A414 Ch 7

Magma Corporation's interest coverage ratio for 2008 is closest to:

25.76 times Interest coverage ratio = EBIT / Interest payments. Interest coverage ratio = 54,100 / 2,100 = 25.76 times

Magma Corporation's operating return on assets for 2009 is closest to:

23.41% Operating return on assets = EBIT / Average total assets. Operating return on assets = 76,200 / [(286,500 + 364,500)/2] = 23.41%

The following information relates to Alpha Inc.: Opening inventory = $47,000 Ending inventory = $28,000 Sales = $77,000 Cost of goods sold = $54,000 The amount of purchases made by the company is closest to:

$35,000 Purchases = Ending inventory + COGS - Opening inventory. Purchases = 28,000 + 54,000 - 47,000 = $35,000

The following information relates to Gamma Corporation: Payables turnover = 8 Average trade payables = $11,000 Sales = $95,000 Cost of goods sold = $74,000 Opening inventory = $32,000 The company's ending inventory is closest to:

$46,000 Ending inventory = Opening inventory + Purchases - Cost of goods sold. Purchases = Payables turnover Average trade payables. Purchases = 8 11,000 = 88,000. Therefore, ending inventory = 32,000 + 88,000 - 74,000 = $46,000

Magma Corporation's debt‐to‐assets ratio for 2008 is closest to:

0.25 Debt‐to‐assets ratio = Total debt / Total assets. Debt‐to‐assets ratio = 72,000 / 286,500 = 0.251

Referring to the enclosed Statement of Financial Position and Income Statement, Magma Corporation's debt‐to‐capital ratio for 2009 is closest to:

0.38 Debt‐to‐capital = Total debt / (Total debt + Shareholders' equity). Debt‐to‐capital = 134,700 / (134,700 + 217,500) = 0.382

Question 110.5 / 0.5 ptsReferring to the enclosed Statement of Financial Position and Income Statement, Magma Corporation's debt‐to‐equity ratio for 2009 is closest to:

0.62 Debt‐to‐equity = Total debt / Shareholders' equity. Debt‐to‐equity = 134,700 / 217,500 = 0.619

Referring to the enclosed Statement of Financial Position and Income Statement, Magma Corporation's cash ratio for 2009 is closest to:

1.09 Cash ratio = (Cash + Short‐term marketable securities) / Current liabilities. Cash ratio = (5,100 + 8,300) / 12,300 = 1.089

Magma Corporation's financial leverage ratio for 2009 is closest to:

1.54 Financial leverage = Average total assets / Average total equity. Financial leverage = [(286,500 + 364,500)/2] / [(206,000 + 217,500)/2] = 1.537

Magma Corporation's number of days of inventory on hand for 2009 is closest to:

10.26 days. Days of inventory on hand = 365 / Inventory turnover. Days of inventory on hand = 365 / 35.586 = 10.257

Referring to the enclosed Statement of Financial Position and Income Statement, Magma Corporation's number of days of payables for 2009 is closest to:

10.47 days. Number of days of payables = 365 / Payables turnover. Number of days of payables = 365 / 34.877 = 10.465

Magma Corporation's net profit margin for 2009 is closest to:

14.66% Net profit margin = Net profit / Revenue. Net profit margin = (53,900 / 367,700) 100 = 14.659%

Magma Corporation's return on assets for 2009 is closest to:

16.60% Return on assets = Net income / Average total assets. Return on assets = 53,900 / [(286,500 + 364,500)/2] = 16.559%

Magma Corporation's adjusted return on assets for 2009 is closest to:

17.00% Adjusted return on assets = [Net income + Interest expense (1 - Tax rate)] / Average total assets. Adjusted return on assets = [53,900 + 2,400 (1 - 0.4)] / [(286,500 + 364,500)/2]. Adjusted return on assets = 17.00%

Referring to the enclosed Statement of Financial Position and Income Statement, Magma Corporation's return on total capital for 2008 is closest to:

19.46% Return on total capital = EBIT / (Short‐term debt + Long‐term debt + Equity. Return on total capital = 54,100 / (72,000 + 206,000) = 19.46%. Magma Corporation does not have any short‐term debt outstanding.

