Chapter 3: Working with Financial Statements
Some recent financial statements for Smolira Golf Corp. follow. Use this information to
work Problems 26 through 30:
SMOLIRA GOLF CORP.
2008 and 2009 Balance Sheets
Assets
2008
Current Assets
Cash
$ 21,860
A/R
11,316
Inventory
23,084
Total Current Assets $ 56,260
Fixed Assets
Net PP&E
$234,068
Total Assets
$290,328
2009
$ 22,050
13,850
24,650
$ 60,550
$260,525
$321,075
Liabilities and Owners’ Equity
2008
Current Liabilities
A/P
$ 19,320
Notes Payable
10,000
Other
9,643
Total Current Liabs $ 38,963
Long-Term Debt
$ 75,000
Owners’ Equity
Common Stock $ 25,000
Retained Earnings 151,365
Total Owners’ Equity $176,365
Total Liabs and OE $290,328
2009
$ 22,850
9,000
11,385
$ 43,235
$ 85,000
$ 25,000
167,840
$192,840
$321,075
SMOLIRA GOLF CORP.
2009 Income Statement
Sales
Cost of Goods Sold
Depreciation
Earnings Before Interest and Taxes (EBIT)
Interest Expense
Earnings Before Taxes (EBT)
Taxes (35%)
Net Income
$305,830
210,935
26,850
$ 68,045
11,930
$ 56,115
19,640
$ 36,475
Dividends
$20,000
Transferred to Retained Earnings $16,475
$36,475
26.
Calculating Financial Ratios: Find the following financial ratios for Smolira
Gold Corp. (use year-end figures rather than average values where appropriate):
Short-Term Solvency Ratios:
2008
1.4439
a. Current Ratio
2009
1.4005
The current ratio is current assets divided by current liabilities:
CurrentRatio 
CurrentAssets
CurrentLiabilities
CurrentRatio2008 
$56,260
 1.44393399
$38,963
CurrentRatio2009 
$60,550
 1.40048572
$43,235
2008
0.8515
b. Quick Ratio
2009
0.8303
The quick ratio is current assets minus inventory divided by current
liabilities:
QuickRatio 
CurrentAssets  Inventory
CurrentLiabilities
QuickRatio2008 
$56,260  $23,084
 0.85147448
$38,963
QuickRatio2009 
$60,550  $24,650
 0.83034578
$43,235
2008
0.5610
c. Cash Ratio
2009
0.5100
The cash ratio is cash divided by current liabilities:
CashRatio 
Cash
CurrentLiabilities
CashRatio2008 
$21,860
 0.56104509
$38,963
CashRatio 2009 
$22,050
 0.51000347
$43,235
Asset Utilization Ratios:
2009
0.9525X
d. Total Asset Turnover (TAT)
The TAT ratio is net sales divided by total assets:
TATRatio 
NetSales
TotalAssets
TATRatio2009 
$305,830
 0.95251888
$321,075
2009
8.5572X
e. Inventory Turnover
The inventory turnover ratio is cost of goods sold divided by inventory:
InventoryTurnoverRatio 
CostOfGoodsSold
Inventory
InventoryTurnoverRatio2009 
$210,935
 8.55720081
$24,650
f. Accounts Receivables (A/R) Turnover
2009
22.0816X
The A/R turnover ratio is net sales divided by accounts receivable:
A / RTurnoverRatio 
A / RRatio 2009 
NetSales
A/ R
$305,830
 22.08158845
$13,850
Long-Term Solvency Ratios:
2008
0.3925
g. Total Debt Ratio
2009
0.3994
The total debt ratio is total debt (total assets minus total equity) divided by
total assets:
TotalDebtRatio 
TotalDebt TotalAssets  TotalEquity

TotalAssets
TotalAssets
TotalDebtRatio2008 
$38,963  $75,000 $290,328  $176,365

 0.39253190
$290,328
$290,328
TotalDebtRatio2009 
$43,235  $85,000 $321,075  $192,840

 0.39939267
$321,075
$321,075
2008
0.6462
h. Debt-Equity Ratio
2009
0.6650
The debt-equity ratio is total debt divided by total equity:
DebtEquityRatio 
TotalDebt
TotalEquity
DebtEquityRatio2008 
$38,963  $75,000
 0.64617696
$176,365
DebtEquityRatio2009 
$43,235  $85,000
 0.66498133
$192,840
i. Equity Multiplier Ratio
Leverage Multiplier Ratio
2008
1.6462
2009
1.6650
1.6462
1.6650
The equity multiplier ratio is 1 plus the debt-equity ratio:
EquityMultiplierRati o  1 
TotalDebt
TotalEquity
EquityMultiplierRati o2008  1  0.64617696  1.64617696
EquityMultiplierRati o2009  1  0.66498133  1.66498133
The leverage multiplier ratio is total assets divided by total equity:
LeverageMultiplierRa tio 
TotalAssets
TotalEquity
LeverageMultiplierRa tio2008 
$290,328
 1.64617696
$176,365
LeverageMultiplierRa tio2009 
$321,075
 1.66498133
$192,840
j. Times Interest Earned (TIE) Ratio
2009
5.7037X
The TIE ratio is EBIT divided by interest:
TIERatio 
EBIT
Interest
TIERatio2009 
$68,045
 5.70368818
$11,930
2009
7.9543X
k. Cash Coverage Ratio
The cash coverage ratio is EBIT plus depreciation divided by interest:
CashCoverageRatio 
EBIT  Depreciati onExpense
Interest
CashCoverageRatio2009 
$68,045  $26,850
 7.95431685
$11,930
Profitability Ratios:
l. Net Profit Margin (NPM) Ratio
2009
11.9266%
The NPM ratio is net income divided by net sales:
NPMRatio 
NetIncome
NetSales
NPMRatio2009 
$36,475
 11.926561%
$305,830
m. Return On Assets (ROA)
2009
11.3603%
The ROA ratio is net income divided by total assets:
ROA 
NetIncome
TotalAssets
ROA2009 
$36,475
 11.360274%
$321,075
n. Return On Equity (ROE)
2009
18.9146%
The ROE ratio is net income divided by total equity:
ROE 
NetIncome
TotalEquity
ROE 2009 
$36,475
 18.914644%
$192,840
27.
DuPont Identity: Construct the DuPont identity for Smolira Gold Corp.
The DuPont identity is:
ROE  NPM  TAT  EM
ROE 
NetIncome NetSales
TotalDebt

