Finance 2150 - Chapter 4
12) Lorna Doom Inc. has an annual interest expense of $30,000 and pays income tax equal to 40 percent of taxable income (EBT). Lorna Doom's times-interest-earned ratio is 4.2. What is Lorna Doom's net income? $126,000 $96,000 $57,600 $57,000
$57,600
(Evaluating profitability) The Malia Corporation had sales in 2019 of $63 million, total assets of $49 million, and total liabilities of $23 million. The interest rate on the company's debt is 6.8 percent and its tax rate is 21 percent. The operating profit margin was 11 percent. What were the company's operating income and net income? What was the operating return on assets and return on equity? Assume that interest must be paid on all of the debt. 3). The operating return on assets was ______%. (round to 1 decimal place)
14.1
Table 4-1 Stewart Company Balance Sheet Assets: Cash and marketable securities $600,000 Accounts receivable 900,000 Inventories 1,500,000 Prepaid expenses 75,000 Total current assets $3,075,000 Fixed assets 8,000,000 Less: accum. depr. (2,075,000) Net fixed assets $5,925,000 Total assets $9,000,000 Liabilities: Accounts payable $800,000 Notes payable 700,000 Accrued taxes 50,000 Total current liabilities $1,550,000 Long-term debt 2,500,000 Owner's equity (1 million shares of common stock outstanding) 4,950,000 Total liabilities and owner's equity $9,000,000 Net sales (all credit) $10,000,000 Less: Cost of goods sold (3,000,000) Selling and administrative expense (2,000,000) Depreciation expense (250,000) Interest expense (200,000) Earnings before taxes 4,550,000 Income taxes (1,820,000) Net income $2,730,000 7) Based on the information in Table 4-1, assuming that no preferred dividends were paid, the return on common equity is 38.83% 44.86% 17.56% 55.15%
55.15%
5) The acid-test ratio of a firm would be unaffected by which of the following? common stock is sold and the money is invested in marketable securities inventories are sold for cash inventories are sold on a short-term credit basis accounts payable are reduced by obtaining a short-term loan
accounts payable are reduced by obtaining a short-term loan
4) Baker Corp. is required by a debt agreement to maintain a current ratio of at least 2.5, and Baker's current ratio now is 3. Baker wants to purchase additional inventory for its upcoming Christmas season, and will pay for the inventory with short-term debt. How much inventory can Baker purchase without violating its debt agreement if their total current assets equal $15 million? $1.67 million $6.00 million $4.50 million $0.50 million
$1.67 million
10 Acme Incorporated has a debt ratio of .42, noncurrent liabilities of $20,000 and total assets of $70,000. What is Acme's level of current liabilities? $12,348 $10,600 $8,400 $9,400
$9,400
15) Benkart Corporation has sales of $5,000,000, net income of $800,000, total assets of $2,000,000, and 100,000 shares of common stock outstanding. If Benkart's P/E ratio is 12, what is the company's current stock price? $60 per share $240 per share $360 per share $96 per share
$96 per share
Table 4-1 Stewart Company Balance Sheet Assets: Cash and marketable securities $600,000 Accounts receivable 900,000 Inventories 1,500,000 Prepaid expenses 75,000 Total current assets $3,075,000 Fixed assets 8,000,000 Less: accum. depr. (2,075,000) Net fixed assets $5,925,000 Total assets $9,000,000 Liabilities: Accounts payable $800,000 Notes payable 700,000 Accrued taxes 50,000 Total current liabilities $1,550,000 Long-term debt 2,500,000 Owner's equity (1 million shares of common stock outstanding) 4,950,000 Total liabilities and owner's equity $9,000,000 Net sales (all credit) $10,000,000 Less: Cost of goods sold (3,000,000) Selling and administrative expense (2,000,000) Depreciation expense (250,000) Interest expense (200,000) Earnings before taxes 4,550,000 Income taxes (1,820,000) Net income $2,730,000 2) Based on the information in Table 4-1, the acid-test ratio is 1.71 1.67 0.98 1.02
1.02
Table 4-1 Stewart Company Balance Sheet Assets: Cash and marketable securities $600,000 Accounts receivable 900,000 Inventories 1,500,000 Prepaid expenses 75,000 Total current assets $3,075,000 Fixed assets 8,000,000 Less: accum. depr. (2,075,000) Net fixed assets $5,925,000 Total assets $9,000,000 Liabilities: Accounts payable $800,000 Notes payable 700,000 Accrued taxes 50,000 Total current liabilities $1,550,000 Long-term debt 2,500,000 Owner's equity (1 million shares of common stock outstanding) 4,950,000 Total liabilities and owner's equity $9,000,000 Net sales (all credit) $10,000,000 Less: Cost of goods sold (3,000,000) Selling and administrative expense (2,000,000) Depreciation expense (250,000) Interest expense (200,000) Earnings before taxes 4,550,000 Income taxes (1,820,000) Net income $2,730,000 9) Based on the information in Table 4-1, the total asset turnover ratio is 1.11 2.33 4.45 1.41
