Finance Final Prep II

Robotics desires a sustainable growth rate of 9.5 percent while maintaining a 30 percent dividend payout ratio and a 12 percent profit margin. The company has a capital intensity ratio of .95. What equity multiplier is required to achieve the company's desired rate of growth?

1.19 .095 = [ROE × (1 - .30)] / {1 - [ROE × (1 - .30)]}; ROE = .15 .15 = .12 × (1 / .95) × EM; EM = 1.19

Use the below information to answer the following question. Income Statement For the Year Net sales $631,000 COGS 442,220 Depreciation 28,100 EBIT $160,700 Interest 14,900 Taxable income $145,800 Taxes 49,600 Net income $96,200 Balance Sheet Beginning of Year End of Year Cash $ 38,200 $ 43,700 Accounts receivable 91,400 86,150 Inventory 203,900 214,600 Net fixed assets 516,100 537,950 Total assets $849,600 $882,400 Accounts payable $136,100 $104,300 Long-term debt 329,500 298,200 Common stock ($1 par value) 75,000 82,000 Retained earnings 309,000 397,900 Total Liab. & Equity $849,600 $882,400 What is the quick ratio at the end of the year?

1.24 Quick ratio for year-end = ($43,700 + 86,150) / $104,300 = 1.24

Corner Supply has a current accounts receivable balance of $246,000. Credit sales for the year just ended were $2,430,000. How many days on average did it take for credit customers to pay off their accounts during this past year?

36.95 days

A firm has total assets of $310,100 and net fixed assets of $168,500. The average daily operating costs are $2,980. What is the value of the interval measure?

47.52 days

BL Industries has ending inventory of $302,800 and cost of goods sold for the year just ended was $1.41 million. On average, how long did a unit of inventory sit on the shelf before it was sold?

78.38 days Day's sales in inventory = 365 / ($1,410,000 / $302,800) = 78.38 days

TJ's has annual sales of $813,200, total debt of $176,000, total equity of $395,000, and a profit margin of 5.63 percent. What is the return on assets?

8.02 percent

Drive-Up has sales of $31.4 million, total assets of $27.6 million, and total debt of $14.9 million. The profit margin is 3.7 percent. What is the return on equity?

9.15 percent Return on equity = (.037 × $31.4m) / ($27.6m - 14.9m) = .0915, or 9.15 percent

The Outlet has a capital intensity ratio of .87 at full capacity. Currently, total assets are $48,900 and current sales are $53,600. At what level of capacity is the firm currently operating?

95.36 percent Total capacity sales = $48,900 / .87 = $56,206.90 Current capacity utilization = $53,600 / $56,206.90 = .9536, or 95.36 percent

Which one of the following ratios identifies the amount of total assets a firm needs in order to generate $1 in sales?

Capital intensity ratio.

Which one of the following policies most directly affects the projection of the retained earnings balance to be used on a pro forma statement?

Dividend policy.

Beach Wear has current liabilities of $350,000, a quick ratio of 1.65, inventory turnover of 3.2, and a current ratio of 2.9. What is the cost of goods sold?

$1,400,000 Current assets = 2.9 × $350,000 = $1,015,000 ($1,015,000 - Inventory) / $350,000 = 1.65; Inventory = $437,500 Costs of goods sold = 3.2 × $437,500 = $1,400,000

Use the below information to answer the following question. Income Statement For the Year Sales $36,200 Cost of goods sold 27,900 Depreciation 2,950 Earnings before interest and taxes $ 5,350 Interest paid 1,180 Taxable income $ 4,170 Taxes 1,270 Net income $ 2,900 Dividends $870 Balance Sheet End-of-Year Cash $ 350 Accounts receivable 3,150 Inventory 8,300 Total current assets $11,800 Net fixed assets 27,600 Total assets $39,400 Accounts payable $ 3,950 Long-term debt 14,700 Common stock ($1 par value) 12,500 Retained earnings 8,250 Total Liab. & Equity $39,400 This firm is currently operating at full capacity. The profit margin and the dividend payout ratio are held constant. Net working capital and fixed assets vary directly with sales. Sales are projected to increase by 11 percent. What is the external financing needed?

