FIN081- Financial Statement Analysis (Part 2)

Accounts receivable 52. Ruth Company currently has $1,000,000 in accounts receivable. Its days sales outstanding (DSO) is 50 days. The company wants to reduce its DSO to the industry average of 32 days by pressuring more of its customers to pay their bills on time. The company's CFO estimates that if this policy is adopted the company's average sales will fall by 10 percent. Assuming that the company adopts this change and succeeds in reducing its DSO to 32 days and does lose 10 percent of its sales, what will be the level of accounts receivable following the change? Assume a 365-day year. a. $576,000 b. $633,333 c. $750,000 d. $900,000 e. $966,667

A

Du Pont equation 47. The Wilson Corporation has the following relationships: Sales/Total assets 2.0 Return on assets (ROA) 4.0% Return on equity (ROE) 6.0% What is Wilson's profit margin and debt ratio? a. 2%; 0.33 b. 4%; 0.33 c. 4%; 0.67 d. 2%; 0.67 e. 4%; 0.50

A

EBITDA coverage ratio 65. Peterson Packaging Corp. has $9 billion in total assets. The company's basic earning power (BEP) ratio is 9 percent, and its times interest earned ratio is 3.0. Peterson's depreciation and amortization expense totals $1 billion. It has $0.6 billion in lease payments and $0.3 billion must go towards principal payments on outstanding loans and long-term debt. What is Peterson's EBITDA coverage ratio? a. 2.06 b. 1.52 c. 2.25 d. 1.10 e. 2.77

A

Financial statement analysis 38. Russell Securities has $100 million in total assets and its corporate tax rate is 40 percent. The company recently reported that its basic earning power (BEP) ratio was 15 percent and its return on assets (ROA) was 9 percent. What was the company's interest expense? a. $ 0 b. $ 2,000,000 c. $ 6,000,000 d. $15,000,000 e. $18,000,000

A

OA 53. A fire has destroyed a large percentage of the financial records of the Carter Company. You have the task of piecing together information in order to release a financial report. You have found the return on equity to be 18 percent. If sales were $4 million, the debt ratio was 0.40, and total liabilities were $2 million, what would be the return on assets (ROA)? a. 10.80% b. 0.80% c. 1.25% d. 12.60% e. Insufficient information.

A

Profit margin 67. The Merriam Company has determined that its return on equity is 15 percent. Management is interested in the various components that went into this calculation. You are given the following information: total debt/total assets = 0.35 and total assets turnover = 2.8. What is the profit margin? a. 3.48% b. 5.42% c. 6.96% d. 2.45% e. 12.82%

A

Accounts receivable increase 51. Cannon Company has enjoyed a rapid increase in sales in recent years, following a decision to sell on credit. However, the firm has noticed a recent increase in its collection period. Last year, total sales were $1 million, and $250,000 of these sales were on credit. During the year, the accounts receivable account averaged $41,096. It is expected that sales will increase in the forthcoming year by 50 percent, and, while credit sales should continue to be the same proportion of total sales, it is expected that the days sales outstanding will also increase by 50 percent. If the resulting increase in accounts receivable must be financed externally, how much external funding will Cannon need? Assume a 365-day year. a. $ 41,096 b. $ 51,370 c. $ 47,359 d. $106,471 e. $ 92,466

B

Current ratio and inventory 50. Iken Berry Farms has $5 million in current assets, $3 million in current liabilities, and its initial inventory level is $1 million. The company plans to increase its inventory, and it will raise additional short-term debt (that will show up as notes payable on the balance sheet) to purchase the inventory. Assume that the value of the remaining current assets will not change. The company's bond covenants require it to maintain a current ratio that is greater than or equal to 1.5. What is the maximum amount that the company can increase its inventory before it is restricted by these covenants? a. $0.50 million b. $1.00 million c. $1.33 million d. $1.66 million e. $2.33 million

B

Market price per share 39. You are given the following information: Stockholders' equity = $1,250; price/earnings ratio = 5; shares outstanding = 25; and market/book ratio = 1.5. Calculate the market price of a share of the company's stock. a. $ 33.33 b. $ 75.00 c. $ 10.00 d. $166.67 e. $133.32