Magma Corporation's working capital turnover for 2009 is closest to:

19.66 Working capital turnover = Revenue / Average working capital. Working capital for 2008 = 26,600 - 8,500 = 18,100. Working capital for 2009 = 31,600 - 12,300 = 19,300. Average working capital = (18,100 + 19,300) / 2 = 18,700. Working capital turnover = 367,700 / 18,700 = 19.663

Magma Corporation's quick ratio for 2008 is closest to:

2.00 Quick ratio = (Cash + Short‐term marketable securities + Receivables) / Current liabilities. Quick ratio = (5,500 + 6,200 + 5,300) / 8,500 = 2

Magma Corporation's pre‐tax margin for 2008 is closest to:

22.64% Pre‐tax margin = EBT / Revenue. Pre‐tax margin = (54,900 / 242,500) 100 = 22.639%

The following information relates to Rose Inc.: • Net profit margin = 15.7% • Return on assets = 20.57% • Financial leverage = 1.42 • Asset turnover = 1.31 Rose Inc.'s return on equity is closest to: Correct!

29.21% ROE = Net profit margin Asset turnover Financial leverage. ROE = 15.7% 1.31 1.42 = 29.21%

Magma Corporation's current ratio for 2008 is closest to:

3.13 Current ratio = Current assets / Current liabilities. Current ratio = 26,600 / 8,500 = 3.129

Magma Corporation's payables turnover for 2009 is closest to:

34.88 Payables turnover = Purchases / Average trade payables. Purchases = Ending inventory + Cost of goods sold - Opening inventory. Purchases = 6,200 + 197,500 - 4,900 = 198,800. Payables turnover = 198,800 / [(4,700 + 6,700)/2] = 34.877

Magma Corporation's payables turnover for 2009 is closest to:

34.88 Payables turnover = Purchases / Average trade payables. Purchases = Ending inventory + Cost of goods sold - Opening inventory. Purchases = 6,200 + 197,500 - 4,900 = 198,800. Payables turnover = 198,800 / [(4,700 + 6,700)/2] = 34.877

The following information relates to Blue Inc.: • Revenue = $442,200 • Cost of goods sold = $239,100 • Net income = $53,100 • Total assets at the beginning of the period = $544,000 • Total assets at the end of the period = $775,000 • Financial leverage ratio = 0.55 Blue Inc.'s return on equity for the period is closest to:

4.43% Return on equity = (Net income / Average total assets) (Average total assets/Average shareholders' equity). Return on equity = (53,100 / 659,500) 0.55. Return on equity = 4.43%

Magma Corporation's fixed charge coverage ratio for 2009 is closest to:

4.79 Fixed charge coverage ratio = (EBIT + Lease payments) / (Interest + Lease payments). Fixed charge coverage ratio = (76,200 + 17,100) / (2,400 + 17,100) = 4.785

The following information relates to Fly High Corporation: • Revenue = $17 million • Cost of goods sold = $5.5 million • Other expenses = $4.2 million • Interest expense = $2.4 million • Tax expense = $3.3 million • Asset turnover = 1.24 Total shareholders' equity at the beginning of the period = $30 million Assuming that shareholders' equity remains the same during the period, Fly High's ROE for the period is closest to:

5.33% Average total assets = Revenue / Asset turnover. Average total assets = 17,000,000 / 1.24 = $13,709,677.42. Therefore, financial leverage = 13,709,677.42 / 30,000,000 = 0.45699. Net income = 17 - 5.5 - 4.2 - 2.4 - 3.3 = $1.6 million. ROE = (1,600,000 / 17,000,000) 1.24 0.45699 = 5.33%.