$1,646 Projected total assets = $39,400 × 1.11 = $43,734 Projected accounts payable = $3,950 × 1.11 = $4,384.50 Projected retained earnings = $8,250 + [$2,900 - 870) × 1.11] = $10,503.30 External financing need = $43,734 - 4,384.50 - 14,700 - 12,500 - 10,503.30 = $1,646

Use the below information to answer the following question. Income Statement For the Year Sales $42,700 Cost of goods sold 29,250 Depreciation 3,750 Earnings before interest and taxes $ 9,700 Interest paid 1,360 Taxable income $ 8,340 Taxes 2,840 Net income $ 5,500 Dividends $1,925 Balance Sheet End-of-Year Cash $1,320 Accounts receivable 3,780 Inventory 10,200 Total current assets $15,300 Net fixed assets 33,600 Total assets $48,900 Accounts payable $ 3,650 Long-term debt 18,100 Common stock ($1 par value) 15,000 Retained earnings 12,150 Total Liab. & Equity $48,900 What are the pro forma retained earnings for next year if this firm grows at a rate of 3.6 percent and both the profit margin and the dividend payout ratio remain constant?

$15,854 Pro forma retained earnings = $12,150 + [($5,500 - 1,925) × 1.036)] = $15,854

Ed's Market is operating at full capacity with a sales level of $547,200 and fixed assets of $471,000. The profit margin is 5.4 percent. What is the required addition to fixed assets if sales are to increase by 4 percent?

$18,840 Required addition to fixed assets = $471,000 × .04 = $18,840 This can also be computed as: Capital intensity ratio / $471,000 / $547,200 = .86075 Required addition to fixed assets = $547,200 × .04 × .86075 = $18,840

Use the below information to answer the following question. Income Statement For the Year Sales $28,400 Cost of goods sold 21,200 Depreciation 2,700 Earnings before interest and taxes $ 4,500 Interest paid 850 Taxable income $ 3,650 Taxes 1,400 Net income $ 2,250 Dividends $900 Balance Sheet End-of-Year Cash $ 550 Accounts receivable 2,450 Inventory 4,700 Total current assets $ 7,700 Net fixed assets 16,900 Total assets $24,600 Accounts payable $ 2,700 Long-term debt 9,800 Common stock ($1 par value) 8,000 Retained earnings 4,100 Total Liab. & Equity $24,600 Assume the profit margin and the payout ratio for this firm are constant. If sales increase by 6 percent, what is the pro forma retained earnings?

$5,531 Pro forma retained earnings = $4,100 + [($2,250 - 900) × 1.06] = $5,531

Use the below information to answer the following question. Income Statement For the Year Sales $36,200 Cost of goods sold 27,900 Depreciation 2,950 Earnings before interest and taxes $ 5,350 Interest paid 1,180 Taxable income $ 4,170 Taxes 1,270 Net income $ 2,900 Dividends $870 Balance Sheet End-of-Year Cash $ 350 Accounts receivable 3,150 Inventory 8,300 Total current assets $11,800 Net fixed assets 27,600 Total assets $39,400 Accounts payable $ 3,950 Long-term debt 14,700 Common stock ($1 par value) 12,500 Retained earnings 8,250 Total Liab. & Equity $39,400 This firm is currently operating at 96 percent of capacity. What is the required increase in fixed assets if sales are projected to increase by 14 percent?

