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The Fern Furniture Company, a manufacturer and wholesaler of high-quality home furnishings, has been experiencing low profitability in recent years. As a result, the board of directors has replaced the president of the firm with a new president, Helen Adams, who has asked you to make an analysis of the firm's financial position using the Du Pont chart. The most recent industry average ratios, and Fern's financial statements, are as follows:INDUSTRY AVERAGE RATIOSCurrent ratio 2x Sales/fixed assets 6xDebtftotal assets 30% Sales/total assets 3XTimes-interest-earned 7x Profit margin on sates 3%EBlTDAcoverage 9X Return ontotal assets 9%Sales/inventory lox Return on common equity 12.9%Days sales outstanding' 24 daysaCalculation is based on a 360-day year.Fern Furniture Company: Balance Sheet as of December 31, 2001 (Millions of Dollars)Cash $ 45 Accounts payable $ 45Marketable securities 33 Notes payable 45Net receivables 66 Other current liabilities 21Inventories 159 Total current liabilities $111Total current assets $303 Long-term debt 24Total liabilities $135Gross fixed assets 225Less depreciation 78 Common stock 114Net fixed assets $147 Retained earnings 201Total stockholders' equity $315Total assets $450 Total liabilities and equity $450Fern Furniture Company: Income Statement for Year Ended December 31, 2001 (Millions of Dollars)Net sales $795.0Cost of goods sold 660.0Gross profit $ 135.0Selling expenses 73.5Depreciation expense 12.0Earnings before interest and taxes $ 49.5Interest expense 4.5Earnings before taxes (EBT) 45.0Taxes (40%) 18.0Net income $ 270a. Calculate those ratios that you think would be useful in this analysis.b. Construct an extended Du Pont equation for Fern, and compare the company's ratios to the industry average ratios.c. Do the balance sheet accounts or the income statement figures seem to be primarily responsible for the low profits?41 'Which specific accounts seem to be most out of line in relation to other firms in the industry?e. If Fern had a pronounced seasonal sales pattern, or if it grew rapidly during the year, how might that affect the validity of your ratio analysis? How might you correct for such potential problems?
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