Financial ratio analysis is conducted by four groups of analysts: managers, equity investors, long-term creditors, and short-term creditors. What is the primary emphasis of each of these groups in evaluating ratios?

Question

Ace Industries has current assets equal to $3 million. The company’s current ratio is 1.5, and its quick ratio is 1.0. What is the firm’s level of current liabilities? What is the firm’s level of inventories?
You are a financial analyst for a certain company. The director of capital budgeting has asked you to analyze two proposed capital investments. Each project has a cost of $ 10,000 and the cost of capital of each project is 12 % .The projects’ expected net cash flow are as follows

Answer the following question based on the above information:
Projects payback period and NPV
Which project or projects should be accepted if they are independent
Which project should be accepted if they are mutually exclusive
Data for SAREM Import-Export Enterprise are as follow.
SAREM Import-Export Enterprise
Balance sheet Sene 30, 2016
Assets Liabilities and Shareholders’ Equity
Cash……………………Br.77, 500 Account payable…………Br. 129,000
Receivable…………….......336,000 Notes payable………..………. 84,000
Inventories……………..... ..241,500 Other current liabilities…… 117,000 Total current Asset……..Br. 655,000 Total current liabilities…..Br. 330,000
Net fixed asset……………..292,000 Long-term debt……………....256,500
Common equity……………..361,000
Total assets……………Br. 947,500 Total liabilities &Equity…Br.947,500
SAREM Import-Export Enterprise
Income Statement
For the year ended Sene 30, 2016
Sales Br. 1,607,500
Cost of goods sold:
Materials……………………………………Br. 717,000
Labor…………………………………………..453,000
Heat, light and power…………………………. 68,000
Indirect labor…………………………………..113,000
Depreciation……………………………………41,500 1,392,500
Gross profit…………………………………………… ……………..Br. 215,000
Selling expenses……………………………………………Br. 115,000
General & administrative expense ……………………………. 30,000 145,000 Earnings before interest and taxes (EBIT)………………………… …………Br. 70,000
Interest expense……………………………..……………………………………… 24,500
Earning before tax………………………………………………………………Br. 45,000
Income tax (40%)…………………………………………………………………..18,200
Net income…………………………………………………….. …………………...27,300
Required
Calculate the following ratios from the data given in the financial statements above for SAREM Import-Export Enterprise.
Current ratio
Inventory turnover
Total asset Turnover
Net Profit Margin
Return on Total assets
Return on Equity
Debt ratio
A saving account opened 3 months ago now has a balance of Birr 20,400. If the bank pays 8% simple interest, how much money was deposited?
Find the amount that an investor should deposit in a bank today if he needs Birr 20,000 in 3 months at a simple interest rate of 9%.
Find the compound amount compound interest resulting from the investment of Birr 1000 at 6% for 10 years,
Compounded annually.
Compounded semiannually.
Compounded quarterly.
Compounded monthly.
Compounded continuously.

Answer 1

Let's address each topic as follows:

Financial Ratio Analysis

1. Managers: Primarily focus on operational efficiency, profitability, and liquidity ratios, analyzing how well the company utilizes its resources to generate profits and manage cash flows.

2. Equity Investors: Focus on profitability and valuation ratios, such as earnings per share (EPS) and price-to-earnings (P/E) ratio, assessing the company's ability to generate returns on their investments.

3. Long-term Creditors: Assess solvency and financial stability, focusing on ratios such as debt-to-equity and interest coverage ratios to evaluate the likelihood of the company meeting long-term obligations.

4. Short-term Creditors: Emphasize liquidity ratios like the current ratio and quick ratio to ensure the company can meet its short-term liabilities.

Ace Industries: Current Liabilities and Inventories

• Current Ratio = Current Assets / Current Liabilities \[ 1.5 = 3,000,000 / Current Liabilities \] Current Liabilities = \( 3,000,000 / 1.5 = 2,000,000 \)

• Quick Ratio = (Current Assets - Inventories) / Current Liabilities \[ 1.0 = (3,000,000 - Inventories) / 2,000,000 \] Therefore, \( 3,000,000 - Inventories = 2,000,000 \Rightarrow Inventories = 1,000,000 \)

Summary:

• Current Liabilities = $2,000,000
• Inventories = $1,000,000

Capital Investment Analysis: Payback Period and NPV

Let’s assume that the expected net cash flows for the projects are the same or provided afterwards. Write the following if expected cash flow information is given:

• Payback Period: The payback period is calculated as the time taken to recover the initial investment. If cash flows are consistent, divide the initial investment by annual cash flow.

• Net Present Value (NPV): NPV is the present value of cash inflows minus initial investment. Calculated as follows: \[ NPV = \sum \frac{CF_t}{(1 + r)^t} - Initial Investment \] where \( CF_t \) is cash flow at time \( t \) and \( r \) is the discount rate (cost of capital).

Decisions:

• Independent Projects: Accept each project if the NPV is positive.
• Mutually Exclusive Projects: Accept the project with the higher NPV.

SAREM Import-Export Enterprise Ratios Calculation

1. Current Ratio: \[ = \frac{Total Current Assets}{Total Current Liabilities} = \frac{655,000}{330,000} \approx 1.99 \]

2. Inventory Turnover: \[ = \frac{Cost of Goods Sold}{Average Inventory} = \frac{1,392,500}{(241,500 + 241,500)/2} \approx 5.77 \]

3. Total Asset Turnover: \[ = \frac{Sales}{Total Assets} = \frac{1,607,500}{947,500} \approx 1.70 \]

4. Net Profit Margin: \[ = \frac{Net Income}{Sales} = \frac{27,300}{1,607,500} \approx 1.70% \]

5. Return on Total Assets (ROA): \[ = \frac{Net Income}{Total Assets} = \frac{27,300}{947,500} \approx 2.88% \]

6. Return on Equity (ROE): \[ = \frac{Net Income}{Common Equity} = \frac{27,300}{361,000} \approx 7.57% \]

7. Debt Ratio: \[ = \frac{Total Liabilities}{Total Assets} = \frac{586,500}{947,500} \approx 61.9% \]

Savings Account Calculation

• Deposited Amount: \[ A = P(1 + rt) \Rightarrow 20,400 = P(1 + 0.08 \times \frac{3}{12}) \] \[ P = \frac{20,400}{1.02} \approx 20,000 \]

Finding Present Value for Future Amount

• Present Value Calculation (needs to be rearranged for PV): \[ PV = \frac{Future Value}{(1 + rt)} = \frac{20,000}{1 + 0.09 \times \frac{3}{12}} \] After calculation, you will find the present amount.

Compound Interest Calculation

1. Compounded Annually: \[ A = P(1 + r/n)^{nt} \text{ for } n=1 \] \[ = 1000(1 + 0.06)^10 \]

2. Compounded Semiannually: \[ n=2 \] \[ = 1000(1 + 0.03)^{20} \]

3. Compounded Quarterly: \[ n=4 \] \[ = 1000(1 + 0.015)^{40} \]

4. Compounded Monthly: \[ n=12 \] \[ = 1000(1 + 0.005)^{120} \]

5. Compounded Continuously: \[ A = Pe^{rt} = 1000e^{0.06 \times 10} \]

All of the above calculations can be computed to get the final amounts for each case.