Assignment # 02

Course Instructor: Prof Noman Nazir.

Subject: Business Finance
Assignment Topic: Ratios
Department: B.S-Accounting & Finance
Semester: 04
Submitted by:
 Waleed Naveed (F1F18BSAF0030)

Date of submission: 22-05-2020

Checked by_____ Remarks_____

 Assignment # 2
QUESTION NO. 1
Raza, Inc,and Hassan, Inc., are competitors in the manufacture of a certain good. Some financial
statement values for each company follow. Use them in a ratio analysis that compares the firms’
financial leverage and profitability.

Item Raza Inc. Hassan Inc.

Total Assets $ 10,000,000 $ 10,000,000
Total Equity 9,000,000 5,000,000
Total Debt 1,000,000 5,000,000
Annual Interest 100,000 500,000
Total Sales 25,000,000 25,000,000
EBIT 6,250,000 6,250,000
Earnings available for Common Stockholders 3,690,000 3,450,000

A) Calculate the following debt and coverage ratios for the two companies. Discuss
their financial risk and ability to cover the costs in relation to each other.

1. Debt Ratio = Total Liabilities / Total Assets

Raza inc:-
Debt ratio=1,000,000/10,000,000
Raza inc. = 10%
Hassan inc:-
Debt ratio=5,000,000/10,000,000
Hassan inc. = 50%
2. Times Interest Earned Ratio = (EBIT) / Interest
Raza inc:-
Time interest earned ratio=6,250,000/100,000
Raza inc. = 62.5
Hassan inc:-
Time interest earned ratio=6,250,000/500,000
Hassan inc = 12.5
Hassan inc is a much greater financial risk than Raza inc/as indicated by the higher Debt
Ratio and lower Times Interest Earned Ratios.
B) Calculate the following profitability ratios for the two companies. Discuss
their profitability relative to one another.
1. Operating profit margin = Operating profits / Sales
Raza inc:-
Operating profit margin=6,250,000/25,000,000
Raza inc. =0 .25
 Hassan inc:-
Operating profit margin= 6,250,000/25,000,000
Hassan inc= 0.252.
2. Net profit margin = earnings available for common stockholders / Sales
Raza inc:-
Net profit margin=3,690,000/25,000,000
Raza inc. =0.1476
Hassan inc:-
Net profit margin=3,450,000/25,000,000
Hassan inc. = .1383
3. Return on total assets = Earnings available for common stockholders / Total Assets
Raza inc:-
Return on total assets=3,690,000/10,000,000
Raza inc= 0.369
Hassan inc:-
Return on total assets=3,450,000/10,000,000
Hassan inc. = 0.3454.
4. Return on common equity = Earnings available for common stockholders / Common
stock equity
Raza inc:-
Return on equity=3,690,000 /9,000,000
Raza inc. = 0.41
Hassan inc:-
Return on equity=3,450,000/5,000,000
Hassan inc. = .29
C) In what way has the larger debt of Timberland Forest made it more profitable than
Pelican Paper?
By financing, Hassan inc. has gained access to resources that allow for operating
maneuverability.
What are the risks that Hassan inc investors undertake when they choose to
purchase its stock instead of Raza inc.?
Hassan inc. has less resources free to work with so if something unforeseen happens then
company may not be able to compensate and the financiers will suffer

Question no 2:
 R3 Printing, Inc., had sales totaling $40,000,000 in fiscal year 2012. Some ratios for the company are
listed below. Use this information to determine the dollar values of various income statement and
balance sheet accounts as requested.

R3 Printing, Inc.
Calculate values for the following:
Year Ended December 31, 2012
Sales $40,000,000 1. Gross profits
Gross profit margin 80% 2. Cost of goods sold
Operating profit margin 35% 3. Operating expenses
Net profit margin 8% 4. Operating profits
Return on total assets 16% 5. Earnings available for common stockholders
Return on common equity 20% 6. Total assets
Total asset turnover 2 7. Total common stockholders’ equity
Average collection period 62.2 days 8. Accounts receivable

1. Gross profit:
Gross profit margin= Gross Profits/Sales
0.8 = Gross Profits / $40,000,000
Gross Profits = $32,000,000
2. Cost of Goods Sold
Gross Profits = COGS – Sales
$32,000,000 = COGS - $40,000,000
COGS = $8,000,000
3. Operating Profits (EBIT):
Operating Profit Margin = Operating Profits / Sales
0.35 = Operating Profits / $40,000,000
Operating Profits = $14,000,000
4. Operating Expenses
Gross Profit – Operating Expenses = Operating Profit
$32,000,000 – Operating Expenses = $14,000,000
Operating Expenses = $18,000,000

5. Earnings Available for Common Stockholders

Net Profit Margin = Earnings Available for Common Stockholders / Sales
0.08 = Earnings Available for Common Stockholders / $40,000,000
Earnings Available for Common Stockholders = $3,200,000
 6. Total assets
(ROA) = Earnings Available for Common Stockholders / Total Assets
0.16 = $3,200,000 / Total Assets
Total Assets = $20,000,000

7. Total common stockholder’s equity

Return on common equity = Earnings available for common stockholders / Common stock
equity
0.20=3,200,000/common stock
Common stock=16,000,000
8. Accounts receivable
Turnover of accounts receivables= 365/average collection period
Turnover of accounts receivables =365/62.2

Turnover of accounts receivables= 5.868

Account receivable turnover= sales/ account receivable
5.87=40,000,000/accounts receivable
Account receivable= 6814310.051 or 6814310