Question

Data for Lozano Chip Company and its industry averages follow. Lozano Chip Company: Balance Sheet as of December 31, 2019 (Thousands of Dollars) Cash $ 215,000 Accounts payable Receivables 1,575,000 Notes payable Inventories 1,135,000 Other current liabilities Total current assets $2,925,000 Total current liabilities Net fixed assets 1,345,000 Long-term debt Common equity Total assets $4,270,000 Total liabilities and equity $ 600,000 100,000 520,000 $1,220,000 400,000 2,650,000 $4,270,000 Lozano Chip Company: Income Statement for Year Ended December 31, 2019 (Thousands of Dollars) Sales $7,500,000 Cost of goods sold 6,375,000 Selling, general, and administrative expens Earnings before interest and taxes (EBIT) $ 182,000 Interest expense 40,000 Earnings before taxes (EBT) $ 142,000 Federal and state income taxes (25%) 35,500 Net income $ 106,500

Answer 1

Part A

Current assets / current liabilities = 2925000/1220000 = 2.4

Days sales outstanding = accounts receivable *365 /sales =1575000*365/7500000 = 76.7

COGS / inventory = 6375000/1135000 = 5.6

Sales / fixed assets = 7500000/1345000 = 5.6

Sales / total assets = 7500000/4270000 = 1.8

Net income sales = 106500/7500000 = 1.4%

Net income / total assets = 106500/4270000 = 2.5%

Net income / common equity = 106500/2650000 = 4.0%

Total debt / total assets = 1620000/4270000 = 37.9%

Total liabilities / total equity = 1620000/2650000 = 61.1%

Part B

For the firm, ROE = Profit margin * total asset turnover * equity multiplier = 1.4%*1.8*(4270000/2650000) = 4.1%

For the industry ROE = 1.2%*3*2.5 = 9%

Common equity / total assets = 1-60% = 40%

Equity multiplier = 1/40% = 2.5

Part C

the firm should tighten credit or enforce a more stringent collection policy.

turnover ratio is well below the industry average so sales should be increased, assets decreased, or both.

profit margin is higher than the industry average, its other profitability ratios are low compared to the industry—net income should be higher given the amount of equity