown below. Sales for the year were
$3,040,000 with 75 percent of sales sold on credit.
Bryan Corporation
Balance Sheet
xxxx

Assets Liabilities & Stockholders’ Equity

Cash P 50,000 Accounts payable P 220,000
Accounts Receivable 280,000 Accrued Expenses 80,000
Inventory 240,000 Bonds Payable (LT) 118,000
Plant & Equipment 380,000 Common Stock 100,000
Paid-in Capital 150,000
Retained Earnings 282,000
Total Liabilities and
Total Assets P950,000 Stockholders’ Equity P950,000

Compute the following ratios:

a. Current ratio.
b. Quick ratio.
c. Debt-to-total-assets ratio.
d. Asset turnover.
e. Average collection period.
7. A firm has net income before interest and taxes of P96,000 and interest expense of
P24,000.
a. What is the times-interest-earned ratio?
b. If the firm’s lease payments are P40,000, what is the fixed charge coverage?

8. The Global Products Corporation has three subsidiaries.

Medical Heavy
 Supplies Machinery Electronics
Sales ……………… P20,000,000 P5,000,000 P4,000,000
Net Income ………. 1,200,000 190,000 320,000
Assets …………….. 8,000,000 8,000,000 3,000,000

a. Which division has the lowest return on sales?

b. Which division has the highest return on assets?
c. Compute the return on assets for the entire corporation
d. If the P8,000,000 investment in the heavy machinery division is sold off and
redeployed in the medical supplies subsidiary at the same rate of return on assets
currently achieved in the medical supplies division, what will be the new return on
assets for the entire corporation
9. Construct the current assets section of the balance sheet from the following data.
(Use cash as a plug figure after computing the other values.)
Yearly sales (credit) …………… P420,000
Inventory turnover ……………. 7 times
Current liabilities ……………… 80,000
Current ratio ………………….. 2
Average collection period (ACP) 36 days
Current Assets:
Cash …………. ……………. __________
Accounts Receivable ………. __________
Inventory …………………... __________
Total Current Assets ………….. __________

10. The Shannon Corporation has credit sales of P750,000. Given the following ratios,
fill in the balances sheet. Construct a balance sheet

Total assets turnover …………… 2.5 times

Cash to total assets …………….. 2.0 percent
Accounts Receivable turnover … 10.0 times
Inventory turnover ……………... 15.0 times
Current ratio ……………………. 2.0 times
Debt to total assets ……………... 45.0 percent