1.11
Table 4-1 Stewart Company Balance Sheet Assets: Cash and marketable securities $600,000 Accounts receivable 900,000 Inventories 1,500,000 Prepaid expenses 75,000 Total current assets $3,075,000 Fixed assets 8,000,000 Less: accum. depr. (2,075,000) Net fixed assets $5,925,000 Total assets $9,000,000 Liabilities: Accounts payable $800,000 Notes payable 700,000 Accrued taxes 50,000 Total current liabilities $1,550,000 Long-term debt 2,500,000 Owner's equity (1 million shares of common stock outstanding) 4,950,000 Total liabilities and owner's equity $9,000,000 Net sales (all credit) $10,000,000 Less: Cost of goods sold (3,000,000) Selling and administrative expense (2,000,000) Depreciation expense (250,000) Interest expense (200,000) Earnings before taxes 4,550,000 Income taxes (1,820,000) Net income $2,730,000 8) Based on the information in Table 4-1, the fixed asset turnover ratio is 4.80 2.17 1.69 4.39
1.69
Table 4-1 Stewart Company Balance Sheet Assets: Cash and marketable securities $600,000 Accounts receivable 900,000 Inventories 1,500,000 Prepaid expenses 75,000 Total current assets $3,075,000 Fixed assets 8,000,000 Less: accum. depr. (2,075,000) Net fixed assets $5,925,000 Total assets $9,000,000 Liabilities: Accounts payable $800,000 Notes payable 700,000 Accrued taxes 50,000 Total current liabilities $1,550,000 Long-term debt 2,500,000 Owner's equity (1 million shares of common stock outstanding) 4,950,000 Total liabilities and owner's equity $9,000,000 Net sales (all credit) $10,000,000 Less: Cost of goods sold (3,000,000) Selling and administrative expense (2,000,000) Depreciation expense (250,000) Interest expense (200,000) Earnings before taxes 4,550,000 Income taxes (1,820,000) Net income $2,730,000 1) Based on the information in Table 4-1, the current ratio is 2.88 1.98 2.86 1.92
1.98
Table 4-1 Stewart Company Balance Sheet Assets: Cash and marketable securities $600,000 Accounts receivable 900,000 Inventories 1,500,000 Prepaid expenses 75,000 Total current assets $3,075,000 Fixed assets 8,000,000 Less: accum. depr. (2,075,000) Net fixed assets $5,925,000 Total assets $9,000,000 Liabilities: Accounts payable $800,000 Notes payable 700,000 Accrued taxes 50,000 Total current liabilities $1,550,000 Long-term debt 2,500,000 Owner's equity (1 million shares of common stock outstanding) 4,950,000 Total liabilities and owner's equity $9,000,000 Net sales (all credit) $10,000,000 Less: Cost of goods sold (3,000,000) Selling and administrative expense (2,000,000) Depreciation expense (250,000) Interest expense (200,000) Earnings before taxes 4,550,000 Income taxes (1,820,000) Net income $2,730,000 11) Based on the information in Table 4-1, and assuming the company's stock price is $30 per share, the P/E ratio is 9.85 10.99 4.83 3.09
10.99
11) Roxbury has sales of $2,250,000; a gross profit of $825,000; total operating costs of $620,000; income taxes of $74,800; total assets of $995,000; and interest expense of $18,000. What is Roxbury's times interest earned ratio? 45.8 8.1 1.3 11.4
11.4
(Evaluating profitability) The Malia Corporation had sales in 2019 of $63 million, total assets of $49 million, and total liabilities of $23 million. The interest rate on the company's debt is 6.8 percent and its tax rate is 21 percent. The operating profit margin was 11 percent. What were the company's operating income and net income? What was the operating return on assets and return on equity? Assume that interest must be paid on all of the debt. 4). The return on equity was ______%. (round to 1 decimal place)
16.3
8) Secular Electric has total equity of $560,000; sales of $2,250,000; current assets of $700,000; and total liabilities of $435,000. What is Secular Electric's total asset turnover? 4.02 2.26 3.21 5.51
2.26
(Price book) Chang, Inc.'s balance sheet shows a stockholders' equity book value (total common equity) of $756,700. The firm's earnings per share is $2.97, resulting in a price/earnings ratio of 12.24X. There are 54,000 shares of common stock outstanding. What is the price/book ratio? The price/book ratio is _____. (Round to 2 decimal places)
2.59