B

OE 57. A firm has a debt/equity ratio of 50 percent. Currently, it has interest expense of $500,000 on $5,000,000 of total debt outstanding. Its tax rate is 40 percent. If the firm's ROA is 6 percent, by how many percentage points is the firm's ROE greater than its ROA? a. 0.0% b. 3.0% c. 5.2% d. 7.4% e. 9.0%

B

P/E ratio and stock price 48. The Charleston Company is a relatively small, privately owned firm. Last year the company had net income of $15,000 and 10,000 shares were outstanding. The owners were trying to determine the equilibrium market value for the stock prior to taking the company public. A similar firm that is publicly traded had a price/earnings ratio of 5.0. Using only the information given, estimate the market value of one share of Charleston's stock. a. $10.00 b. $ 7.50 c. $ 5.00 d. $ 2.50 e. $ 1.50

B

TIE ratio 44. Culver Inc. has earnings after interest but before taxes of $300. The company's times interest earned ratio is 7.00. Calculate the company's interest charges. a. $42.86 b. $50.00 c. $40.00 d. $60.00 e. $57.93

B

TIE ratio 62. Moss Motors has $8 billion in assets, and its tax rate is 40 percent. The company's basic earning power (BEP) ratio is 12 percent, and its return on assets (ROA) is 3 percent. What is Moss' times interest earned (TIE) ratio? a. 2.25 b. 1.71 c. 1.00 d. 1.33 e. 2.50

B

TIE ratio 63. Lancaster Motors has total assets of $20 million. Its basic earning power is 25 percent, its return on assets (ROA) is 10 percent, and the company's tax rate is 40 percent. What is Lancaster's TIE ratio? a. 2.5 b. 3.0 c. 1.5 d. 1.2 e. 0.6

B

Debt ratio 66. Kansas Office Supply had $24,000,000 in sales last year. The company's net income was $400,000, its total assets turnover was 6.0, and the company's ROE was 15 percent. The company is financed entirely with debt and common equity. What is the company's debt ratio? a. 0.20 b. 0.30 c. 0.33 d. 0.60 e. 0.66

C

Market price per share 40. Given the following information, calculate the market price per share of WAM Inc.: Net income $200,000.00 Earnings per share $2.00 Stockholders' equity $2,000,000.00 Market/Book ratio 0.20 a. $20.00 b. $ 8.00 c. $ 4.00 d. $ 2.00 e. $ 1.00

C

Market/book ratio 41. Meyersdale Office Supplies has common equity of $40 million. The company's stock price is $80 per share and its market/book ratio is 4.0. How many shares of stock does the company have outstanding? a. 500,000 b. 125,000 c. 2,000,000 d. 800,000,000 e. Insufficient information.

C

Profit margin 46. Your company had the following balance sheet and income statement information for 2002: Balance Sheet: Cash $ 20 A/R 1,000 Inventories 5,000 Total current assets $6,020 Debt $4,000 Net fixed assets 2,980 Equity 5,000 Total assets $9,000 Total claims $9,000 Income Statement: Sales $10,000 Cost of goods sold 9,200 EBIT $ 800 Interest (10%) 400 EBT $ 400 Taxes (40%) 160 Net income $ 240 The industry average inventory turnover is 5. You think you can change your inventory control system so as to cause your turnover to equal the industry average, and this change is expected to have no effect on either sales or cost of goods sold. The cash generated from reducing inventories will be used to buy tax-exempt securities that have a 7 percent rate of return. What will your profit margin be after the change in inventories is reflected in the income statement? a. 2.1% b. 2.4% c. 4.5% d. 5.3% e. 6.7%

C

ROA 55. Viera Company has $500,000 in total assets. The company's basic earning power (BEP) is 10 percent, its times interest earned (TIE) ratio is 5, and the company's tax rate is 40 percent. What is the company's return on assets (ROA)? a. 3.2% b. 4.0% c. 4.8% d. 6.0% e. 7.2%