Referring to the enclosed Statement of Financial Position and Income Statement, Magma Corporation's receivables turnover for 2009 is closest to:

57.45 Receivables turnover = Revenue / Average receivables. Receivables turnover = 367,700 / [(5,300 + 7,500)/2] = 57.453

Magma Corporation's cash conversion cycle for 2009 is closest to:

6.15 days. Cash conversion cycle = Days of sales outstanding + Days of inventory on hand - Number of days of payables. Cash conversion cycle = 6.353 + 10.257 - 10.465 = 6.145

Referring to the enclosed Statement of Financial Position and Income Statement, Magma Corporation's number of days of sales outstanding for 2009 is closest to:

6.35 days Days of sales outstanding = 365 / Receivables turnover. Days of sales outstanding = 365 / 57.453 = 6.353

Which of the following is most likely to suggest that a company's low receivables turnover is due to credit management issues?

A history of higher bad debts than competitors A low receivables turnover ratio suggests that the company has problems collecting money on time from customers. This will most likely be indicated by high bad debts and credit losses compared to competitors.

Which of the following companies is least likely to report a low fixed asset turnover ratio?

A mature company operating in a labor‐intensive business environment A company operating in a labor‐intensive business environment will likely have a low investment in fixed assets and consequently, a higher fixed‐asset turnover ratio.

Use the following table to find the correct statement about this company's five way DuPont decomposition 2011 2010 2009 2008 2007 ROE 9.47% 15.00% 24.31% 25.82% 24.07% Tax burden 64.85% 59.37% 63.24% 58.20% 62.58% Interest burden 92.58% 92.45% 92.74% 92.85% 92.61% EBIT margin 8.63% 10.41% 13.24% 15.69% 14.35% Asset turnover 0.85 1.21 1.47 1.44 1.58 Leverage 2.15 2.17 2.13 2.19 2.18 The following conclusions may drawn from the given information:

Both statements are likely correct. The following conclusions may be drawn from the given information: • The tax burden ratio has varied with no obvious trend over the years. The recent increase in tax burden ratio (from 59.37% in 2010 to 64.85% in 2011) indicates that taxes declined as a percentage of pre-tax profits. Average tax rates may have declined as a result of (1) new legislation or (2) greater revenue generated in lower tax jurisdictions. • The interest burden ratio remained fairly constant over the period, which suggests that the company's capital structure has remained fairly constant. • The EBIT margin declined over the period, indicating that the company's operations were less profitable. • The company's asset turnover declined over the period, which suggests that the company is becoming increasingly inefficient. • The financial leverage ratio remained fairly constant over the period, which is consistent with the stable interest burden ratio. Overall, the decline in the company's ROE is mainly caused by a decline in the EBIT margin (profitability) and asset turnover (efficiency).

Tiara Corp. divides its operations in three geographical segments. Selected financial information is provided in the following table: (in $'000) Revenue Operating Income Assets Revenue Operating Income Assets Australia 272,310 39,485 231,464 210,258 29,436 189,232 Asia Pacific 668,484 60,164 534,787 581,290 61,035 494,097 Europe 144,085 25,215 100,860 115,268 18,443 86,451 Total 1,084,879 124,863 867,110 906,816 108,914 769,780 Based on the above table, which of the following is least likely to be true?

Europe and Australia have declined in terms of both profitability and efficiency. That should not be a problem since the relative size of these two segments is decreasing (in terms of the share of total revenue). The following conclusions can be drawn from the table: •Asia-Pacific is the company's largest segment, as highlighted by its share of total revenue (61.62%). However, the segment has the lowest profit margin (9%). Further, the relative size of the segment has decreased over the year (share of revenues down from 64.10% to 61.62%). •Europe has the highest profit margin (17.5%) and is the most efficient segment as well (it has the highest ROA and asset turnover). •Australia's profit margin is also relatively high. •Europe and Australia have improved in terms of both profitability and efficiency. It bodes well for the company that the relative size of these two segments is increasing (in terms of the share of total revenue).

An increase in which of the following ratios most likely suggests an improvement in a company's solvency position?