$2,605 Full capacity sales = $36,200 / .96 = $37,708.33 Required increase in fixed assets = ($27,600/$37,708.33) × ($36,200 × 1.14) - $27,600 = $2,605

The most recent financial statements for RPJ Co. are shown here: Sales $19,700 Costs 15,250 Taxes 1,513 Net income 2,937 Current assets 3,018 Fixed assets 18,282 Current liabilities 2,940 Long-term debt 7,600 Equity 10,760 Assets and costs are proportional to sales. The company maintains a constant 40 percent dividend payout ratio and a constant debt-equity ratio. What is the maximum increase in sales that can be sustained next year assuming no new equity is issued?

$3,858 Sustainable growth rate = [($2,937 / $10,760) × (1 - .40)] / {1 - [($2,937 / ($10,760) × (1 - .40)]} = .195848, or 19.5848 percent Maximum increase in sales = $19,700 × .195848 = $3,858

Use the below information to answer the following question. Income Statement For the Year Sales $42,700 Cost of goods sold 29,250 Depreciation 3,750 Earnings before interest and taxes $ 9,700 Interest paid 1,360 Taxable income $ 8,340 Taxes 2,840 Net income $ 5,500 Dividends $1,925 Balance Sheet End-of-Year Cash $1,320 Accounts receivable 3,780 Inventory 10,200 Total current assets $15,300 Net fixed assets 33,600 Total assets $ 48,900 Accounts payable $ 3,650 Long-term debt 18,100 Common stock ($1 par value) 15,000 Retained earnings 12,150 Total Liab. & Equity $48,900 Assume this firm is operating at 88 percent of capacity. All costs and net working capital vary directly with sales. What is the amount of the pro forma net fixed assets for next year if sales are projected to increase by 13 percent?

$33,600 Pro forma capacity level = .88 × (1 + .13) = 99.44 percent. No additional fixed assets are required. Thus, fixed assets will remain at $33,600.

Seaweed Mfg., Inc. is currently operating at only 86 percent of fixed asset capacity. Fixed assets are $387,000. Current sales are $510,000 and are projected to grow to $664,000. What amount must be spent on new fixed assets to support this growth in sales?

$46,319 Full capacity sales = $510,000 / .86 = $593,023.26 Fixed asset need = [$664,000 × ($387,000 / $593,023.26)] - $387,000 = $46,319

The most recent financial data for Porter's Corner is: Sales $4,650 Costs 4,160 Net income 490 Assets 5,820 Debt 2,760 Equity 3,060 Assets and costs are proportional to sales. Debt and equity are not. No dividends or taxes are paid. Next year's sales are projected to be $5,487. What is the amount of the external financing needed?

$469 Sales increase = ($5,487 - 4,650) / $4,650 = .18 Projected assets = $5,820 ×(1 + .18) = $6,867.60 Projected equity = $3,060 + [$490 × (1 + .18)] = $3,638.20 External financing need = $6,867.60 - 2,760 - 3,638.20 = $469

The most recent financial information for Last in Line is: Sales $9,800 Costs 8,740 Net income 1,060 Assets 8,950 Debt 4,760 Equity 4,190 Assets and costs are proportional to sales. Debt and equity are not. A dividend of $371 was paid, and the company wishes to maintain a constant payout ratio. Next year's sales are projected to be $10,584. What is the amount of the external financing need?

-$28 Sales increase = ($10,584 - 9,800) / $9,800 = .08 Projected assets = $8,950 × (1 + .08) = $9,666 Projected equity = $4,190 + [($1,060 - 371) × (1 + .08)] = $4,934.12 External financing need = $9,666 - 4,760 - 4,934.12 = -$28

The most recent financial data for Ocean Movers, Inc. is: Sales $19,700 Costs 15,250 Taxes 1,513 Net income 2,937 Current assets 3,018 Fixed assets 18,282 Current liabilities 2,940 Long-term debt 7,600 Equity 10,760 Assets, costs, and current liabilities are proportional to sales. Long-term debt and equity are not. The company maintains a constant 50 percent dividend payout ratio. Next year's sales are projected to increase by 7 percent. What is the external financing need if the firm is currently operating at full capacity?