C

ROE 45. Tapley Dental Supply Company has the following data: Net income $240 Sales $10,000 Total assets $6,000 Debt ratio 75% TIE ratio 2.0 Current ratio 1.2 BEP ratio 13.33% If Tapley could streamline operations, cut operating costs, and raise net income to $300 without affecting sales or the balance sheet (the additional profits will be paid out as dividends), by how much would its ROE increase? a. 3.00% b. 3.50% c. 4.00% d. 4.25% e. 5.50%

C

ROE 56. Selzer Inc. sells all its merchandise on credit. It has a profit margin of 4 percent, days sales outstanding equal to 60 days, receivables of $150,000, total assets of $3 million, and a debt ratio of 0.64. What is the firm's return on equity (ROE)? Assume a 365-day year. a. 7.1% b. 33.4% c. 3.4% d. 71.0% e. 8.1%

C

ROE 59. The Amer Company has the following characteristics: Sales $1,000 Total assets $1,000 Total debt/Total assets 35.00% Basic earning power (BEP) ratio 20.00% Tax rate 40.00% Interest rate on total debt 4.57% What is Amer's ROE? a. 11.04% b. 12.31% c. 16.99% d. 28.31% e. 30.77%

C

Equity multiplier 60. A firm that has an equity multiplier of 4.0 will have a debt ratio of a. 4.00 b. 3.00 c. 1.00 d. 0.75 e. 0.25

D

ROA 43. A firm has a profit margin of 15 percent on sales of $20,000,000. If the firm has debt of $7,500,000, total assets of $22,500,000, and an after-tax interest cost on total debt of 5 percent, what is the firm's ROA? a. 8.4% b. 10.9% c. 12.0% d. 13.3% e. 15.1%

D

ROE 58. Assume Meyer Corporation is 100 percent equity financed. Calculate the return on equity, given the following information: Earnings before taxes $1,500 Sales $5,000 Dividend payout ratio 60% Total assets turnover 2.0 Tax rate 30% a. 25% b. 30% c. 35% d. 42% e. 50%

D

TIE ratio 64. Roll's Boutique currently has total assets of $3 million in operation. Over this year, its performance yielded a basic earning power (BEP) of 25 percent and a return on assets (ROA) of 12 percent. The firm's earnings are subject to a 35 percent tax rate. On the basis of this information, what is the firm's times interest earned (TIE) ratio? a. 1.84 b. 1.92 c. 2.83 d. 3.82 e. 4.17

D

Market/book ratio 42. Strack Houseware Supplies Inc. has $2 billion in total assets. The other side of its balance sheet consists of $0.2 billion in current liabilities, $0.6 billion in long-term debt, and $1.2 billion in common equity. The company has 300 million shares of common stock outstanding, and its stock price is $20 per share. What is Strack's market/book ratio? a. 1.25 b. 2.65 c. 3.15 d. 4.40 e. 5.00

E

P/E ratio and stock price 49. Cleveland Corporation has 100,000 shares of common stock outstanding, its net income is $750,000, and its P/E is 8. What is the company's stock price? a. $20.00 b. $30.00 c. $40.00 d. $50.00 e. $60.00

E

ROA 54. Humphrey Hotels' operating income (EBIT) is $40 million. The company's times interest earned (TIE) ratio is 8.0, its tax rate is 40 percent, and its basic earning power (BEP) ratio is 10 percent. What is the company's return on assets (ROA)? a. 6.45% b. 5.97% c. 4.33% d. 8.56% e. 5.25%

E

TIE ratio 61. Alumbat Corporation has $800,000 of debt outstanding, and it pays an interest rate of 10 percent annually on its bank loan. Alumbat's annual sales are $3,200,000, its average tax rate is 40 percent, and its net profit margin on sales is 6 percent. If the company does not maintain a TIE ratio of at least 4 times, its bank will refuse to renew its loan, and bankruptcy will result. What is Alumbat's current TIE ratio? a. 2.4 b. 3.4 c. 3.6 d. 4.0 e. 5.0

E