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CHAPTER 04—ANALYSIS OF FINANCIAL STATEMENTS
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%
CHAPTER 04—ANALYSIS OF FINANCIAL STATEMENTS
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%
CHAPTER 04—ANALYSIS OF FINANCIAL STATEMENTS
b.
4.08%
c.
4.48%
d.
4.93%
e.
5.18%
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
2015
Cash and securities
$ 2,500
Accounts receivable
11,500
Inventories
16,000
Total current assets
$30,000
CHAPTER 04—ANALYSIS OF FINANCIAL STATEMENTS
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 $)
2015
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
CHAPTER 04—ANALYSIS OF FINANCIAL STATEMENTS
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
CHAPTER 04—ANALYSIS OF FINANCIAL STATEMENTS
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
CHAPTER 04—ANALYSIS OF FINANCIAL STATEMENTS
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%
CHAPTER 04—ANALYSIS OF FINANCIAL STATEMENTS
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%
CHAPTER 04—ANALYSIS OF FINANCIAL STATEMENTS
126. 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%
127. 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%
128. Refer to Exhibit 4.1. What is the firm's dividends per share?
a.
$1.14
CHAPTER 04—ANALYSIS OF FINANCIAL STATEMENTS
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
CHAPTER 04—ANALYSIS OF FINANCIAL STATEMENTS
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
CHAPTER 04—ANALYSIS OF FINANCIAL STATEMENTS
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
