Bus 332 Homework 5 Essay

1414 Words Mar 26th, 2016 6 Pages
1. [ROA and ROE models and Ratio Components] The Salza Technology Corporation successfully increased its “top line” sales from $375,000 in 2012 to $450,000 in 2013. Net income also increased as did the venture’s total assets. You have been asked to compare the financial performance between the two years.

Salza Technology Corporation Annual Income Statements (in $ Thousands) | 2012 | 2013 | Net sales | $375 | $450 | Less: Cost of goods sold | -225 | -270 | Gross profit | 150 | 180 | Less: Operating expenses | -46 | -46 | Less: Depreciation | -25 | -30 | Less: Interest | -4 | -4 | Income before taxes | 75 | 100 | Less: Income taxes | -20 | -30 | Net income | $ 55 | $70 | Cash dividends | $ 17 | $ 20 |
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[Liquidity and Financial Leverage Ratios] Refer to the Salza Technology Corporation in Problem 1.

A. Using average balance sheet account data, calculate the (a) current ratio, (b) quick ratio, (c) total-debt-to-total-assets ratio, and (d) the interest coverage ratio for 2013.

sing average account balances:
(a)
Current ratio: Average current assets/Average current liabilities
= (($240 + $300)/2) + (($60 + $95)/2) = $270/$77.50 = 3.48 times
(b)
Quick ratio: (Average current assets – Average inventories)/Average current liabilities
= (($240 + $300)/2 - ($151 + $204)/2)/($60 + $95)/2 = ($270 - $177.50)/$77.50
= $92.50/$77.50 = 1.19 times
(c)
Total-debt-to-total-assets ratio: Average total debt/Average total assets
= (($60 + $95)/2 + ($15 + 15)/2)/($345 + $465)/2 = ($77.50 + $15)/$405
= $92.50/$405 = 22.84%

(d)
Interest coverage ratio: Average EBITDA/Average interest
EBITDA = Net sales – Cost of goods sold – Operating expenses
2012: $375 - $225 - $46 = $104
2013: $450 - $270 - $46 = $134
Interest coverage ratio = (($104 + $134)/2)/(($4 + $4)/2) = ($238/2)/($8/2)
= $119/$4 = 29.75 times

B. Repeat the ratio calculations requested in Part A separately for 2012 and 2013 using year-end balance sheet account data. What changes, if any, have occurred in terms of liquidity and financial leverage?

a)
Current ratio:
2012:

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