Homework 3

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Outdoor Gear reduced its general and administrative costs this year. This cost improvement will increase which of the following ratios? 1. Profit margin 2. ROA 3. Total asset turnover 4. ROE

1, 2, & 4 only

Pizza Pie maintains a constant debt-equity ratio of .55. The firm had net income of $14,800 for the year and paid $12,000 in dividends. The firm has total assets of $248,000. What is the sustainable growth rate?

1.78% Sustainable growth rate = {[($14,800/$248,000)×(1 + .55)] ×[($14,800 -12,000)/$14,800]}/(1 - {[($14,800/$248,000)×(1 + .55)] ×[($14,800 -12,000)/$14,800]}) = .0178, or 1.78 %

Mistletoe Gifts has $93,840 in total assets, depreciation of $2,106, and interest of $1,214. The total asset turnover rate is .94. Earnings before interest and taxes are equal to 19 percent of sales. What is the cash coverage ratio?

15.54 Cash Coverage Ratio = [0.19*0.94*$93,840)]+$2,106]/$1,214 = 15.54

Donovan's would like to increase its internal rate of growth. Decreasing which will help the firm achieve its goal?

Dividend payout ratio (3.4)

The sustainable growth rate is based on the premise that:

The debt-equity ratio will be held constant (3.4)

What best indicates a firm is utilizing its assets more efficiently than it has in the past?

A decrease in the capital intensity ratio (3.2)

A firm has an equity multiplier of 1.5 this means that the firm has a

total debt ratio of 0.33 (1.5 - 1)/1.5 = 0.33

A firm has adopted a policy whereby it will not seek any additional external financing. Given this, what is the maximum growth rate for the firm if it has net income of $32,600, total equity of $294,000, total assets of $503,000, and a 25 percent dividend payout ratio?

5.11% Internal growth rate = [($32,600/$503,000) ×(1 -.25)]/{1 - [($32,600/$503,000) ×(1 -.25)]} = .0511 or 5.11%

Good Foods has net income of $82,490, total equity of $518,700, and total assets of $1,089,500. The dividend payout ratio is .30. What is the internal growth rate?

5.60% Internal growth rate = [(82,490/1,089,500)*(1-.30)]/{1-[(82,490/1,089,500)*(1-.30)]}=.0560 or 5.60%

KBJ has total assets of $613,000. There are 21,000 shares of stock outstanding with a market value of $13 a share. The firm has a profit margin of 6.2 percent and a total asset turnover of 1.08. What is the price-earnings ratio?

6.65 Price-earnings ratio = $13/{0.062*($613,000*1.08)]/21,000} = 6.65

Bamp;C Co. has net income of $48,200, sales of $947,100, a capital intensity ratio of .87, and an equity multiplier of 1.53. What is the return on equity?

8.95% ROE = ($48,000/947,100)*(1/.87)*1.53= .0895 or 8.95%

What is true concerning the price-earnings ratio?

A high PE ratio may indicate that a firm is expected to grow significantly (3.2)

Which is correct? Peer group analysis is easier when a firm is a conglomerate versus when it has only a single line of business. Peer group analysis is easier when seasonal firms have different fiscal years. Peer group analysis is simplified when firms use varying methods of depreciation. Comparing results across geographic locations is easier since all countries now use a common set of accounting standards. Adjustments have to be made when comparing the income statements of firms that use different methods of accounting for inventory.

Adjustments have to be made when comparing the income statements of firms that use different methods of accounting for inventory. (3.5)

What will increase the current ratio, all else constant? Assume the current ratio is greater than 1.0

Cash payment of an account payable (3.2)

A firm has a current ratio of 1.4 and a quick ratio of 0.9 given this, you know for certain that the firm:

Has positive net working capital (3.2)


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