-$286 Projected assets = ($3,018 + 18,282) × (1 + .07) = $22,791 Projected current liabilities = $2,940 × 1.07 = $3,145.80 Projected equity = $10,760 + [$2,937 × (1 - .50) × (1 + .07)] = $12,331.30 External financing need = $22,791 - 3,145.80 - 7,600 - 12,331.30 = -$286

Use the below information to answer the following question. Income Statement For the Year Sales $28,400 Cost of goods sold 21,200 Depreciation 2,700 Earnings before interest and taxes $ 4,500 Interest paid 850 Taxable income $ 3,650 Taxes 1,400 Net income $ 2,250 Dividends $900 Balance Sheet End-of-Year Cash $ 550 Accounts receivable 2,450 Inventory 4,700 Total current assets $ 7,700 Net fixed assets 16,900 Total assets $24,600 Accounts payable $ 2,700 Long-term debt 9,800 Common stock ($1 par value) 8,000 Retained earnings 4,100 Total Liab. & Equity $24,600 This firm is currently operating at maximum capacity. All costs, assets, and current liabilities vary directly with sales. The tax rate and the dividend payout ratio will remain constant. How much additional debt is required if no new equity is raised and sales are projected to increase by 5 percent?

-$323 Projected total assets = $24,600 × 1.05 = $25,830 Projected accounts payable = $2,700 × 1.05 = $2,835 Current long-term debt = $9,800 Current common stock = $8,000 Projected retained earnings = $4,100 + [($2,250 - 900) × 1.05] = $5,517.50 Additional debt required = $25,830 - 2,835 - 9,800 - 8,000 - 5,517.50 = -$323

A firm has a debt-equity ratio of .57. What is the total debt ratio?

.36 The debt-equity ratio is .57. If total debt is $57 and total equity is $100, then total assets are $157. Total debt ratio = $57 / $157 = .36.

Uptown Men's Wear has accounts payable of $2,214, inventory of $7,950, cash of $1,263, fixed assets of $8,400, accounts receivable of $3,907, and long-term debt of $4,200. What is the value of the net working capital to total assets ratio?

.51 Net working capital to total assets = ($1,263 + 3,907 + 7,950 - 2,214) / ($1,263 + 3,907 + 7,950 + 8,400) = .51

Lancaster Toys has a profit margin of 5.1 percent, a total asset turnover of 1.84, and a return on equity of 16.2 percent. What is the debt-equity ratio?

.73 Equity multiplier = .162 / (.051 × 1.84) = 1.73 Debt-equity ratio = 1.73- 1 = .73

Rural Market's has $878,000 of sales and $913,000 of total assets. The firm is operating at 93 percent of capacity. What is the capital intensity ratio at full capacity?

.97 Full-capacity sales = $878,000 / .93 = $944,086.02 Capital intensity ratio = $913,000 / $944,086.02 = .97

A firm wishes to maintain an internal growth rate of 11 percent and a dividend payout ratio of 24 percent. The current profit margin is 7 percent and the firm uses no external financing sources. What must the total asset turnover rate be?

1.86 times Retention ratio = 1 - .24 = .76 Internal growth rate = .11 = (ROA × .76)/[1 - (ROA × .76)]; ROA = .1304 Return on assets = .1304 = .07 × TAT; Total asset turnover = 1.86 times

A firm has sales of $3,340, net income of $274, net fixed assets of $2,600, and current assets of $920. The firm has $430 in inventory. What is the common-size statement value of inventory?

