Demonstration Problem Chapter 11 – Problem 13 Ratio Analysis – Comprehensive Problem Accounting...

Demonstration Problem

Chapter 11 – Problem 13

Ratio Analysis – Comprehensive Problem

AccountingWhat the Numbers Mean 10e

Problem Definition• Presented below are summarized data from the balance sheets and

income statements of Wiper, Inc.:

WIPER, INC.Condensed Balance Sheets

December 31, 2014, 2013, and 2012

2014 2013 2012

Current assets . . . . . . . . . . . . . $ 677 $ 891 $ 736Other assets. . . . . . . . . . . . . . . 2,413 1,920 1,719 $3,090 $2,811 $2,455

Current liabilities . . . . . . . . . . . . $ 562 $ 803 $ 710Other liabilities. . . . . . . . . . . . . . 1,521 982 827Stockholders’ equity. . . . . . . . . . 1,007 1,026 918 $3,090 $2,811 $2,455

Problem Definition

WIPER, INC.Selected Income Statement Data and Other Data For the Years Ended December 31, 2014 and 2013

(in millions)

Income statement data: 2014 2013

Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,050 $2,913 Operating income . . . . . . . . . . . . . . . . . . . . . . . . . 296 310 Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . 84 65 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192 187Other data: Average number of common shares outstanding. . . . . 41.3 46.7 Total dividends paid . . . . . . . . . . . . . . . . . . . . . . . $ 50.0 $ 52.3

a. Calculate return on investment, based on net income and average total assets, for 2014 and 2013. Show both margin and turnover in your calculation.

b. Calculate return on equity for 2014 and 2013.c. Calculate working capital and the current ratio for each

of the past three years. d. Calculate earnings per share for 2014 and 2013.e. If Wiper’s stock had a price/earnings ratio of 13 at the

end of 2014, what was the market price of the stock?f. Calculate the cash dividend per share for 2014 and the

dividend yield based on the market price calculated in part e.

Problem Definition

g. Calculate the dividend payout ratio for 2014.h. Assume that accounts receivable at December 31, 2014,

totaled $309 million. Calculate the number of days’ sales in receivables at that date.

i. Calculate Wiper’s debt ratio and debt/equity ratio at December 31, 2014 and 2013.

j. Calculate the times interest earned ratio for 2014 and 2013.

k. Review the results of these calculations, evaluate the profitability and liquidity of this company, and state your opinion about its suitability as an investment for a young, single professional with funds to invest in common stock.

Problem Definition

a.

Problem Solution

ROI = Margin x Turnover

Net income Net income Sales Average total assets Sales Average total assets

2014 ROI =

Problem Solution

ROI = Margin x Turnover

Net income Net income . Sales Average total assets Sales Average total assets

a.

2014 ROI = ($192 / $3,050)

Problem Solution

ROI = Margin x Turnover

Net income Net income Sales Average total assets Sales Average total assets

a.

2014 ROI = ($192 / $3,050) * [$3,050 / (($2,811 + $3,090) / 2)]

Problem Solution

ROI = Margin x Turnover

Net income Net income Sales Average total assets Sales Average total assets

a.

2014 ROI = ($192 / $3,050) * [$3,050 / (($2,811 + $3,090) / 2)] = 6.3% margin * 1.034 turnover

Problem Solution

ROI = Margin x Turnover

Net income Net income Sales Average total assets Sales Average total assets

a.

2014 ROI = ($192 / $3,050) * [$3,050 / (($2,811 + $3,090) / 2)] = 6.3% margin * 1.034 turnover = 6.5% ROI

Problem Solution

ROI = Margin x Turnover

Net income Net income Sales Average total assets Sales Average total assets

a.

2014 ROI = ($192 / $3,050) * [$3,050 / (($2,811 + $3,090) / 2)] = 6.3% margin * 1.034 turnover = 6.5% ROI

2013 ROI =

Problem Solution

ROI = Margin x Turnover

Net income Net income Sales Average total assets Sales Average total assets

a.

2014 ROI = ($192 / $3,050) * [$3,050 / (($2,811 + $3,090) / 2)] = 6.3% margin * 1.034 turnover = 6.5% ROI

2013 ROI = ($187 / $2,913)

Problem Solution

ROI = Margin x Turnover

Net income Net income Sales Average total assets Sales Average total assets

a.

