Chapter 3: Working with Financial Statements

Some recent financial statements for Smolira Golf Corp. follow. Use this information to
work Problems 26 through 30:

SMOLIRA GOLF CORP.

2008 and 2009 Balance Sheets

Assets Liabilities and Owners’ Equity

2008 2009 2008 2009
Current Assets Current Liabilities
Cash $ 21,860 $ 22,050 A/P $ 19,320 $ 22,850
A/R 11,316 13,850 Notes Payable 10,000 9,000
Inventory 23,084 24,650 Other 9,643 11,385
Total Current Assets $ 56,260 $ 60,550 Total Current Liabs $ 38,963 $ 43,235
Fixed Assets Long-Term Debt $ 75,000 $ 85,000
Net PP&E $234,068 $260,525 Owners’ Equity
Common Stock $ 25,000 $ 25,000
Retained Earnings 151,365 167,840
Total Owners’ Equity $176,365 $192,840
Total Assets $290,328 $321,075 Total Liabs and OE $290,328 $321,075

SMOLIRA GOLF CORP.

2009 Income Statement

Sales $305,830
Cost of Goods Sold 210,935
Depreciation 26,850
Earnings Before Interest and Taxes (EBIT) $ 68,045
Interest Expense 11,930
Earnings Before Taxes (EBT) $ 56,115
Taxes (35%) 19,640
Net Income $ 36,475

Dividends $20,000
Transferred to Retained Earnings $16,475
$36,475

26. Calculating Financial Ratios: Find the following financial ratios for Smolira
Gold Corp. (use year-end figures rather than average values where appropriate):
Short-Term Solvency Ratios:
2008 2009
a. Current Ratio 1.4439 1.4005

The current ratio is current assets divided by current liabilities:

CurrentAssets
CurrentRatio 
CurrentLiabilities

$56,260
CurrentRatio2008   1.44393399
$38,963

$60,550
CurrentRatio2009   1.40048572
$43,235

2008 2009
b. Quick Ratio 0.8515 0.8303

The quick ratio is current assets minus inventory divided by current

liabilities:

CurrentAssets  Inventory
QuickRatio 
CurrentLiabilities

$56,260  $23,084
QuickRatio2008   0.85147448
$38,963

$60,550  $24,650
QuickRatio2009   0.83034578
$43,235

2008 2009
c. Cash Ratio 0.5610 0.5100

The cash ratio is cash divided by current liabilities:

Cash
CashRatio 
CurrentLiabilities

$21,860
CashRatio2008   0.56104509
$38,963

$22,050
CashRatio 2009   0.51000347
$43,235
Asset Utilization Ratios:
2009
d. Total Asset Turnover (TAT) 0.9525X

The TAT ratio is net sales divided by total assets:

NetSales
TATRatio 
TotalAssets

$305,830
TATRatio2009   0.95251888
$321,075

2009
e. Inventory Turnover 8.5572X

The inventory turnover ratio is cost of goods sold divided by inventory:

CostOfGoodsSold
InventoryTurnoverRatio 
Inventory

$210,935
InventoryTurnoverRatio2009   8.55720081
$24,650

2009
f. Accounts Receivables (A/R) Turnover 22.0816X

The A/R turnover ratio is net sales divided by accounts receivable:

NetSales
A / RTurnoverRatio 
A/ R

$305,830
A / RRatio 2009   22.08158845
$13,850
Long-Term Solvency Ratios:
2008 2009
g. Total Debt Ratio 0.3925 0.3994

The total debt ratio is total debt (total assets minus total equity) divided by
total assets:

TotalDebt TotalAssets  TotalEquity

TotalDebtRatio  
TotalAssets TotalAssets

$38,963  $75,000 $290,328  $176,365

TotalDebtRatio2008    0.39253190
$290,328 $290,328

$43,235  $85,000 $321,075  $192,840

TotalDebtRatio2009    0.39939267
$321,075 $321,075

2008 2009
h. Debt-Equity Ratio 0.6462 0.6650

The debt-equity ratio is total debt divided by total equity:

TotalDebt
DebtEquityRatio 
TotalEquity

$38,963  $75,000
DebtEquityRatio2008   0.64617696
$176,365

$43,235  $85,000
DebtEquityRatio2009   0.66498133
$192,840

2008 2009
i. Equity Multiplier Ratio 1.6462 1.6650

Leverage Multiplier Ratio 1.6462 1.6650

The equity multiplier ratio is 1 plus the debt-equity ratio:

TotalDebt
EquityMultiplierRati o  1 
TotalEquity

EquityMultiplierRati o2008  1  0.64617696  1.64617696

 EquityMultiplierRati o2009  1  0.66498133  1.66498133

The leverage multiplier ratio is total assets divided by total equity:

TotalAssets
LeverageMultiplierRa tio 
TotalEquity

$290,328
LeverageMultiplierRa tio2008   1.64617696
$176,365

$321,075
LeverageMultiplierRa tio2009   1.66498133
$192,840

2009
j. Times Interest Earned (TIE) Ratio 5.7037X

The TIE ratio is EBIT divided by interest:

EBIT
TIERatio 
Interest

$68,045
TIERatio2009   5.70368818
$11,930

2009
k. Cash Coverage Ratio 7.9543X

The cash coverage ratio is EBIT plus depreciation divided by interest:

EBIT  Depreciati onExpense

CashCoverageRatio 
Interest

$68,045  $26,850
CashCoverageRatio2009   7.95431685
$11,930
Profitability Ratios:
2009
l. Net Profit Margin (NPM) Ratio 11.9266%

The NPM ratio is net income divided by net sales:

NetIncome
NPMRatio 
NetSales

$36,475
NPMRatio2009   11.926561%
$305,830

2009
m. Return On Assets (ROA) 11.3603%

The ROA ratio is net income divided by total assets:

NetIncome
ROA 
TotalAssets

$36,475
ROA2009   11.360274%
$321,075

2009
n. Return On Equity (ROE) 18.9146%

The ROE ratio is net income divided by total equity:

NetIncome
ROE 
TotalEquity

$36,475
ROE 2009   18.914644%
$192,840
27. DuPont Identity: Construct the DuPont identity for Smolira Gold Corp.

