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Chapter 04: Analysis of Financial Statements
term debt, use the funds to buy back stock, and raise the equity multiplier to 2.0. The size of the firm (assets)
would not change. She thinks that operations would not be affected, but interest on the new debt would lower
the profit margin to 4.5%. This would probably not be a good move, as it would decrease the ROE from 7.5%
to 6.5%.
Multiple Choice: Problems
A good bit of relatively simple algebra is involved in these problems, and although the calculations are simple, it will take
students some time to set up the problems and do the arithmetic. We allow for this when assigning problems for a timed
test. Also, note that students must know the definitions of a number of ratios to answer the questions. We provide our
students with a formula sheet on exams, using the relevant sections of Appendix C at the then of the text. Otherwise, they
spend too much time trying to memorize thing rather than trying to understand the issues.
The difficulty of the problems depends on (1) whether or not students are provided with a formula sheet and (2) the
amount of time they have to work the problems. Out difficulty assessments assume that they have a formula sheet and a
"reasonable" amount of time for the test. Note that a few of the problems are trivially easy if students have formula sheets.
To work some of the problems, students must transpose equations and solve for items that are normally inputs. For
example, the equation for the profit margin is given as Profit margin = Net income/Sales. We might have a problem where
sales and the profit margin are given and then require students to find the firm's net income. We explain to our students in
class before the exam that they will have to transpose terms in the formulas to work some problems.
Problems 84 through 114 are all stand-along problems with individualized data. Problems 115 through 133 are all
based on a common set of financial statements, and they require students to calculate ratios and find items like EPS, TIE,
and the like using this data set. The financial statements can be changed algorithmically, and this changes the calculated
ratios and other items.
84. Ryngard Corp's sales last year were $42,000, and its total assets were $16,000. What was its total assets turnover ratio
(TATO)?
a.
2.68
b.
2.36
c.
2.31
d.
3.15
e.
2.63
Chapter 04: Analysis of Financial Statements
85. Beranek Corp has $695,000 of assets (which equal total invested capital), and it uses no debt - it is financed only with
common equity. The new CFO wants to employ enough debt to raise the total debt to total capital ratio to 40%, using the
proceeds from borrowing to buy back common stock at its book value. How much must the firm borrow to achieve the
target debt ratio?
a.
$219,620
b.
$278,000
c.
$344,720
d.
$294,680
e.
$247,420
Chapter 04: Analysis of Financial Statements
86. Ajax Corp's sales last year were $510,000, its operating costs were $362,500, and its interest charges were $12,500.
What was the firm's times-interest-earned (TIE) ratio?
a.
11.80
b.
8.85
c.
13.10
d.
12.15
e.
14.75
87. Royce Corp's sales last year were $250,000, and its net income was $23,000. What was its profit margin?
a.
9.57%
b.
8.37%
c.
9.20%
d.
11.32%
e.
9.38%
Chapter 04: Analysis of Financial Statements
88. River Corp's total assets at the end of last year were $480,000 and its net income was $32,750. What was its return on
total assets?
a.
6.28%
b.
5.73%
c.
6.82%
d.
6.48%
e.
7.71%
89. X-1 Corp's total assets at the end of last year were $490,000 and its EBIT was 52,500. What was its basic earning
power (BEP) ratio?
a.
13.07%
b.
10.29%
c.
11.57%
d.
12.86%
Chapter 04: Analysis of Financial Statements
e.
10.71%
90. Zero Corp's total common equity at the end of last year was $370,000 and its net income was $70,000. What was its
ROE?
a.
18.92%
b.
18.92%
c.
14.57%
d.
17.41%
e.
15.32%
Chapter 04: Analysis of Financial Statements
91. Your sister is thinking about starting a new business. The company would require $425,000 of assets, and it would be
financed entirely with common stock. She will go forward only if she thinks the firm can provide a 13.5% return on the
invested capital, which means that the firm must have an ROE of 13.5%. How much net income must be expected to
warrant starting the business?
a.
$49,916
b.
$63,686
c.
$66,555
d.
$57,375
e.
$55,654
92. Herring Corporation has operating income of $235,000 and a 40% tax rate. The firm has short-term debt of $115,000,
long-term debt of $321,000, and common equity of $436,000. What is its return on invested capital?
a.
14.92%
b.
15.50%
c.
16.17%
d.
17.42%
e.
18.27%
Chapter 04: Analysis of Financial Statements
93. Song Corp's stock price at the end of last year was $16.75 and its earnings per share for the year were $1.30. What was
its P/E ratio?
a.
9.79
b.
11.98
c.
14.82
d.
12.88
e.
15.72
Chapter 04: Analysis of Financial Statements
94. Hoagland Corp's stock price at the end of last year was $48.50, and its book value per share was $25.00. What was its
market/book ratio?
a.
2.17
b.
1.94
c.
1.63
d.
1.55
e.
1.80
95. Precision Aviation had a profit margin of 8.00%, a total assets turnover of 1.5, and an equity multiplier of 1.8. What
was the firm's ROE?
a.
22.68%
b.
16.63%
c.
20.95%
d.
23.76%
e.
21.60%
Chapter 04: Analysis of Financial Statements
96. Meyer Inc's total invested capital is $660,000, and its total debt outstanding is $185,000. The new CFO wants to
establish a total debt to total capital ratio of 55%. The size of the firm will not change. How much debt must the company
add or subtract to achieve the target debt to capital ratio?
a.
$217,160
b.
$178,000
c.
$176,220
d.
