Chapter 4: Analysis of Financial Statements
103.
Duffert Industries has total assets of $1,000,000 and total current liabilities (consisting only of accounts
payable and
accruals) of $125,000. Duffert finances using only long-term debt and common equity. The
interest rate on its debt
is 8% and its tax rate is 40%. The firm’s basic earning power ratio is 15% and its debt–
to capital rate is 40%. What
are Duffert’s ROE and ROIC?
a. 12.00%; 10.29%
b. 12.57%; 10.29%
c. 13.94%; 9.86%
d. 13.94%; 10.29%
e. 13.94%; 11.50%
104.
Chang Corp. has $375,000 of assets, and it uses only common equity capital (zero debt). Its sales for the last
year
were $595,000, and its net income was $25,000. Stockholders recently voted in a new management team
that has
promised to lower costs and get the return on equity up to 15.0%. What profit margin would the firm
need in order
to achieve the 15% ROE, holding everything else constant?
a. 9.45%
b. 9.93%
c. 10.42%
d. 10.94%
e. 11.49%
105.
Last year Ann Arbor Corp had $155,000 of assets (which equals total invested capital), $305,000 of sales,
$20,000
of net income, and a debt-to-total-capital ratio of 37.5%. The new CFO believes a new computer
program will
enable it to reduce costs and thus raise net income to $33,000. The firm finances using only debt
and common
equity. Assets, total invested capital, sales, and the debt to capital ratio would not be affected.
By how much would
the cost reduction improve the ROE?
a. 11.51%
b. 12.11%
c. 12.75%
d. 13.42%
e. 14.09%
ROE
13.82%
106.
Brookman Inc’s latest EPS was $2.75, its book value per share was $22.75, it had 315,000 shares outstanding,
and
its debt/total invested capital ratio was 44%. The firm finances using only debt and common equity and
its total
assets equal total invested capital. How much debt was outstanding?
a. $4,586,179
b. $4,827,557
c. $5,081,639
d. $5,349,094
e. $5,630,625
107.
Last year Harrington Inc. had sales of $325,000 and a net income of $19,000, and its year-end assets were
$250,000. The firm’s total-debt-to-total-capital ratio was 45.0%. The firm finances using only debt and
common
equity and its total assets equal total invested capital. Based on the DuPont equation, what was the
ROE?
a. 13.82%
b. 14.51%
c. 15.23%
d. 16.00%
e. 16.80%
108.
Last year Rennie Industries had sales of $305,000, assets of $175,000 (which equals total invested capital), a
profit
margin of 5.3%, and an equity multiplier of 1.2. The CFO believes that the company could reduce its
assets by $51,000 without affecting either sales or costs. The firm finances using only debt and common
equity. Had it
reduced its assets by this amount, and had the debt/total invested capital ratio, sales, and costs
remained constant,
how much would the ROE have changed?
a. 4.10%
b. 4.56%
c. 5.01%
d. 5.52%
e. 6.07%
109.
Last year Blease Inc had a total assets turnover of 1.33 and an equity multiplier of 1.75. Its sales were
$295,000
and its net income was $10,600. The firm finances using only debt and common equity and its
total assets equal total invested capital. The CFO believes that the company could have operated more
efficiently, lowered its costs,
and increased its net income by $10,250 without changing its sales, assets, or
capital structure. Had it cut costs and
increased its net income by this amount, how much would the ROE have
changed?
a. 6.55%
b. 7.28%
c. 8.09%
d. 8.90%
e. 9.79%
110.
Last year Jandik Corp. had $295,000 of assets (which is equal to its total invested capital), $18,750 of net
income,
and a debt-to-total-capital ratio of 37%. Now suppose the new CFO convinces the president to
increase the debt-
to-total-capital ratio to 48%. Sales, total assets, and total invested capital will not be
affected, but interest expenses
would increase. However, the CFO believes that better cost controls would be
sufficient to offset the higher
interest expense and thus keep net income unchanged. By how much would the
change in the capital structure
improve the ROE?
a. 2.13%
b. 2.35%
c. 2.58%
d. 2.84%
e. 3.12%
111.