Table 4-1 Stewart Company Balance Sheet Assets: Cash and marketable securities $600,000 Accounts receivable 900,000 Inventories 1,500,000 Prepaid expenses 75,000 Total current assets $3,075,000 Fixed assets 8,000,000 Less: accum. depr. (2,075,000) Net fixed assets $5,925,000 Total assets $9,000,000 Liabilities: Accounts payable $800,000 Notes payable 700,000 Accrued taxes 50,000 Total current liabilities $1,550,000 Long-term debt 2,500,000 Owner's equity (1 million shares of common stock outstanding) 4,950,000 Total liabilities and owner's equity $9,000,000 Net sales (all credit) $10,000,000 Less: Cost of goods sold (3,000,000) Selling and administrative expense (2,000,000) Depreciation expense (250,000) Interest expense (200,000) Earnings before taxes 4,550,000 Income taxes (1,820,000) Net income $2,730,000 6) Based on the information in Table 4-1, the times interest earned ratio is 12.33 times 19.00 times 32.33 times 23.75 times
23.75 times
Table 4-1 Stewart Company Balance Sheet Assets: Cash and marketable securities $600,000 Accounts receivable 900,000 Inventories 1,500,000 Prepaid expenses 75,000 Total current assets $3,075,000 Fixed assets 8,000,000 Less: accum. depr. (2,075,000) Net fixed assets $5,925,000 Total assets $9,000,000 Liabilities: Accounts payable $800,000 Notes payable 700,000 Accrued taxes 50,000 Total current liabilities $1,550,000 Long-term debt 2,500,000 Owner's equity (1 million shares of common stock outstanding) 4,950,000 Total liabilities and owner's equity $9,000,000 Net sales (all credit) $10,000,000 Less: Cost of goods sold (3,000,000) Selling and administrative expense (2,000,000) Depreciation expense (250,000) Interest expense (200,000) Earnings before taxes 4,550,000 Income taxes (1,820,000) Net income $2,730,000 3) Based on the information in Table 4-1, the average collection period is 29.85 days 46.34 days 32.85 days 36.50 days
32.85 days
(Evaluating liquidity) Aylward Inc. currently has $2,169,000 in current assets and $856,000 in current liabilities. The company's managers want to increase the firm's inventory, which will be financed by a short-term note with the bank. What level of inventories can the firm carry without its current ratio falling below 2.1? The cost of the additional inventory financed with the short-term note is _________.
337,636
(Market-value ratios) Garret Industries has a price/earnings ratio of 20.92X. If Garret's earnings per share is $1.74, what is the price per share of Garret's stock? (Round to nearest cent.)
36.4
(Evaluating profitability) The Malia Corporation had sales in 2019 of $63 million, total assets of $49 million, and total liabilities of $23 million. The interest rate on the company's debt is 6.8 percent and its tax rate is 21 percent. The operating profit margin was 11 percent. What were the company's operating income and net income? What was the operating return on assets and return on equity? Assume that interest must be paid on all of the debt. 2). The net income was _______.
4,239,140
(Evaluating profitability) Last year, Stevens Inc. had sales of $399,000, with a cost of goods sold of $113,000. The firm's operating expenses were $125,000, and its increase in retained earnings was $58,000. There are currently 22,300 common stock shares outstanding and the firm pays a $1.62 dividend per share. a. Assuming the firm's earnings are taxed at 21 percent, construct the firm's income statement. (Round to the nearest dollar. NOTE: You may input expense accounts as negative values.) Stevens Inc. Income Statement Sales 399,000 Cost of goods sold -113,000 Gross profits 286,000 Operating expenses -125,000 Operating profits 161,000 Interest expense -41,853 Earnings before taxes 119,147 Income taxes -25,021 Net income $94,126 b. Compute the firm's operating profit margin. _____% (Round to 1 decimal)
40.4
9) Solid State, Inc. has a total equity of $560,000; sales of $2,250,000; total assets of $995,000; and current liabilities of $310,000. What is Solid State's debt ratio? 43.7% 55.4% 31.2% 66.7%
43.7%
Table 4-1 Stewart Company Balance Sheet Assets: Cash and marketable securities $600,000 Accounts receivable 900,000 Inventories 1,500,000 Prepaid expenses 75,000 Total current assets $3,075,000 Fixed assets 8,000,000 Less: accum. depr. (2,075,000) Net fixed assets $5,925,000 Total assets $9,000,000 Liabilities: Accounts payable $800,000 Notes payable 700,000 Accrued taxes 50,000 Total current liabilities $1,550,000 Long-term debt 2,500,000 Owner's equity (1 million shares of common stock outstanding) 4,950,000 Total liabilities and owner's equity $9,000,000 Net sales (all credit) $10,000,000 Less: Cost of goods sold (3,000,000) Selling and administrative expense (2,000,000) Depreciation expense (250,000) Interest expense (200,000) Earnings before taxes 4,550,000 Income taxes (1,820,000) Net income $2,730,000 4) Based on the information in Table 4-1, the debt ratio is 24.1% 45.0% 32.6% 55.2%
45.0%
