# Week 3 Quest

1. Calculating Liquidity Ratios: SDJ, Inc., has net working capital of \$1,350, current liabilities of \$4,290, and inventory of \$1,820. What is the current ratio? What is the quick ratio?
Solution:

Working capital = current assets- current liabilities

Current assets = working capital+ current liabilities

= \$1,350+\$4,290= \$5,640

Current ratio    = current assets/current liabilities

=\$5640/4290 = 1.315

Quick ratio = (current assets-inventory)/current liabilities = (\$5,640-\$1,820)/\$4290 = 0.890

1. Calculating Profitability Ratios: Tinkers Bells has sales of \$27 million, total assets of \$19 million, and total debt of \$6.4 million. If the profit margin is 8 percent, what is net income? What is ROA? What is ROE?
Solution:

Sales = \$27 million

Total assets = \$19 million

Total debt = \$6.4 million

Profit margin = net income/sales

Therefore,

Net income= sales*profit margin = 8%*\$27 million = \$2.16 million

ROA = net income/total assets = \$2.16 million/\$19 million = 11.37%

ROE = net income/total equity = \$2.16 million/(\$19 million -\$6.4 million) = 17.14%

1. DuPont Identity: If Windemere Legal has an equity multiplier of 1.60, total asset turnover of 1.32, and a profit margin of 8 percent, what is its ROE?
Solution:

ROE                = Profit margin x Total Asset Turnover x  Equity multiplier

=0.08*1.32*1.60

= 0.16896 or 16.896%

1. DuPont Identity: Jiminy Cricket Removal has a profit margin of 10 percent, total asset turnover of 1.35, and ROE of 15.70 percent. What is this firm’s debt-equity ratio?
Solution:

ROE                = Profit margin x Total Asset Turnover x  Equity multiplier

15.70               = 10 x 1.35 x  Equity multiplier

15.70 = 13.5 x  Equity multiplier

Equity multiplier         = 15.70/13.5

= 1.16

Equity multiplier = 1+ debt to equity ratio

Debt to equity ratio     = equity multiplier – 1

=1.16-1

= 0.16

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