Last year Kruse Corp had $305,000 of assets (which is equal to its total invested capital), $403,000 of sales,
$28,250 of net income, and a debt-to-total-capital ratio of 39%. The new CFO believes the firm has
excessive fixed
assets and inventory that could be sold, enabling it to reduce its total assets and total
invested capital to $252,500.
The firm finances using only debt and common equity. Sales, costs, and net income would not be affected,
and the
firm would maintain the same capital structure (but with less total debt). By how much would the
reduction in
assets improve the ROE?
a. 2.85%
b. 3.00%
c. 3.16%
d. 3.31%
e. 3.48%
112.
Jordan Inc has the following balance sheet and income statement data:
Cash
$ 14,000
Accounts payable
$ 42,000
Receivables
70,000
Other current liab.
28,000
Inventories
280,000
Total CL
$ 70,000
Total CA
$364,000
Long-term debt
140,000
Net fixed assets
126,000
Common equity
280,000
Total assets
$490,000
Total liab. and equity
$490,000
Sales
$280,000
Net income
$ 21,000
The new CFO thinks that inventories are excessive and could be lowered sufficiently to cause the current ratio
to
equal the industry average, 2.75, without affecting either sales or net income. Assuming that inventories are
sold off
and not replaced to get the current ratio to the target level, and that the funds generated are used to
buy back
common stock at book value, by how much would the ROE change?
a. 11.26%
b. 11.85%
c. 12.45%
d. 13.07%
e. 13.72%
Original balance sheet and income statement data:
Cash $ 14,000 Accounts payable
$ 42,000
Receivables 70,000 Other current liabilities
28,000
Inventories 280,000 Total CL
$ 70,000
Total CA $364,000 Long-term debt
140,000
Net fixed assets 126,000 Common equity
280,000
Orig ROE = NI/Old Equity:
New ROE = NI/New Equity:
113.
Last year Hamdi Corp. had sales of $500,000, operating costs of $450,000, and year-end assets (which is
equal to its total invested capital) of $395,000. The debt-to-total-capital ratio was 17%, the interest rate on
the debt was
7.5%, and the firm’s tax rate was 35%. The new CFO wants to see how the ROE would have
been affected if the
firm had used a 50% debt-to-total-capital ratio. Assume that sales, operating costs, total
assets, total invested
capital, and the tax rate would not be affected, but the interest rate would rise to 8.0%.
By how much would the
ROE change in response to the change in the capital structure?
a. 1.71%
b. 1.90%
c. 2.11%
d. 2.34%
e. 2.58%
114.
Quigley Inc. is considering two financial plans for the coming year. Management expects sales to be
$300,000,
operating costs to be $265,000, assets (which is equal to its total invested capital) to be
$200,000, and its tax rate to
be 35%. Under Plan A it would finance the firm using 25% debt and 75%
common equity. The interest rate on the
debt would be 8.8%, but under a contract with existing bondholders
the TIE ratio would have to be maintained at or
above 4.0. Under Plan B, the maximum debt that met the TIE
constraint would be employed. Assuming that sales,
operating costs, assets, total invested capital, the interest
rate, and the tax rate would all remain constant, by how
much would the ROE change in response to the
change in the capital structure?
a. 3.71%
b. 4.08%
c. 4.48%
d. 4.93%
e. 5.18%
8.80%
8.80%
Chapter 4: Analysis of Financial Statements
Exhibit 4.1
The balance sheet and income statement shown below are for Koski Inc. Note that the firm has no
amortization
charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and
the notes payable
will be rolled over.