Table 4-1 Stewart Company Balance Sheet Assets: Cash and marketable securities $600,000 Accounts receivable 900,000 Inventories 1,500,000 Prepaid expenses 75,000 Total current assets $3,075,000 Fixed assets 8,000,000 Less: accum. depr. (2,075,000) Net fixed assets $5,925,000 Total assets $9,000,000 Liabilities: Accounts payable $800,000 Notes payable 700,000 Accrued taxes 50,000 Total current liabilities $1,550,000 Long-term debt 2,500,000 Owner's equity (1 million shares of common stock outstanding) 4,950,000 Total liabilities and owner's equity $9,000,000 Net sales (all credit) $10,000,000 Less: Cost of goods sold (3,000,000) Selling and administrative expense (2,000,000) Depreciation expense (250,000) Interest expense (200,000) Earnings before taxes 4,550,000 Income taxes (1,820,000) Net income $2,730,000 10) Based on the information in Table 4-1, the operating profit margin is 32.8% 37.5% 26.4% 47.5%
47.5%
Table 4-1 Stewart Company Balance Sheet Assets: Cash and marketable securities $600,000 Accounts receivable 900,000 Inventories 1,500,000 Prepaid expenses 75,000 Total current assets $3,075,000 Fixed assets 8,000,000 Less: accum. depr. (2,075,000) Net fixed assets $5,925,000 Total assets $9,000,000 Liabilities: Accounts payable $800,000 Notes payable 700,000 Accrued taxes 50,000 Total current liabilities $1,550,000 Long-term debt 2,500,000 Owner's equity (1 million shares of common stock outstanding) 4,950,000 Total liabilities and owner's equity $9,000,000 Net sales (all credit) $10,000,000 Less: Cost of goods sold (3,000,000) Selling and administrative expense (2,000,000) Depreciation expense (250,000) Interest expense (200,000) Earnings before taxes 4,550,000 Income taxes (1,820,000) Net income $2,730,000 5) Based on the information in Table 4-1, the OROA is 46.54% 39.50% 52.78% 24.73%
52.78%
(Evaluating profitability) The Malia Corporation had sales in 2019 of $63 million, total assets of $49 million, and total liabilities of $23 million. The interest rate on the company's debt is 6.8 percent and its tax rate is 21 percent. The operating profit margin was 11 percent. What were the company's operating income and net income? What was the operating return on assets and return on equity? Assume that interest must be paid on all of the debt. 1). The operating profits were ________.
6,930,000
3) All of the following will improve a firm's liquidity position except: increase inventory turnover. increase accounts receivable turnover. increase the average collection period. increase long-term debt and invest the money in marketable securities.
increase the average collection period.
14) XYZ Corporation has a P/E ratio of 20 and EFG Corporation has a P/E ratio of 10. It is likely that investors expect XYZ's earnings to grow faster than EFG's earnings. investors believe that for the same level of earnings growth, XYZ is a higher risk company. investors believe XYZ stock is overvalued. XYZ's earnings per share are twice the earnings per share of EFG.
investors expect XYZ's earnings to grow faster than EFG's earnings.
7) Asset efficiency ratios for Fischer, Inc. are given in the table below. Based on this information, Fischer, Inc.'s fixed asset turnover ratio is likely to be ________. Fischer, Inc. Peer Group Total Asset Turnover 1.58X 2.05X Accounts Collection Period 30 days 35 days Inventory Turnover 6.34X 5.22X Fixed Asset Turnover ????? 3.50X negative less than 3.50 greater than 3.50 equal to 3.50
less than 3.50
1) A firm that wants to know if it has enough cash to meet its bills would be most likely to use which kind of ratio? leverage profitability efficiency liquidity
liquidity
2) All of the following measure liquidity except: current ratio. operating return on assets. inventory turnover. acid-test ratio.
operating return on assets.
6) An inventory turnover ratio of 7.2 compared to an industry average of 5.1 is likely to indicate that the firm is selling a product mix that includes more high margin items. the firm is managing its inventory inefficiently. the firm has higher sales than the industry average. the firm's products are in inventory for fewer days before they are sold than is average for the industry.
the firm's products are in inventory for fewer days before they are sold than is average for the industry.
13) HighLev Incorporated borrows heavily and uses the leverage to boost its return on equity to 30% this year, nearly 10% higher than the industry average. However, HighLev's stock price decreases relative to its industry counterparts. How is this possible? the high levels of debt increased the riskiness of HighLev relative to its competitors Markets are inefficient and fail to recognize the benefits of leverage The increased debt resulted in interest payments that made HighLev's operating income drop even though return on equity increased Shareholders are not interested in return on equity
the high levels of debt increased the riskiness of HighLev relative to its competitors
