Finance Case Chapter 4 D'Leon Inc. Part 2

Finance Case Chapter 4

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

a. Ratios are used by managers to help improve the firm’s performance, by lenders to help evaluate the firm’s repaying debts. The five major categories 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?

a. The current ratio for 2009 would be 2.34x, by using the equation of current assets/current liability.

b. The Quick ratio for 2009 would be 0.842x, this is so by using the equation of current assets-inventories/current liabilities

i. The company’s current and quick ratios are identical to the ratios of 2007, however the ratios have improved from where they were at in 2008.

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?

a. The inventory turnover for 2009 would be 4.10x, this is so because of the equation, sales/inventory

b. The DSO’s for 2009 would be 45.55 days based on the equation, recievables/(sales/365)

c. The Fixed Assets Turnover for 2009 would be 8.61x because of the equation, sales/net fixed assets

d. The Total Assets Turnover for 2009 would be, 2.01x this comes from the equation, Sales/Total Assets

i. The firm’s inventory and total assets turnover are in fact lower than those in their industry, while the DOS is also below the industry. The only ratio that is actually above where all the other...