2014 ROI = ($192 / $3,050) * [$3,050 / (($2,811 + $3,090) / 2)] = 6.3% margin * 1.034 turnover = 6.5% ROI

2013 ROI = ($187 / $2,913) * [$2,913 / (($2,455 + $2,811) / 2)]

Problem Solution

ROI = Margin x Turnover

Net income Net income Sales Average total assets Sales Average total assets

a.

2014 ROI = ($192 / $3,050) * [$3,050 / (($2,811 + $3,090) / 2)] = 6.3% margin * 1.034 turnover = 6.5% ROI

2013 ROI = ($187 / $2,913) * [$2,913 / (($2,455 + $2,811) / 2)] = 6.4% margin * 1.106 turnover

Problem Solution

ROI = Margin x Turnover

Net income Net income Sales Average total assets Sales Average total assets

a.

2014 ROI = ($192 / $3,050) * [$3,050 / (($2,811 + $3,090) / 2)] = 6.3% margin * 1.034 turnover = 6.5% ROI

2013 ROI = ($187 / $2,913) * [$2,913 / (($2,455 + $2,811) / 2)] = 6.4% margin * 1.106 turnover = 7.1% ROI

Problem Solution

ROI = Margin x Turnover

Net income Net income Sales Average total assets Sales Average total assets

a.

a. Calculate return on investment, based on net income and average total assets, for 2014 and 2013. Show both margin and turnover in your calculation.

b. Calculate return on equity for 2014 and 2013.c. Calculate working capital and the current ratio for each

of the past three years. d. Calculate earnings per share for 2014 and 2013.e. If Wiper’s stock had a price/earnings ratio of 13 at the

end of 2014, what was the market price of the stock?f. Calculate the cash dividend per share for 2014 and the

dividend yield based on the market price calculated in part e.

Problem Definition

b.

Problem Solution

ROE = Net income / Average stockholders’ equity

b.

2014 ROE =

Problem Solution

ROE = Net income / Average stockholders’ equity

b.

2014 ROE = $192 / (($1,007 + $1,026) / 2)

Problem Solution

ROE = Net income / Average stockholders’ equity

b.

2014 ROE = $192 / (($1,007 + $1,026) / 2) = 18.9%

Problem Solution

ROE = Net income / Average stockholders’ equity

b.

2014 ROE = $192 / (($1,007 + $1,026) / 2) = 18.9%

2013 ROE =

Problem Solution

ROE = Net income / Average stockholders’ equity

b.

2014 ROE = $192 / (($1,007 + $1,026) / 2) = 18.9%

2013 ROE = $187

Problem Solution

ROE = Net income / Average stockholders’ equity

b.

2014 ROE = $192 / (($1,007 + $1,026) / 2) = 18.9%

2013 ROE = $187 / (($1,026 + $918) / 2)

Problem Solution

ROE = Net income / Average stockholders’ equity

b.

2014 ROE = $192 / (($1,007 + $1,026) / 2) = 18.9%

2013 ROE = $187 / (($1,026 + $918) / 2) = 19.2%

Problem Solution

ROE = Net income / Average stockholders’ equity

a. Calculate return on investment, based on net income and average total assets, for 2014 and 2013. Show both margin and turnover in your calculation.

b. Calculate return on equity for 2014 and 2013.c. Calculate working capital and the current ratio for

each of the past three years. d. Calculate earnings per share for 2014 and 2013.e. If Wiper’s stock had a price/earnings ratio of 13 at the

end of 2014, what was the market price of the stock?f. Calculate the cash dividend per share for 2014 and the

dividend yield based on the market price calculated in part e.

Problem Definition

Problem Solution

c. 2014 2013 2012

Current assets . . . . . . . . . . . . . $677 $891 $736

Problem Solution

c. 2014 2013 2012

Current assets . . . . . . . . . . . . . $677 $891 $736

Current liabilities . . . . . . . . . . (562) (803) (710)

Problem Solution

c. 2014 2013 2012

Current assets . . . . . . . . . . . . . $677 $891 $736

Current liabilities . . . . . . . . . . (562) (803) (710)

Working capital (CA –CL) . . . $115 $ 88 $ 26

Problem Solution

c. 2014 2013 2012

Current assets . . . . . . . . . . . . . $677 $891 $736

Current liabilities . . . . . . . . . . (562) (803) (710)

Working capital (CA –CL) . . . $115 $ 88 $ 26 Current ratio (CA / CL) . . . . . 1.2 1.1 1.0

a. Calculate return on investment, based on net income and average total assets, for 2014 and 2013. Show both margin and turnover in your calculation.

b. Calculate return on equity for 2014 and 2013.c. Calculate working capital and the current ratio for each

of the past three years. d. Calculate earnings per share for 2014 and 2013.e. If Wiper’s stock had a price/earnings ratio of 13 at the

end of 2014, what was the market price of the stock?f. Calculate the cash dividend per share for 2014 and the

dividend yield based on the market price calculated in part e.

