Data for Morton Chip Company and its industry averages follow. a. Calculate the indicated ratios for Morton.

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Question:

Data for Morton Chip Company and its industry averages follow.
a. Calculate the indicated ratios for Morton.
b. Construct the extended Du Pont equation for both Morton and the industry.
c. Outline Morton’s strengths and weaknesses as revealed by your analysis.
d. Suppose Morton had doubled its sales as well as its inventories, accounts receivable, and common equity during 2007. How would that information affect the validity of your ratio analysis? (Hint: Think about averages and the effects of rapid growth on ratios if averages are not used. No calculations are needed.)

Morton Chip Company: Balance Sheet as of December 31, 2007 (In Thousands)

Cash $77,500 Accounts payable $129,000
Receivables 336,000 Notes payable 84,000
Inventories 241,500 Other current liabilities 117,000
Total current assets $655,000 Total current liabilities $330,000
Net fixed assets 292,500 Long-term debt 256,500
____ Common equity 361,000
Total assets $947,500 Total liabilities and equity $947,500

Morton Chip Company: Income Statement for Year Ended December 31, 2007 (In Thousands)

Sales $1,607,500
Cost of goods sold 1,392,500
Selling, general, and administrative expenses 145,000
Earnings before interest and taxes (EBIT) $ 70,000
Interest expense 24,500
Earnings before taxes (EBT) $ 45,500
Federal and state income taxes (40%) 18,200
Net income $ 27,300

Ratio Morton Industry Average
Current assets/current liabilities 2.0
Days sales outstanding 35.0 days
Sales/inventory 6.7
Sales/fixed assets 12.1
Sales/total assets 3.0
Net income/sales 1.2%
Net income/total assets 3.6%
Net income/common equity 9.0%
Total debt/total assets 60.0%

Calculation is based on a 365-day year.