12.22 percent Common-size inventory = $430 / ($2,600 + 920) = .1222, or 12.22 percent

Use the below information to answer the following question. Income Statement For the Year Sales $28,400 Cost of goods sold 21,200 Depreciation 2,700 Earnings before interest and taxes $ 4,500 Interest paid 850 Taxable income $ 3,650 Taxes 1,400 Net income $ 2,250 Dividends $900 Balance Sheet End-of-Year Cash $ 550 Accounts receivable 2,450 Inventory 4,700 Total current assets $ 7,700 Net fixed assets 16,900 Total assets $24,600 Accounts payable $ 2,700 Long-term debt 9,800 Common stock ($1 par value) 8,000 Retained earnings 4,100 Total Liab. & Equity $24,600 If this firm decides to maintain a constant debt-equity ratio, what rate of growth can it maintain, assuming that no additional external equity financing is available.

12.56 percent Retention ratio = ($2,250 - 900) / $2,250 = .60 Sustainable growth rate = {[$2,250 / ($8,000 + 4,100)] × .60} / {1 - [$2,250 / ($8,000 + 4,100) × .60]} = .1256, or 12.56 percent

Use the below information to answer the following question. Income Statement For the Year Net sales $631,000 COGS 442,220 Depreciation 28,100 EBIT $160,700 Interest 14,900 Taxable income $145,800 Taxes 49,600 Net income $96,200 Balance Sheet Beginning of Year End of Year Cash $ 38,200 $43,700 Accounts receivable 91,400 86,150 Inventory 203,900 214,600 Net fixed assets 516,100 537,950 Total assets $849,600 $882,400 Accounts payable $136,100 $104,300 Long-term debt 329,500 298,200 Common stock ($1 par value) 75,000 82,000 Retained earnings 309,000 397,900 Total Liab. & Equity $849,600 $882,400 How many days on average does it take to sell the inventory? (Use year-end values)

177.13 days Days' sales in inventory = 365 / ($442,200 / $214,600) = 177.13 days

The Docksider has net income for the most recent year of $24,650. The tax rate was 15 percent. The firm paid $1,800 in total interest expense and deducted $2,900 in depreciation expense. What was the cash coverage ratio for the year?

18.72 times Earnings before taxes = $24,650 / (1 - .15) = $29,000 Earnings before interest and taxes = $29,000 + 1,800 = $30,800 Cash coverage ratio = ($30,800 + 2,900) / $1,800 = 18.72 times

A firm has 160,000 shares of stock outstanding, sales of $1.94 million, net income of $126,400, a price-earnings ratio of 21.3, and a book value per share of $7.92. What is the market-to-book ratio?

2.12 Earnings per share = $126,400 / 160,000 = $.79 Price per share = $.79 × 21.3 = $16.827 Market-to-book ratio = $16.827 / $7.92 = 2.12

Use the below information to answer the following question. Income Statement For the Year Net sales $631,000 COGS 442,220 Depreciation 28,100 EBIT $160,700 Interest 14,900 Taxable income $145,800 Taxes 49,600 Net income $96,200 Balance Sheet Beginning of Year End of Year Cash $ 38,200 $43,700 Accounts receivable 91,400 86,150 Inventory 203,900 214,600 Net fixed assets 516,100 537,950 Total assets $849,600 $882,400 Accounts payable $136,100 $104,300 Long-term debt 329,500 298,200 Common stock ($1 par value) 75,000 82,000 Retained earnings 309,000 397,900 Total Liab. & Equity $849,600 $882,400 What is the return on equity using year-end values?

20.05 percent Return on equity = $96,200 / ($82,000 + 397,900) = .2005, or 20.05 percent

The Dog House has net income of $3,450 and total equity of $8,600. The debt-equity ratio is .60 and the payout ratio is 30 percent. What is the internal growth rate?

21.29 percent Total assets = $8,600 ×(1 + .60) = $13,760 Return on assets = $3,450 / $13,760 = .250727 Internal growth = [.250727 × (1 - .30)] / {1 - [.250727 × (1 - .30)]} = .2129, or 21.29 percent

Use the below information to answer the following question. Income Statement For the Year Net sales $827,500 COGS 611,800 Depreciation 23,100 EBIT $192,600 Interest 9,700 Taxable income $182,900 Taxes 6,200 Net income $176,700 Balance Sheet Beginning of Year End of Year Cash $ 38,200 $43,700 Accounts receivable 91,400 86,150 Inventory 203,900 214,600 Net fixed assets 516,100 537,950 Total assets $849,600 $882,400 Accounts payable $136,100 $104,300 Long-term debt 329,500 298,200 Common stock ($1 par value) 75,000 82,000 Retained earnings 309,000 397,900 Total Liab. & Equity $849,600 $882,400 What is the cash coverage ratio for the year?