Problem Definition

d.

Problem Solution

EPS = Net income / Weighted-average number of shares outstanding

d.

2014 EPS =

Problem Solution

EPS = Net income / Weighted-average number of shares outstanding

d.

2014 EPS = $192

Problem Solution

EPS = Net income / Weighted-average number of shares outstanding

d.

2014 EPS = $192 / 41.3

Problem Solution

EPS = Net income / Weighted-average number of shares outstanding

d.

2014 EPS = $192 / 41.3 = $4.65

Problem Solution

EPS = Net income / Weighted-average number of shares outstanding

d.

2014 EPS = $192 / 41.3 = $4.65

2013 EPS =

Problem Solution

EPS = Net income / Weighted-average number of shares outstanding

d.

2014 EPS = $192 / 41.3 = $4.65

2013 EPS = $187

Problem Solution

EPS = Net income / Weighted-average number of shares outstanding

d.

2014 EPS = $192 / 41.3 = $4.65

2013 EPS = $187 / 46.7

Problem Solution

EPS = Net income / Weighted-average number of shares outstanding

d.

2014 EPS = $192 / 41.3 = $4.65

2013 EPS = $187 / 46.7 = $4.00

Problem Solution

EPS = Net income / Weighted-average number of shares outstanding

a. Calculate return on investment, based on net income and average total assets, for 2014 and 2013. Show both margin and turnover in your calculation.

b. Calculate return on equity for 2014 and 2013.c. Calculate working capital and the current ratio for each

of the past three years. d. Calculate earnings per share for 2014 and 2013.e. If Wiper’s stock had a price/earnings ratio of 13 at

the end of 2014, what was the market price of the stock?

f. Calculate the cash dividend per share for 2014 and the dividend yield based on the market price calculated in part e.

Problem Definition

e.

Problem Solution

Price/Earnings Ratio = Market Price / Earnings Per Share

e.

13 =

Problem Solution

Price/Earnings Ratio = Market Price / Earnings Per Share

e.

13 = $???

Problem Solution

Price/Earnings Ratio = Market Price / Earnings Per Share

e.

13 = $??? / $4.65

Problem Solution

Price/Earnings Ratio = Market Price / Earnings Per Share

e.

13 = $??? / $4.65

Market price =

Problem Solution

Price/Earnings Ratio = Market Price / Earnings Per Share

e.

13 = $??? / $4.65

Market price = $60.45

Problem Solution

Price/Earnings Ratio = Market Price / Earnings Per Share

a. Calculate return on investment, based on net income and average total assets, for 2014 and 2013. Show both margin and turnover in your calculation.

b. Calculate return on equity for 2014 and 2013.c. Calculate working capital and the current ratio for each

of the past three years. d. Calculate earnings per share for 2014 and 2013.e. If Wiper’s stock had a price/earnings ratio of 13 at the

end of 2014, what was the market price of the stock?f. Calculate the cash dividend per share for 2014 and

the dividend yield based on the market price calculated in part e.

Problem Definition

f.

Problem Solution

Cash dividends per share = Total cash dividends /

Weighted average shares outstanding

f.

$50 million

Problem Solution

Cash dividends per share = Total cash dividends /

Weighted average shares outstanding

f.

$50 million / 41.3 million

Problem Solution

Cash dividends per share = Total cash dividends /

Weighted average shares outstanding

f.

$50 million / 41.3 million = $1.21

Problem Solution

Cash dividends per share = Total cash dividends /

Weighted average shares outstanding

f.

$50 million / 41.3 million = $1.21

Problem Solution

Cash dividends per share = Total cash dividends /

Weighted average shares outstanding

Dividend yield = Cash dividends per share / Market price per share

f.

