FIN 303 - Chapter 4: Analyzing Financial Statements

All else being equal, which of the following will decrease a firm's current ratio? a) An increase in accounts payable b) A decrease in depreciation expense c) None of these d) A decrease in the net fixed assets

a) An increase in accounts payable

Trident Corp., has debt of $3.35 million with an interest rate of 6.875 percent. The company has an EBIT of $2,766,009. What is its times-interest-earned ratio? (Round your final answer to nearest number.)

12 times Work:

Sandhill Jewelers management announced that the company had net earnings of $4,496,000 for this year. The company has 3,997,000 shares outstanding, and the year-end stock price is $59.65. What are Sandhill's earnings per share and P/E ratio? (Round to 2 decimal places)

$1.12; 53.26 times Work: Earnings per Share = Net Income / Total # of Shares Outstanding Earnings per Share = $4,496,000 / 3,997,000 shares Earnings per Share = 1.12 per share P/E ratio = Current Price / EPS P/E ratio = $59.65 / 1.12 P/E ratio = 53.26 times

Sandhill Corporation has current liabilities of $422,000, a quick ratio of 1.8, inventory turnover of 5.2, and a current ratio of 3.0. What is the cost of goods sold for Sandhill Corporation?

$2,633,280 Work: Current Ratio = Current Assets / Current Liabilities 3 = Current Assets / $422,000 Current Assets = $1,266,000 Quick Ratio = (current assets - inventories) / current liabilities 1.8 = ($1,266,000 - Inventories) / $422,000 Inventories = $506,400 Inventory Turnover = COGS / Inventory 5.2 = COGS / $506,400 COGS = $2,633,280

What will be a firm's equity multiplier given a debt ratio of 0.45? (Round your final answer to two decimal places.)

1.82 Work:

ReelTime Video has reported a total asset turnover of 2.3 times and an ROA of 17% and ROE of 25%. What is the firm's net profit margin?

7.4%

Saunders, Inc., has a ROE of 18.7 percent, an equity multiplier of 2.53 times, sales of $2.75 million, and a total assets turnover of 2.7 times. What is the firm's net income? (Round your final answer to two decimal places.)

$75,281.80 Work: Total Asset Turnover = Sales/Total Assets 2.7 = $2,750,000 / Total Assets Total Assets = $1,018,518.52 Equity Multiplier = Total Assets / Equity 2.53 = $1,018,518.52 / Equity Equity = $402,576.49 ROE = Net Income / Equity 18.7% = Net Income / $402,576.49 Net Income = $75,281.80

Ronaldinho Trading Co. is required by its bank to maintain a current ratio of at least 1.75, and its current ratio now is 2.1. The firm plans to acquire additional inventory to meet an unexpected surge in the demand for its products and will pay for the inventory with short-term debt. How much inventory can the firm purchase without violating its debt agreement, if their total current assets equal $3.5 million? (Round your final answer to the nearest dollar.)

$777,777 Work:

Kelvy & Sons has a current ratio of 1.2, current assets of $508,315, and inventory of $98,666. What is the firm's quick ratio?

0.97 Work: Current Ratio = Current Assets / Current Liabilities 1.2 = $508,315 / Current Liabilities Current Liabilities = $423,595.83 Quick Ratio = (current assets - inventories) / current liabilities Quick Ratio = ($508,315 - $98,666) / $423,595.83 Quick Ratio = 0.97

Wildhorse Corp. has a gross profit margin of 36.00 percent, sales of $30,000,000, and inventory of $16,000,000. What is its inventory turnover ratio? (Round answer to 2 decimal places)

1.2 times Work: Gross Profit Margin = (Revenue - COGS) / Revenue 36% = ($30m - COGS) / $30m COGS = $19,200,000 Inventory Turnover = COGS / Inventory Inventory Turnover = $19,200,000 / $16m Inventory Turnover = 1.2

Wildhorse, Inc., has a debt ratio of 0.58. What are the company's debt-to-equity ratio and equity multiplier? (Round to 2 decimals)

1.38; 2.38 Work: Debt Ratio = Total Liabilities / Total Assets 0.58 = Total Liabilities / Total Assets 0.58 = 58 / 100 Total Assets = Total Liabilities + Total Equities 100 = 58 + Total Equities Total Equities = 42 Debt-to-Equity Ratio = Total Liabilities / Total Equity Debt-to-Equity Ratio = 58 / 42 1.38 Equity multiplier = Total Assets / Total Equity Equity multiplier = 100 / 42 2.38

Your firm has an equity multiplier of 2.47. What is its debt-to-equity ratio? (Round your final answer to two decimal places.)

1.47 Work:

Wildhorse, Inc., a manufacturer of electrical supplies, has an ROE of 23.1 percent, a profit margin of 6.00 percent, and a total asset turnover ratio of 2.50 times. Its peer group also has an ROE of 23.1 percent, but has outperformed Wildhorse with a net profit margin of 7.0 percent and a total asset turnover ratio of 3.0 times. Calculate the Wildhorse's equity multiplier and peer group equity multiplier.

1.54; 1.1 Work: Manufacturer of Electric Supplies ROA = Net Profit Margin x Total Asset Turnover ROA = 6% x 2.50 ROA = 0.15 ROE = ROA x Equity Multiplier 23.1% = 15% x Equity Multiplier Equity Multiplier = 1.54 times Peer Group ROA = Net Profit Margin x Total Asset Turnover ROA = 7% x 3.0 ROA = 0.21 ROE = ROA x Equity Multiplier 23.1% = 21% x Equity Multiplier Equity Multiplier = 1.1 times

Bobcat Industries has a net profit margin of 3%, a total asset turnover of 2 times; and a debt ratio of 40%. What is the firm's ROE?