The DuPont identity is:

ROE  NPM  TAT  EM

NetIncome NetSales TotalDebt

ROE   1 
NetSales TotalAssets TotalEquity

$36,475 $305,830 $43,235  $85,000

ROE   1   18.914644%
$305,830 $321,075 $192,840

ROE  NPM  TAT  LM

NetIncome NetSales TotalAssets

ROE   
NetSales TotalAssets TotalEquity

$36,475 $305,830 $321,075

ROE     18.914644%
$305,830 $321,075 $192,840
28. Statement of Cash Flow: Prepare the 2009 statement of cash flows for Smolira
Golf Corp.

SMOLIRA GOLF CORP.

2009 Statement of Cash Flows

Cash: Beginning of 20091 $ 21,8601

Operating Activities
Net Income $ 36,475
Plus:
Depreciation 26,850
Increase in A/P2 3,5302
Increase in Other Current Liabilities3 1,7423
Less:
Increase in A/R4 (2,534)4
Increase in Inventory5 (1,566)5
Net Cash from Operating Activities $ 64,497
Investment Activities
Fixed Asset Acquisition6 $(53,307)6
Net Cash from Investment Activities $(53,307)
Financing Activities
Decrease in Notes Payable7 $ (1,000)7
Dividends Paid (20,000)
Increase in Long-Term Debt8 10,0008
Net Cash from Financing Activities $(11,000)
Net Increase (Decrease) in Cash $ 190
Cash: End of 20099 $ 22,0509
1
Cash: Beginning of 2009 is the same as ending cash for 2008
2
Increase in A/P:

A / P  A / P2009  A / P2008  $22,850  $19,320  $3,530

3
Increase in Other Current Liabilities:

OtherCL  OtherCL2009  OtherCL2008  $11,385  $9,643  $1,742

4
Increase in A/R:

A / R  A / R2008  A / R2009  $11,316  $13,850  $(2,534)

5
Increase in Inventory:

Inventory  Inventory2008  Inventory2009  $23,084  $24,650  $(1,566)

 6
Increase in Fixed Assets:

NFA  NFA2008  ( DepreciationExpense2009  NFA2009)

NFA  $234,068  ($26,850  $260,525)  $(53,307)

7
Decrease in Notes Payable:

NP  NP2009  NP2008  $9,000  $10,000  ($1,000)

8
Increase in Long-Term Debt:

LTD  LTD2009  LTD2008  $85,000  $75,000  $10,000

9
Cash: End of Year:

Cash  Cash2009  Cash2008  $22,050  $21,860  $190

Cash2009  $21,860  $64,497  $(53,307)  $(11,000)  $22,050

Cash2009  $21,860  $190  $22,050

29. Market Value Ratios: Smolira Golf Corp. has 25,000 shares of common stock
outstanding, and the market price for a share of stock at the end of 2009 was $43.
What is the price-earnings ratio? What are the dividends per share? What is the
market-to-book ratio at the end of 2009? If the company’s growth is 9 percent,
what is the PEG ratio?
The price-earnings (PE) ratio is:
Pr icePerShare
PERatio 
EarningsPerShare

Earnings per share (EPS) are:

NetIncome $36,475
EPS    $1.459
SharesOuts tan ding 25,000Shares

Pr icePerShare $43.00
PERatio    29.47224126 X
EarningsPerShare $1.459

Dividends per share are:

Dividends $20,000
DPS    $0.80
SharesOuts tan ding 25,000Shares

Market-to-Book ratio is:

 Market Pr icePerShare
MarketToBookRatio 
BookValuePerShare

TotalEquity $192,840
BookValuePerShare    $7.7136
SharesOuts tan ding 25,000Shares

$43.00
MarketToBookRatio   5.57456959 X
$7.7136

The PE-to-Growth (PEG) ratio is:

PERatio 29.47224126
PEGRatio    3.27469347 X
GrowthRate 9

The PEG ratio is a valuation metric for determining the relative trade-off between
the price of a stock, the earnings generated per share, and the company’s
expected growth rate. Since the PE ratio is generally higher for a company with
higher growth, dividing the PE ratio by the firm’s growth rate enables the
evaluation of firm’s with different growth rates.

30. Tobin’s Q: What is Tobin’s Q for Smolira Golf? What assumptions are you
making about the book value of assets and the market value of assets? Are these
assumptions realistic? Why or why not?
Tobin’s Q is:
MarketValueOfEquity  BookValueOfDebt
Tobin ' sQ 
BookValueOfAssets

Market Value of Equity is:

MarketValueOfEquity  Pr icePerShare  SharesOuts tan ding

MarketValueOfEquity  $43.00  25,000Shares  $1,075,000

Book Value of Debt is:

BookValueOfDebt  CurrentLiabs  LongTermLiabs

BookValueOfDebt  $43,235  $85,000  $128,235

MarketValueOfEquity  BookValueOfDebt
Tobin ' sQ 
BookValueOfAssets

$1,075,000  $128,235
Tobin ' sQ   3.74752005
$321,075