$50 million / 41.3 million = $1.21

$1.21 per share

Problem Solution

Cash dividends per share = Total cash dividends /

Weighted average shares outstanding

Dividend yield = Cash dividends per share / Market price per share

f.

$50 million / 41.3 million = $1.21

$1.21 per share / $60.45 per share

Problem Solution

Cash dividends per share = Total cash dividends /

Weighted average shares outstanding

Dividend yield = Cash dividends per share / Market price per share

f.

$50 million / 41.3 million = $1.21

$1.21 per share / $60.45 per share = 2%

Problem Solution

Cash dividends per share = Total cash dividends /

Weighted average shares outstanding

Dividend yield = Cash dividends per share / Market price per share

g. Calculate the dividend payout ratio for 2014.h. Assume that accounts receivable at December 31, 2014,

totaled $309 million. Calculate the number of days’ sales in receivables at that date.

i. Calculate Wiper’s debt ratio and debt/equity ratio at December 31, 2014 and 2013.

j. Calculate the times interest earned ratio for 2014 and 2013.

k. Review the results of these calculations, evaluate the profitability and liquidity of this company, and state your opinion about its suitability as an investment for a young, single professional with funds to invest in common stock.

Problem Definition

g.

Problem Solution

Dividend payout ratio = Dividends per share / Earnings per share

g.

$1.21 per share

Problem Solution

Dividend payout ratio = Dividends per share / Earnings per share

g.

$1.21 per share / $4.65 per share

Problem Solution

Dividend payout ratio = Dividends per share / Earnings per share

g.

$1.21 per share / $4.65 per share = 26%

Problem Solution

Dividend payout ratio = Dividends per share / Earnings per share

g. Calculate the dividend payout ratio for 2014.h. Assume that accounts receivable at December 31,

2014, totaled $309 million. Calculate the number of days’ sales in receivables at that date.

i. Calculate Wiper’s debt ratio and debt/equity ratio at December 31, 2014 and 2013.

j. Calculate the times interest earned ratio for 2014 and 2013.

k. Review the results of these calculations, evaluate the profitability and liquidity of this company, and state your opinion about its suitability as an investment for a young, single professional with funds to invest in common stock.

Problem Definition

h.

Problem Solution

Average days’ sales = Annual sales / 365 days

h.

$3,050 million

Problem Solution

Average days’ sales = Annual sales / 365 days

h.

$3,050 million / 365 days

Problem Solution

Average days’ sales = Annual sales / 365 days

h.

$3,050 million / 365 days = $8.356 million

Problem Solution

Average days’ sales = Annual sales / 365 days

h.

$3,050 million / 365 days = $8.356 million

Problem Solution

Average days’ sales = Annual sales / 365 days

Number of days’ sales in accounts receivable = Accounts receivable / Average days’ sales

h.

$3,050 million / 365 days = $8.356 million

$309 million

Problem Solution

Average days’ sales = Annual sales / 365 days

Number of days’ sales in accounts receivable = Accounts receivable / Average days’ sales

h.

$3,050 million / 365 days = $8.356 million

$309 million / $8.356 million

Problem Solution

Average days’ sales = Annual sales / 365 days

Number of days’ sales in accounts receivable = Accounts receivable / Average days’ sales

h.

$3,050 million / 365 days = $8.356 million

$309 million / $8.356 million = 37.0 days

Problem Solution

Average days’ sales = Annual sales / 365 days

Number of days’ sales in accounts receivable = Accounts receivable / Average days’ sales

g. Calculate the dividend payout ratio for 2014.h. Assume that accounts receivable at December 31, 2014,

totaled $309 million. Calculate the number of days’ sales in receivables at that date.

i. Calculate Wiper’s debt ratio and debt/equity ratio at December 31, 2014 and 2013.

j. Calculate the times interest earned ratio for 2014 and 2013.

k. Review the results of these calculations, evaluate the profitability and liquidity of this company, and state your opinion about its suitability as an investment for a young, single professional with funds to invest in common stock.

Problem Definition

i.

Problem Solution

Debt ratio = Total liabilities / (Total liabilities + stockholders’ equity)

i.

12/31/14 debt ratio =

Problem Solution

Debt ratio = Total liabilities / (Total liabilities + stockholders’ equity)

i.

12/31/14 debt ratio = ($562 + $1,521)

Problem Solution

Debt ratio = Total liabilities / (Total liabilities + stockholders’ equity)

i.