22.24 Cash coverage ratio = ($192,600 + 23,100) / $9,700 = 22.24

Hungry Lunch has net income of $68,710, a price-earnings ratio of 13.7, and earnings per share of $.24. How many shares of stock are outstanding?

286,292 Number of shares = $68,710 / $.24 = 286,292

Which one of the following is a source of cash?

Acquisition of debt

Atlas Industries combines the smaller investment proposals from each operational unit into a single project for planning purposes. This process is referred to as which one of the following?

Aggregation.

Which one of the following statements is correct?

An increase in the depreciation expense will not affect the cash coverage ratio.

Al's has a price-earnings ratio of 18.5. Ben's also has a price-earnings ratio of 18.5. Which one of the following statements must be true if Al's has a higher PEG ratio than Ben's?

Ben's is increasing its earnings at a faster rate than the Al's.

Which one of the following standardizes items on the income statement and balance sheet relative to their values as of a chosen point in time?

Common-base year statement.

Which one of the following is a source of cash?

Decrease in inventory

An increase in current liabilities will have which one of the following effects, all else held constant? Assume all ratios have positive values.

Decrease in the quick ratio.

All else constant, which one of the following will increase the internal rate of growth?

Decrease in total assets.

A firm currently has $600 in debt for every $1,000 in equity. Assume the firm uses some of its cash to decrease its debt while maintaining its current equity and net income. Which one of the following will decrease as a result of this action?

Equity multiplier.

Which one of the following statements concerning financial planning for a firm is correct?

Financial plans often contain alternative options based on economic development

The most acceptable method of evaluating the financial statements of a firm is to compare the firm's current:

Financial ratios to the firm's historical ratios.

The price-sales ratio is especially useful when analyzing firms that have which one of the following?

Negative earnings.

You are developing a financial plan for a corporation. Which of the following questions will be considered as you develop this plan? I. How much net working capital will be needed? II. Will additional fixed assets be required? III. Will dividends be paid to shareholders? IV. How much new debt must be obtained?

I, II, III, and IV.

An increase in which of the following will increase the return on equity, all else constant? I. Total asset turnover. II. Net income. III. Total assets. IV. Debt-equity ratio.

I, II, and IV only.

When utilizing the percentage of sales approach, managers: I. Estimate company sales based on a desired level of net income and the current profit margin. II. Consider only those assets that vary directly with sales. III. Consider the current production capacity level. IV. Can project both net income and net cash flows.

III and IV only.

Which one of the following is a source of cash for a non-tax-paying firm?

Increase in common stock.

The cash coverage ratio directly measures the ability of a firm to meet which one of its following obligations?

Payment of interest to a lender.

Which one of the following terms is applied to the financial planning method which uses the projected sales level as the basis for determining changes in balance sheet and income statement account values?

Percentage of sales method.

The external financing need:

Will limit growth if unfunded.

A firm's net working capital and all of its expenses vary directly with sales. The firm is operating currently at 96 percent of capacity. The firm wants no additional external financing of any kind. The tax rate is 34 percent and the dividend payout ratio is fixed at 25 percent. Which one of the following statements related to the firm's pro forma statements for next year must be correct?

The firm cannot exceed its internal rate of growth.

Tobin's Q relates the market value of a firm's assets to which one of the following?

Today's cost to duplicate those assets.

Which one of these is a requirement if the sustainable growth rate is to exceed the internal growth rate?

Total debt > $0.