10% Work: ROA = Net Profit Margin x Total Asset Turnover ROA = 3% x 2 ROA = 0.06 Debt Ratio = Total Liabilities / Total Assets 0.40 = Total Liabilities / Total Assets 0.40 = 40 / 100 Total Assets = Total Liabilities + Total Equity 100 = 40 + Total Equity Total Equity = 60 Equity Multiplier = Total Assets / Total Equity Equity Multiplier = 100 / 60 Equity Multiplier = 1.67 ROE = ROA x Equity Multiplier ROE = 6% x 1.67 ROE = 0.10 10%

GenTech Pharma has reported the following information: Sales/Total assets = 2.89; ROA = 10.74%; ROE = 20.36% What are the firm's profit margin and equity multiplier? (Round your profit margin answer to one decimal place, and equity multiplier answer to two decimal places.)

3.7%; 190 Work:

Jet, Inc., has net sales of $712,478 and accounts receivable of $167,435. What are the firm's accounts receivable turnover and day's sales outstanding? (Round your accounts receivable turnover to two decimal places and day's sales outstanding to nearest day.)

4.26 times; 86 days Work:

RTR Corp. has reported a net income of $812,425 for the year. The company's share price is $13.45, and the company has 312,490 shares outstanding. Compute the firm's price-earnings ratio. (Round your final answer to two decimal places.)

5.17 times Work:

Sorenstam Corp. has an equity multiplier of 2.34 times, total assets of $4,512,895, a ROE of 17.5 percent, and a total assets turnover of 3.1 times. Calculate the firm's ROA. (Round your percentage answer to two decimal places.)

7.48% Work: ROE = ROA x Equity Multiplier 17.5% = ROA x 2.34 ROA = 0.0748 7.48%

Sandhill reported the following information for its fiscal year end: On net sales of $48.400 billion, the company earned net income after taxes of $6.776 billion. It had a cost of goods sold of $19.844 billion and EBIT of $8.470 billion. What are the company's gross profit margin, operating profit margin, and net profit margin? (Round to 1 decimal place)

GPM: 59% OPM: 17.5% NPM 14% Work: EBIT = EBITDA -DA Gross Profit Margin = (Net Sales - COGS) / Net Sales Gross Profit Margin = ($48.400b - $19.844b) / $48.400b GPM = 0.59 59% Operating Profit Margin = EBIT / Net Sales OPM = $8.470b / $$48.400b OPM = 0.175 17.5% Net Profit Margin = Net Income / Net Sales NPM = $6.776b / $48.400b NPM = 0.14 14%

List the ways a company's financial manager can benchmark the company's own performance. Financial managers can benchmark their firm's performance by collecting data in three ways: a) trend b) peer group c) sensitivity d) industry average analysis allows managers to determine if ratios have changed over time. e) Peer group f) Industry average g) Trend h) Sensitivity analysis is performed by comparing ratios to the averages of firms that have similar product lines and sales; while i) sensitivity j) peer group k) industry average l) trend analysis involves comparing ratios those of direct competitors.

a) trend f) Industry average j) peer group

Coverage ratios, like times interest earned and cash coverage ratio, allow: a) A firm's creditors to assess how well the firm will meet its short-term liabilities other than interest expense. b) A firm's management to assess how well they meet short-term liabilities. c) A firm's creditors to assess how well the firm will meet its interest obligations. d) A firm's shareholders to assess how well the firm will meet its short-term liabilities.

c) A firm's creditors to assess how well the firm will meet its interest obligations.

The quick ratio may be a better indicator of liquidity than the current ratio because _____ may be relatively difficult to convert to cash in a short period of time. a) accounts payable b) marketable securities c) inventory d) plant and equipment

c) Inventory

Which one of the following statements is NOT true? a) The accounts receivables turnover ratio measures how quickly the firm collects its credit sales. b) One ratio that measures the efficiency of a firm's collection policy is day's sales outstanding. c) The more days that it takes a firm to collect on its receivables, the more efficient the firm is. d) Day's sales outstanding measures in days, the time a firm takes to convert its receivables into cash.

c) The more days that it takes a firm to collect on its receivables, the more efficient the firm is.

Which of the following is NOT true of liquidity ratios? a) There are two commonly used ratios to measure liquidity—current ratio and quick ratio. b) The higher the liquidity ratios, the more liquid the firm and the better its ability to pay its short-term bills. c) They measure the ability of a firm to meet short-term obligations with short-term assets without putting the firm in financial trouble. d) For manufacturing firms, quick ratios will tend to be much larger than current ratios.

d) For manufacturing firms, quick ratios will tend to be much larger than current ratios.

Which of the following statements is correct? a) The lower the level of a firm's debt, the higher the firm's equity multiplier. b) The tax benefit from using debt financing reduces a firm's risk. c) The lower the level of a firm's debt, the higher the firm's leverage. d) The lower the level of a firm's debt, the lower the firm's equity multiplier.

d) The lower the level of a firm's debt, the lower the firm's equity multiplier.

A common-size balance sheet presents the amounts in asset, liability, and owners' equity accounts as a... a) percentage of total net cash flow b) percentage of total net income c) percentage of total sales d) percentage of total assets

d) percentage of total assets