Question 1

CHALLENGEUsing the data in the following table for a number of firms in the same industry, do the following:

1. Compute the total asset turnover, the net profit margin, the equity multiplier, and the return on equity for each firm.
2. Evaluate each firm's performance by comparing the firms with one another. Which firm or firms appear to be having problems? What corrective action would you suggest the poorer performing firms take? Finally, what additional data would you want to have on hand when conducting your analyses?

Question 2

BASICTarheel Furniture Company is planning to establish a wholly owned subsidiary to manufacture upholstery fabrics. Tarheel expects to earn $1 million after taxes on the venture during the first year. The president of Tarheel wants to know what the subsidiary's balance sheet would look like. The president believes that it would be advisable to begin the new venture with ratios that are similar to the industry average.

Tarheel plans to make all sales on credit. All calculations assume a 365-day year. In your computations, you should round all numbers to the nearest $1,000.

Based upon the industry average financial ratios presented here, complete the projected balance sheet for Tarheel's upholstery subsidiary.

Question 3

INTERMEDIATEGulf Controls, Inc., has a net profit margin of 10 percent and earnings after taxes of $600,000. Its current balance sheet follows:

1. Calculate Gulf's return on stockholders' equity.
2. The industry average ratios are as follows:

Net Profit Margin: 6%

Total Asset Turnover: 2.5 times

Equity Multiplier: 1.4 times

Compare Gulf Controls with the average firm in the industry. What is the source of the major differences between the Gulf and the industry average ratios?

Question 4

CHALLENGEConsider the Industrial Supply Company example (Table 4.4) again. Assume that the company plans to maintain its dividend payments at the same level in 2017 as in 2016. Also assume that all of the additional financing needed is in the form of short-term notes payable. Determine the amount of additional financing needed and pro forma financial statements (that is, balance sheet, income statement, and selected financial ratios) for 2017 under each of the following conditions:

Increase in Sales Increase in Expenses

1. $3,750,000 $3,750,000
2. $3,000,000 $2,800,000
3. $4,500,000 $4,000,000

TABLE 4.4