Finance Exam 2

A cash dividend is declared and paid

All other things being equal, which of the following would decrease the current ratio?

23.44%

Assume you are given the following relationships for the Rainboldt Corporation: Sales / Total assets 2.4x Return on assets (ROA) 4.90% Return on equity (ROE) 6.40% Calculate Rainboldt's debt ratio.

Has a higher return on assets

Balance Sheet as of December 31, 2012: Cash & equivalents $167,500 Accounts payable $38,500 Accts. receivable 193,000 Notes payable 362,000 Inventories 204,000 Accrued wages & taxes 54,500 Total current assets $564,500 Total current liabilities $455,000 Long-term debt 63,000 Net plant & equip. 373,500 Common equity 420,000 Total assets $938,000 Total liab. & equity $938,000 Statement of Earnings for 2012 / Industry Average Ratio: Sales 1,163,000 Current ratio 1.4× Cost of goods sold 872,000 Quick ratio 1.0× Gross profit $291,000 Days sales outstanding 52 days Operating expenses 192,500 Inventory turnover 3.5× EBIT $98,500 Total asset turnover 1.6× Interest expense 27,000 Net profit margin 1.2% Pre-tax earnings $71,500 Return on assets 1.9% Income taxes (45%) 32,175 Return on equity 3.1% Net income $39,325 Debt ratio 39% Compared to its competitors, Shields

1.73

Concrete Constructors has a return on assets (ROA) of 11 percent, a 2 percent profit margin, and a return on equity (ROE) of 19 percent. What is its equity multiplier?

Has higher short-term liquidity ratios

Consider the following financial data for Shields Corp.: Statement of Financial Position as of December 31, 2012: Cash & equivalents $195,500 Accounts payable $80,000 Receivables 99,500 Short-term bank note 126,000 Inventories 208,000 Accruals 39,500 Total current assets $503,000 Total current liabilities $245,500 Long-term debt 503,000 Net fixed assets 779,000 Common equity 533,500 Total assets $1,282,000 Total liab. & equity $1,282,000 Profit & Loss Statement for 2012 / Industry Average Ratios: Sales $1,102,500 Current ratio 1.7× Cost of sales 871,000 Quick ratio 1.0× Gross profit $231,500 Days sales outstanding 25 days Operating expenses 140,000 Inventory turnover 7.8× EBIT $91,500 Total asset turnover 1.1× Interest expense 29,000 Net profit margin 4.8% Pre-tax earnings $62,500 Return on assets 5.3% Income taxes (30%) 18,750 Return on equity 10.1% Net profit $43,750 Debt ratio 47% Compared to its peers, Shields

$96.429

Hansen's Auto Supply has $1,323,000 in current assets and $495,000 in current liabilities. Its initial inventory level is $385,000, and it will raise funds as additional notes payable and use them to increase inventory. How much can its short-term debt (notes payable) increase without pushing its current ratio below 2.4?

Equity Margin

If a firm's ROE is low and management wants to improve it, the increased use of debt could help, most directly through its effect on the

Inventory levels have increased

Over the past year, Michaely & Co. has realized an increase in its current ratio and a drop in its total asset turnover ratio. However, the company's sales, quick ratio, and fixed asset turnover ratio have remained constant. What explains these changes?

$1,131,781

Riley Brothers has a DSO of 51 days, and its annual sales are $8,100,000. What is its accounts receivable balance? Assume it uses a 365-day year.

1.08

Statement of Financial Position as of December 31, 2012: Cash $56,500 Accounts payable $52,000 Accounts receivable 119,000 Short-term bank note 81,000 Inventories 210,000 Accrued wages and taxes 29,500 Total current assets $385,500 Total short-term liab. $162,500 Long-term debt 288,000 Net fixed assets 353,500 Common equity 288,500 Total assets $739,000 Total liabilities & equity $739,000 Profit & Loss Statement for the Year Ended December 31, 2012: Sales $450,000 Cost of sales 284,500 Gross profit $165,500 Operating expenses 75,000 Earnings before interest and taxes (EBIT) $90,500 Interest expense 48,000 Earnings before taxes (EBT) $42,500 Federal and state income taxes (40 percent) 17,000 Net profit $25,500 Calculate Larry's quick ratio.

2.88%

Statement of Financial Position as of December 31, 2012: Cash & equivalents $54,000 Accounts payable $57,000 Receivables 246,500 Notes payable 82,500 Inventories 282,000 Accruals 44,000 Total current assets $582,500 Total short-term liab. $183,500 Long-term debt 192,000 Net fixed assets 252,500 Common equity 459,500 Total assets $835,000 Total liabilities&equity $835,000 Statement of Earnings for the Year Ended December 31, 2012: Net sales $365,500 Cost of merchandise sold 234,000 Gross profit $131,500 Operating expenses 75,500 Earnings before interest and taxes (EBIT) $56,000 Interest expense 19,000 Earnings before taxes (EBT) $37,000 Federal and state income taxes (35 percent) 12,950 Net income $24,050 Calculate Steve's return on assets (ROA).

0.87

Statement of Financial Position as of December 31, 2012: Cash & equivalents $82,500 Accounts payable $50,500 Accounts receivable 174,000 Notes payable 103,000 Inventories 174,500 Accruals 57,000 Total current assets $431,000 Total current liabilities $210,500 Long-term debt 353,500 Net fixed assets 321,000 Common equity 188,000 Total assets $752,000 Total liabilities&equity $752,000 Profit & Loss Statement for the Year Ended December 31, 2012: Sales $656,500 Cost of sales 434,000 Gross profit $222,500 Operating expenses 106,500 Earnings before interest and taxes (EBIT) $116,000 Interest expense 32,000 Earnings before taxes (EBT) $84,000 Federal and state income taxes (45 percent) 37,800 Net profit $46,200 Calculate Lexi's total asset turnover.

$58.93

The Bellagio Corporation recently reported net income of $2,000,000. It has 500,000 shares of common stock, which currently trades at $60 a share. Bellagio continues to expand and expects that 1 year from now its net income will be $2,750,000. Over the next year it also anticipates issuing an additional 200,000 shares of stock, so that 1 year from now it will have 700,000 shares of common stock. Assuming its price/earnings ratio remains at its current level, what will be its stock price 1 year from now?

If a firm's expected basic earning power (BEP) is constant for all of its assets and exceeds the interest rate on its debt, then adding assets and financing them with debt will raise the firm's expected return on common equity (ROE).

Which of the following statements is correct? a. The higher its debt ratio, the lower a firm's BEP ratio will be, other things held constant. b. The higher its tax rate, the lower a firm's BEP ratio will be, other things held constant. . The higher the interest rate on its debt, the lower a firm's BEP ratio will be, other things held constant. d. If a firm's expected basic earning power (BEP) is constant for all of its assets and exceeds the interest rate on its debt, then adding assets and financing them with debt will raise the firm's expected return on common equity (ROE).

It is a way of standardizing numbers and can facilitate comparisons between firms.

Why is ratio analysis useful? a. It is a way of standardizing numbers and can facilitate comparisons between firms. b. It provides an easy, objective way of telling whether a company is, on balance, in a strong or weak position. c. Unlike "raw" accounting data, ratios cannot be distorted by inflation. d. It's not useful; nobody in the real world ever uses this stuff. e. It eliminates the need to consider "qualitative" factors when evaluating a firm's financial condition.

$45.72

You are given the following information about a company: Shareholders' equity (from balance sheet) $1,588,000 Price / earnings ratio 6.7 Common shares outstanding 66,000 Market / book ratio 1.9 Calculate the price of a share of the company's common stock.