12/31/14 debt ratio = ($562 + $1,521) / $3,090

Problem Solution

Debt ratio = Total liabilities / (Total liabilities + stockholders’ equity)

i.

12/31/14 debt ratio = ($562 + $1,521) / $3,090 = 67.4%

Problem Solution

Debt ratio = Total liabilities / (Total liabilities + stockholders’ equity)

i.

12/31/14 debt ratio = ($562 + $1,521) / $3,090 = 67.4%

12/31/13 debt ratio =

Problem Solution

Debt ratio = Total liabilities / (Total liabilities + stockholders’ equity)

i.

12/31/14 debt ratio = ($562 + $1,521) / $3,090 = 67.4%

12/31/13 debt ratio = ($803 + $982)

Problem Solution

Debt ratio = Total liabilities / (Total liabilities + stockholders’ equity)

i.

12/31/14 debt ratio = ($562 + $1,521) / $3,090 = 67.4%

12/31/13 debt ratio = ($803 + $982) / $2,811

Problem Solution

Debt ratio = Total liabilities / (Total liabilities + stockholders’ equity)

i.

12/31/14 debt ratio = ($562 + $1,521) / $3,090 = 67.4%

12/31/13 debt ratio = ($803 + $982) / $2,811 = 63.5%

Problem Solution

Debt ratio = Total liabilities / (Total liabilities + stockholders’ equity)

i.

12/31/14 debt ratio = ($562 + $1,521) / $3,090 = 67.4%

12/31/13 debt ratio = ($803 + $982) / $2,811 = 63.5%

Problem Solution

Debt ratio = Total liabilities / (Total liabilities + stockholders’ equity)

Debt/equity ratio = Total liabilities / Total stockholders’ equity

i.

12/31/14 debt ratio = ($562 + $1,521) / $3,090 = 67.4%

12/31/13 debt ratio = ($803 + $982) / $2,811 = 63.5%

12/31/14 debt/equity ratio =

Problem Solution

Debt ratio = Total liabilities / (Total liabilities + stockholders’ equity)

Debt/equity ratio = Total liabilities / Total stockholders’ equity

i.

12/31/14 debt ratio = ($562 + $1,521) / $3,090 = 67.4%

12/31/13 debt ratio = ($803 + $982) / $2,811 = 63.5%

12/31/14 debt/equity ratio = ($562 + $1,521)

Problem Solution

Debt ratio = Total liabilities / (Total liabilities + stockholders’ equity)

Debt/equity ratio = Total liabilities / Total stockholders’ equity

i.

12/31/14 debt ratio = ($562 + $1,521) / $3,090 = 67.4%

12/31/13 debt ratio = ($803 + $982) / $2,811 = 63.5%

12/31/14 debt/equity ratio = ($562 + $1,521) / $1,007

Problem Solution

Debt ratio = Total liabilities / (Total liabilities + stockholders’ equity)

Debt/equity ratio = Total liabilities / Total stockholders’ equity

i.

12/31/14 debt ratio = ($562 + $1,521) / $3,090 = 67.4%

12/31/13 debt ratio = ($803 + $982) / $2,811 = 63.5%

12/31/14 debt/equity ratio = ($562 + $1,521) / $1,007 = 207%

Problem Solution

Debt ratio = Total liabilities / (Total liabilities + stockholders’ equity)

Debt/equity ratio = Total liabilities / Total stockholders’ equity

i.

12/31/14 debt ratio = ($562 + $1,521) / $3,090 = 67.4%

12/31/13 debt ratio = ($803 + $982) / $2,811 = 63.5%

12/31/14 debt/equity ratio = ($562 + $1,521) / $1,007 = 207%

12/31/13 debt/equity ratio =

Problem Solution

Debt ratio = Total liabilities / (Total liabilities + stockholders’ equity)

Debt/equity ratio = Total liabilities / Total stockholders’ equity

i.

12/31/14 debt ratio = ($562 + $1,521) / $3,090 = 67.4%

12/31/13 debt ratio = ($803 + $982) / $2,811 = 63.5%

12/31/14 debt/equity ratio = ($562 + $1,521) / $1,007 = 207%

12/31/13 debt/equity ratio = ($803 + $982)

Problem Solution

Debt ratio = Total liabilities / (Total liabilities + stockholders’ equity)

Debt/equity ratio = Total liabilities / Total stockholders’ equity

i.