Fixed charge coverage ratio An increase in the D‐E and the financial leverage ratio indicates a worsening solvency position. An increase in the fixed charge coverage ratio suggests that the company can service its debt obligations more comfortably with operating earnings.

A higher working capital turnover most likely indicates:

Higher operating efficiency. A higher working capital turnover ratio indicates that the company is utilizing its working capital efficiently to generate revenue.

Which of the following is most likely to be used to conduct trend analysis?

Horizontal common‐size financial statements Horizontal common‐size financial statements are prepared to look for trends over time in evaluating a company's past performance and preparing forecasts.

Over 2009, Magma Corporation's ability to service its debt obligations (as measured by its interest coverage ratio) has most likely:

Improved Interest coverage ratio in 2009 = 76,200 / 2,400 = 31.75 times. A higher ratio implies that the company can service its debt from operating earnings more comfortably.

Which of the following is least likely a limitation of ratio analysis?

Most companies around the world subscribe to the same set of accounting standards. Despite the growing convergence between IFRS and U.S. GAAP, significant differences remain across the two sets of standards, which makes comparison across firms difficult.

Based on the following common-size income statement analysis, which of the following is true? . 2006 2006 2007 2007 $ % $ % Sales 400,000 100.0 475,000 100.0 Cost of goods sold (COGS) 320,000 80.0 377,625 79.5 Gross profit 80,000 20.0 97,375 20.5 Selling, general, & administrative expenses (SG&A) 28,000 7.0 30,875 6.5 Depreciation 20,000 5.0 7,125 1.5 Interest expense 20,000 5.0 33,250 7.0 68,000 71,250 Profit before taxes 12,000 3.0 26,125 5.5 Income taxes (30% of pretax profits) 3,600 0.9 7,838 1.7 Net income 8,400 2.1 18,288 3.9

Net income has most likely improved because of improved Earnings Before Taxes Margin Net income has most likely improved because of the improved Earnings Before Taxes Margin, yp from 3.0% to 5.5%.

An increase in which of the following will most likely result in a decrease in a company's cash conversion cycle?

Number of days of payables Cash conversion cycle = DSO + DOH − Days of payables.

Which of the following is least likely included in the credit rating process?

Occupancy Risk Analysis

Use the following table to find the correct statement about this company's two way DuPont decomposition ROE = ROA × Leverage 2008 7.56% 4.70% 1.61 2007 2.91% 2.05% 1.42 2006 2.82% 2.05% 1.38 2005 −0.54% −0.34% 1.61

Over the period, the company's financial leverage ratio was relatively stable. The increase in the company's ROE was primarily due to an increase in profitability (ROA).

Which of the following is least likely a financial sector ratio?

Same store sales "Same store sales" is a ratio that is used for analysis of retailers.

Which of the following classifications of ratios is least likely to be used to evaluate a firm's operating efficiency? Correct!

Solvency ratios Solvency ratios measure a company's ability to meet its long‐term debt obligations. They do not play a major role in evaluating the operating efficiency of a business.

Use the following table to find the correct statement about this company's three way DuPont decomposition ROE = NP margin × Asset TO × Leverage 2008 7.56% 3.95% 1.19 1.61 2007 2.91% 2.47% 0.83 1.42 2006 2.82% 2.49% 0.82 1.38 2005 −0.54% −0.56% 0.60 1.61

The increase in Company A's ROE is a result of better NP margins (improved profitability) and higher asset turnover (improved efficiency), which improved its ROA and its ROE. The increase in Company A's ROE is a result of better NP margins (improved profitability) and higher asset turnover (improved efficiency), which improved its ROA and its ROE.

Magma Corporation's solvency position over 2009 (as measured by its debt‐to‐assets ratio) has most likely:

Weakened. Debt‐to‐assets ratio in 2009 = 134,700 / 364,500 = 0.37. The company's debt‐to‐assets ratio has increased from 0.251, which indicates that the company's solvency position has weakened.