Chapter 2 and 3 FIN 3000

Davis Company has provided the following financial data: Total Asset Turnover = .245 Net Income = $400,000 Equity Multiplier = 1.20 Net Sales = $1,300,000 What is the Return on Equity?

9.1% Correct Explanation Given: Total Asset Turnover = .245 Net Income = $400,000 Equity Multiplier = 1.20 Net Sales = $1,300,000 Profit Margin = Net Income/Net Sales Profit Margin = $400,000/$1,300,000 = .31 ROE = Profit Margin × Total Asset Turnover × Equity Multiplier ROE = .31 × .245 × 1.20 = .0911 ROE = 9.1%

A firm has a debt-equity ratio of .62, a total asset turnover of 1.24, and a profit margin of 5.1 percent. The total equity is $489,600. What is the amount of the net income?

$50,159 ROE = .051(1.24)(1.62) ROE = .1024 Net income = .1024($489,600) Net income = $50,159

If a firm has a debt-equity ratio of 1.0, then its total debt ratio must be which one of the following?

.5

Lassiter Industries has annual sales of $328,000 with 8,000 shares of stock outstanding. The firm has a profit margin of 4.5 percent and a price-sales ratio of 1.20. What is the firm's price-earnings ratio?

26.7 Price per share = 1.20($328,000/8,000) Price per share = $49.20 EPS = [.045($328,000)]/8,000 EPS = $1.845 PE ratio = $49.20/$1.845 PE ratio = 26.7

Which one of these identifies the relationship between the return on assets and the return on equity?

DuPont identity

On a common-size balance sheet all accounts for the current year are expressed as a percentage of:

total assets for the current year.

Canine Supply has sales of $2,800, total assets of $1,900, and a debt-equity ratio of .5. Its return on equity is 15 percent. What is the net income?

$190 ROE = .15 = (Net income/$2,800)($2,800/$1,900)(1.50) Net income = $190

Beach Wear has current liabilities of $350,000, a quick ratio of 1.65, inventory turnover of 4.7, and a current ratio of 2.9. What is the cost of goods sold?

$2,056,250 Current assets = 2.9($350,000) Current assets = $1,015,000 ($1,015,000 − Inventory)/$350,000 = 1.65 Inventory = $437,500 COGS = 4.7($437,500) COGS = $2,056,250

A useful way of standardizing financial statements is to choose a _______ year and then express each item relative to that amount.

base

Chapter 2) Net working capital is defined as:

current assets minus current liabilities.

Mortgage lenders probably have the most interest in the ______ ratios.

long-term debt and times interest earned

Ratios that measure how efficiently a firm manages its assets and operations to generate net income are referred to as _____ ratios.

profitability

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

ratios to the company's historical ratios.

A common-size income statement is an accounting statement that expresses all of a firm's expenses as a percentage of:

sales.

Common size income statements show balance sheet items as a percentage of total assets.

True

RJ's has a fixed asset turnover rate of 1.26 and a total asset turnover rate of .97. Sam's has a fixed asset turnover rate of 1.31 and a total asset turnover rate of .94. Both companies have similar operations. Based on this information, RJ's must be doing which one of the following?

Utilizing its total assets more efficiently than Sam's

The three parts of the Dupont equation are:

Profit margin, Total asset turnover, & Equity Multiplier.

Hungry Lunch has net income of $73,402, a price-earnings ratio of 13.7, and earnings per share of $.43. How many shares of stock are outstanding?

170,702 Number of shares = $73,402/$.43 Number of shares = 170,702

Return on equity can be calculated as ROA × Equity multiplier. What is another way to express this equation?

ROE = ROA × (1 + Debt − Equity Ratio)

Which one of the following accurately describes the three parts of the DuPont identity?

Equity multiplier, profit margin, and total asset turnover