12/31/14 debt ratio = ($562 + $1,521) / $3,090 = 67.4%

12/31/13 debt ratio = ($803 + $982) / $2,811 = 63.5%

12/31/14 debt/equity ratio = ($562 + $1,521) / $1,007 = 207%

12/31/13 debt/equity ratio = ($803 + $982) / $1,026

Problem Solution

Debt ratio = Total liabilities / (Total liabilities + stockholders’ equity)

Debt/equity ratio = Total liabilities / Total stockholders’ equity

i.

12/31/14 debt ratio = ($562 + $1,521) / $3,090 = 67.4%

12/31/13 debt ratio = ($803 + $982) / $2,811 = 63.5%

12/31/14 debt/equity ratio = ($562 + $1,521) / $1,007 = 207%

12/31/13 debt/equity ratio = ($803 + $982) / $1,026 = 174%

Problem Solution

Debt ratio = Total liabilities / (Total liabilities + stockholders’ equity)

Debt/equity ratio = Total liabilities / Total stockholders’ equity

g. Calculate the dividend payout ratio for 2014.h. Assume that accounts receivable at December 31, 2014,

totaled $309 million. Calculate the number of days’ sales in receivables at that date.

i. Calculate Wiper’s debt ratio and debt/equity ratio at December 31, 2014 and 2013.

j. Calculate the times interest earned ratio for 2014 and 2013.

k. Review the results of these calculations, evaluate the profitability and liquidity of this company, and state your opinion about its suitability as an investment for a young, single professional with funds to invest in common stock.

Problem Definition

j.

Problem Solution

Times interest earned = Operating income / Interest expense

j.

For 2014 =

Problem Solution

Times interest earned = Operating income / Interest expense

j.

For 2014 = $296

Problem Solution

Times interest earned = Operating income / Interest expense

j.

For 2014 = $296 / $84

Problem Solution

Times interest earned = Operating income / Interest expense

j.

For 2014 = $296 / $84 = 3.5 times

Problem Solution

Times interest earned = Operating income / Interest expense

j.

For 2014 = $296 / $84 = 3.5 times

For 2013 =

Problem Solution

Times interest earned = Operating income / Interest expense

j.

For 2014 = $296 / $84 = 3.5 times

For 2013 = $310

Problem Solution

Times interest earned = Operating income / Interest expense

j.

For 2014 = $296 / $84 = 3.5 times

For 2013 = $310 / $65

Problem Solution

Times interest earned = Operating income / Interest expense

j.

For 2014 = $296 / $84 = 3.5 times

For 2013 = $310 / $65 = 4.8 times

Problem Solution

Times interest earned = Operating income / Interest expense

g. Calculate the dividend payout ratio for 2014.h. Assume that accounts receivable at December 31, 2014,

totaled $309 million. Calculate the number of days’ sales in receivables at that date.

i. Calculate Wiper’s debt ratio and debt/equity ratio at December 31, 2014 and 2013.

j. Calculate the times interest earned ratio for 2014 and 2013.

k. Review the results of these calculations, evaluate the profitability and liquidity of this company, and state your opinion about its suitability as an investment for a young, single professional with funds to invest in common stock.

Problem Definition

k. A young, single professional would probably be more interested in potential growth of capital rather than current dividend income, and would probably be willing to invest in a stock that represented a relatively risky investment. Based on these criteria, the significant growth in earnings per share and the relatively high financial leverage could make this stock an attractive, though risky, potential investment.

(continued)

Problem Solution

k. The liquidity of the company is relatively low, based on an “average” current ratio of 1.0. Without further information about the composition of current assets and current liability accounts, it is difficult to assess the firm’s liquidity. The number of days’ sales in accounts receivable indicates that the accounts receivable are relatively current, assuming that the credit terms are net 30.

(continued)

Problem Solution

k. (concluded)

The company’s ROI is relatively low, and the

two-year trend is down. This would be a major concern, and the reasons for this situation would be sought. The price/earnings ratio of 13 is typical for a firm with a falling ROI; the fact that the P/E ratio has remained within the “normal” range may indicate that future earnings prospects for the firm are fairly strong.

Problem Solution

AccountingWhat the Numbers Mean 10e

David H. MarshallWayne W. McManus

Daniel F. Viele

You should now have a better understandingof ratio analysis.

Remember that there is a demonstration problem for each chapter that is here for your learning benefit.