Balance Sheet (Millions of $)
Assets
2014
Cash and securities
$ 2,500
Accounts receivable
11,500
Inventories
16,000
Total current assets
$30,000
Net plant and equipment
$20,000
Total assets
$50,000
Liabilities and Equity
Accounts payable
$ 9,500
Accruals
5,500
Notes payable
7,000
Total current liabilities
$22,000
Long-term bonds
$15,000
Total liabilities
$37,000
Common stock
$ 2,000
Retained earnings
11,000
Total common equity
$13,000
Total liabilities and equity
$50,000
Income Statement (Millions of $)
2014
Net sales
$87,500
Operating costs except depreciation
81,813
Depreciation
1,531
Earnings bef interest and taxes (EBIT)
$ 4,156
Less interest
1,375
Earnings before taxes (EBT)
$ 2,781
Taxes
973
Net income
$ 1,808
Other data:
Shares outstanding (millions)
500.00
Common dividends
$632.73
Int rate on notes payable & L-T bonds
6.25%
Federal plus state income tax rate
35%
Year-end stock price
$43.39
115.
Refer to Exhibit 4.1. What is the firm’s current ratio?
a. 0.99
b. 1.10
c. 1.23
d. 1.36
e. 1.50
116.
Refer to Exhibit 4.1. What is the firm’s quick ratio?
a. 0.51
b. 0.64
c. 0.76
d. 0.92
e. 1.10
117.
Refer to Exhibit 4.1. What is the firm’s days sales outstanding? Assume a 365-day year for this calculation.
a. 39.07
b. 41.13
c. 43.29
d. 45.57
e. 47.97
118.
Refer to Exhibit 4.1. What is the firm’s total assets turnover?
a. 1.12
b. 1.40
c. 1.75
d. 2.10
e. 2.52
119.
Refer to Exhibit 4.1. What is the firm’s inventory turnover ratio?
a. 5.47
b. 5.74
c. 6.03
d. 6.33
e. 6.65
120.
Refer to Exhibit 4.1. What is the firm’s TIE?
a. 2.20
b. 2.45
c. 2.72
d. 3.02
e. 3.33
121.
Refer to Exhibit 4.1. What is the firm’s total debt to total capital ratio?
a. 48.55%
b. 53.95%
c. 59.94%
d. 62.80%
e. 68.11%
122.
Refer to Exhibit 4.1. What is the firm’s ROA?
a. 3.62%
b. 3.98%
c. 4.37%
d. 4.81%
e. 5.29%
123.
Refer to Exhibit 4.1. What is the firm’s ROE?
a. 13.21%
b. 13.91%
c. 14.60%
d. 15.33%
e. 16.10%
124.
Refer to Exhibit 4.1. What is the firm’s BEP?
a. 7.50%
b. 7.90%
c. 8.31%
d. 8.73%
e. 9.16%
125.
Refer to Exhibit 4.1. What is the firm’s profit margin?
a. 1.51%
b. 1.67%
c. 1.86%
d. 2.07%
e. 2.27%
126.
Refer to Exhibit 4.1. What is the firm’s operating margin?
a. 3.12%
b. 3.46%
c. 3.85%
d. 4.28%
e. 4.75%
127.
Refer to Exhibit 4.1. What is the firm’s return on invested capital?
a. 4.25%
b. 5.67%
c. 7.72%
d. 9.33%
e. 11.87%
128.
Refer to Exhibit 4.1. What is the firm’s dividends per share?
a. $1.14
b. $1.27
c. $1.39 d.
$1.53
e. $1.68
129.
Refer to Exhibit 4.1. What is the firm’s EPS?
a. $3.26
b. $3.43
c. $3.62
d. $3.80
e. $3.99
130.
Refer to Exhibit 4.1. What is the firm’s P/E ratio?
a. 12.0
b. 12.6
c. 13.2
d. 13.9
e. 14.6
131.
Refer to Exhibit 4.1. What is the firm’s book value per share?
a. $22.29
b. $23.47
c. $24.70
d. $26.00
e. $27.30
132.
Refer to Exhibit 4.1. What is the firm’s market-to-book ratio?
a. 0.87
b. 1.02
c. 1.21
d. 1.42
e. 1.67
133.
Refer to Exhibit 4.1. What is the firm’s equity multiplier?
a. 3.85
b. 4.04
c. 4.24
d. 4.45
e. 4.68