$172,660
e.
$138,840
Chapter 04: Analysis of Financial Statements
97. Helmuth Inc's latest net income was $1,410,000, and it had 225,000 shares outstanding. The company wants to pay out
45% of its income. What dividend per share should it declare? Do not round your intermediate calculations.
a.
$3.13
b.
$2.96
c.
$2.37
d.
$2.45
e.
$2.82
98. Garcia Industries has sales of $167,500 and accounts receivable of $18,500, and it gives its customers 25 days to pay.
The industry average DSO is 27 days, based on a 365-day year. If the company changes its credit and collection policy
sufficiently to cause its DSO to fall to the industry average, and if it earns 8.0% on any cash freed-up by this change, how
would that affect its net income, assuming other things are held constant? Assume all sales to be on credit. Do not round
your intermediate calculations.
a.
$386.13
b.
$601.18
c.
$488.77
d.
$562.08
e.
$537.64
Chapter 04: Analysis of Financial Statements
99. Faldo Corp sells on terms that allow customers 45 days to pay for merchandise. Its sales last year were $325,000, and
its year-end receivables were $60,000. If its DSO is less than the 45-day credit period, then customers are paying on time.
Otherwise, they are paying late. By how much are customers paying early or late? Base your answer on this equation:
DSO - Credit Period = Days early or late, and use a 365-day year when calculating the DSO. A positive answer indicates
late payments, while a negative answer indicates early payments. Assume all sales to be on credit. Do not round your
intermediate calculations.
a.
18.13
b.
17.01
c.
26.86
d.
22.38
e.
17.46
Chapter 04: Analysis of Financial Statements
100. Han Corp's sales last year were $485,000, and its year-end receivables were $52,500. The firm sells on terms that call
for customers to pay 30 days after the purchase, but some delay payment beyond Day 30. On average, how many days late
do customers pay? Base your answer on this equation: DSO - Allowed credit period = Average days late, and use a 365-
day year when calculating the DSO. Assume all sales to be on credit. Do not round your intermediate calculations.
a.
10.18
b.
8.56
c.
8.08
d.
9.51
e.
11.03
Chapter 04: Analysis of Financial Statements
101. Wie Corp's sales last year were $260,000, and its year-end total assets were $355,000. The average firm in the
industry has a total assets turnover ratio (TATO) of 2.4. The firm's new CFO believes the firm has excess assets that can
be sold so as to bring the TATO down to the industry average without affecting sales. By how much must the assets be
reduced to bring the TATO to the industry average, holding sales constant? Do not round your intermediate calculations.
a.
$246,667
b.
$197,333
c.
$241,733
d.
$207,200
e.
$222,000
102. A new firm is developing its business plan. It will require $710,000 of assets (which equals total invested capital),
and it projects $450,000 of sales and $355,000 of operating costs for the first year. Management is reasonably sure of
these numbers because of contracts with its customers and suppliers. It can borrow at a rate of 7.5%, but the bank requires
it to have a TIE of at least 4.0, and if the TIE falls below this level the bank will call in the loan and the firm will go
bankrupt. The firm will use only debt and common equity for financing. What is the maximum debt to capital ratio
(measured as debt/total invested capital) the firm can use? (Hint: Find the maximum dollars of interest, then the debt that
produces that interest, and then the related debt to capital ratio.) Do not round your intermediate calculations.
a.
54.86%
b.
46.83%
c.
44.60%
d.
43.26%
e.
38.80%
Chapter 04: Analysis of Financial Statements
103. Duffert Industries has total assets of $1,080,000 and total current liabilities (consisting only of accounts payable and
accruals) of $100,000. Duffert finances using only long-term debt and common equity. The interest rate on its debt is 7%
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? Do not round your intermediate calculations.
a.
9.33%; 8.23%
b.
11.34%; 8.53%
c.
13.49%; 9.62%
d.
14.35%; 9.92%
e.
16.07%; 11.01%
Chapter 04: Analysis of Financial Statements
104. Chang Corp. has $375,000 of assets, and it uses only common equity capital (zero debt). Its sales for the last year
were $520,000, 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? Do not round your intermediate calculations.
a.
11.03%
b.
8.76%
c.
10.82%
d.
11.14%
e.
12.98%
Chapter 04: Analysis of Financial Statements
105. Last year Ann Arbor Corp had $195,000 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? Do not round your intermediate calculations.
a.
8.85%
b.
10.88%
c.
10.45%
d.
12.37%
e.
10.67%
Chapter 04: Analysis of Financial Statements
106. Brookman Inc's latest EPS was $2.75, its book value per share was $22.75, it had 325,000 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? Do not round your intermediate calculations.
a.
$5,925,563
b.
$4,415,125
c.
$5,518,906
d.
$5,228,438
e.
$5,809,375
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 15.0%. 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? Do not round your intermediate
calculations.
Chapter 04: Analysis of Financial Statements
a.
11.09%
b.
8.85%
c.
8.94%
d.
9.03%
e.
7.42%
108. Last year Rennie Industries had sales of $395,000, 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? Do not round your intermediate calculations.
a.
7.03%
b.
5.25%
c.
6.38%
d.
7.32%
e.
5.90%
Chapter 04: Analysis of Financial Statements
109. Last year Blease Inc had a total assets turnover of 1.33 and an equity multiplier of 1.75. Its sales were $205,000 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? Do not round your intermediate calculations.
a.
11.99%
b.
11.75%
c.
14.08%
d.
14.43%
e.
11.64%