1 
NetSales TotalAssets
TotalEquity
ROE 
$36,475 $305,830
$43,235  $85,000

1 
 18.914644%
$305,830 $321,075
$192,840
ROE  NPM  TAT  LM
ROE 
NetIncome NetSales TotalAssets


NetSales TotalAssets TotalEquity
ROE 
$36,475 $305,830 $321,075


 18.914644%
$305,830 $321,075 $192,840
28.
Statement of Cash Flow: Prepare the 2009 statement of cash flows for Smolira
Golf Corp.
SMOLIRA GOLF CORP.
2009 Statement of Cash Flows
Cash: Beginning of 20091
Operating Activities
Net Income
Plus:
Depreciation
Increase in A/P2
Increase in Other Current Liabilities3
Less:
Increase in A/R4
Increase in Inventory5
Net Cash from Operating Activities
$ 21,8601
$ 36,475
26,850
3,5302
1,7423
(2,534)4
(1,566)5
$ 64,497
Investment Activities
Fixed Asset Acquisition6
Net Cash from Investment Activities
$(53,307)6
$(53,307)
Financing Activities
Decrease in Notes Payable7
Dividends Paid
Increase in Long-Term Debt8
Net Cash from Financing Activities
$ (1,000)7
(20,000)
10,0008
$(11,000)
Net Increase (Decrease) in Cash
$
Cash: End of 20099
$ 22,0509
1
Cash: Beginning of 2009 is the same as ending cash for 2008
2
Increase in A/P:
190
A / P  A / P2009  A / P2008  $22,850  $19,320  $3,530
3
Increase in Other Current Liabilities:
OtherCL  OtherCL2009  OtherCL2008  $11,385  $9,643  $1,742
4
Increase in A/R:
A / R  A / R2008  A / R2009  $11,316  $13,850  $(2,534)
5
Increase in Inventory:
Inventory  Inventory2008  Inventory2009  $23,084  $24,650  $(1,566)
6
Increase in Fixed Assets:
NFA  NFA2008  ( DepreciationExpense2009  NFA2009)
NFA  $234,068  ($26,850  $260,525)  $(53,307)
7
Decrease in Notes Payable:
NP  NP2009  NP2008  $9,000  $10,000  ($1,000)
8
Increase in Long-Term Debt:
LTD  LTD2009  LTD2008  $85,000  $75,000  $10,000
9
Cash: End of Year:
Cash  Cash2009  Cash2008  $22,050  $21,860  $190
Cash2009  $21,860  $64,497  $(53,307)  $(11,000)  $22,050
Cash2009  $21,860  $190  $22,050
29.
Market Value Ratios: Smolira Golf Corp. has 25,000 shares of common stock
outstanding, and the market price for a share of stock at the end of 2009 was $43.
What is the price-earnings ratio? What are the dividends per share? What is the
market-to-book ratio at the end of 2009? If the company’s growth is 9 percent,
what is the PEG ratio?
The price-earnings (PE) ratio is:
PERatio 
Pr icePerShare
EarningsPerShare
Earnings per share (EPS) are:
EPS 
NetIncome
$36,475

 $1.459
SharesOuts tan ding 25,000Shares
PERatio 
Pr icePerShare
$43.00

 29.47224126 X
EarningsPerShare $1.459
Dividends per share are:
DPS 
Dividends
$20,000

 $0.80
SharesOuts tan ding 25,000Shares
Market-to-Book ratio is:
MarketToBookRatio 
Market Pr icePerShare
BookValuePerShare
BookValuePerShare 
TotalEquity
$192,840

 $7.7136
SharesOuts tan ding 25,000Shares
MarketToBookRatio 
$43.00
 5.57456959 X
$7.7136
The PE-to-Growth (PEG) ratio is:
PEGRatio 
PERatio
29.47224126

 3.27469347 X
GrowthRate
9
The PEG ratio is a valuation metric for determining the relative trade-off between
the price of a stock, the earnings generated per share, and the company’s
expected growth rate. Since the PE ratio is generally higher for a company with
higher growth, dividing the PE ratio by the firm’s growth rate enables the
evaluation of firm’s with different growth rates.
30.
Tobin’s Q: What is Tobin’s Q for Smolira Golf? What assumptions are you
making about the book value of assets and the market value of assets? Are these
assumptions realistic? Why or why not?
Tobin’s Q is:
Tobin ' sQ 
MarketValueOfEquity  BookValueOfDebt
BookValueOfAssets
Market Value of Equity is:
MarketValueOfEquity  Pr icePerShare  SharesOuts tan ding
MarketValueOfEquity  $43.00  25,000Shares  $1,075,000
Book Value of Debt is:
BookValueOfDebt  CurrentLiabs  LongTermLiabs
BookValueOfDebt  $43,235  $85,000  $128,235
Tobin ' sQ 
MarketValueOfEquity  BookValueOfDebt
BookValueOfAssets
Tobin ' sQ 
$1,075,000  $128,235
 3.74752005
$321,075