D´León Part Ii

A. Why are ratios useful? What are the five major categories of ratios?

Answer: [S4-1 through S4-5 provide background information. Then, show S4-6 and S4-7 here.] Ratios are used by managers to help improve the firm’s performance, by lenders to help evaluate the firm’s likelihood of repaying debts, and by stockholders to help forecast future earnings and dividends. The five major categories of ratios are: liquidity, asset management, debt management, profitability, and market value.

B. Calculate D’Leon’s 2009 current and quick ratios based on the projected balance sheet and income statement data. What can



you say about the company’s liquidity positions in 2007, 2008, and as projected for 2009? We often think of ratios as being useful (1) to managers to help run the business, (2) to bankers for credit analysis, and (3) to stockholders for stock valuation. Would these different types of analysts have an equal interest in these liquidity ratios?

Answer: [Show S4-8 and S4-9 here.]

Current ratio09 = Current assets/Current liabilities

= $2,680,112/$1,144,800 = 2.34.

Quick ratio09= (Current assets – Inventories)/Current liabilities = ($2,680,112 – $1,716,480)/$1,144,800

= $963,632/$1,144,800 = 0.842.

The company’s current and quick ratios are identical to its 2007 current and quick ratios, and they have improved from their 2008 levels. However, both the current and quick ratios are well below the industry averages.

C. Calculate the 2009 inventory turnover, days sales outstanding (DSO), fixed assets turnover, and total assets turnover. How does D’Leon’s utilization of assets stack up against other firms in its industry?

Answer: [Show S4-10 through S4-15 here.]

Inventory turnover09= Sales/Inventory

= $7,035,600/$1,716,480 = 4.10. DSO09 = Receivables/(Sales/365)

= $878,000/($7,035,600/365) = 45.55 days.

Fixed assets turnover09 = Sales/Net fixed assets

= $7,035,600/$817,040 = 8.61.

Total assets turnover09 =...