CHAPTER 04—ANALYSIS OF FINANCIAL STATEMENTS
EASY
90. Zero Corp’s total common equity at the end of last year was $405,000 and its net income was $70,000. What was its
ROE?
a.
14.82%
b.
15.60%
c.
16.42%
d.
17.28%
e.
18.15%
EASY
91. Your sister is thinking about starting a new business. The company would require $375,000 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.
$41,234
b.
$43,405
c.
$45,689
d.
$48,094
e.
$50,625
e
EASY
CHAPTER 04—ANALYSIS OF FINANCIAL STATEMENTS
92. Herring Corporation has operating income of $225,000 and a 40% tax rate. The firm has short-term debt of $120,000,
long-term debt of $330,000, and common equity of $450,000. What is its return on invested capital?
a.
13.75%
b.
14.33%
c.
15.00%
d.
16.25%
e.
17.10%
c
EASY
93. Song Corp’s stock price at the end of last year was $23.50 and its earnings per share for the year were $1.30. What was
its P/E ratio?
a.
17.17
b.
18.08
c.
18.98
d.
19.93
e.
20.93
EASY
CHAPTER 04—ANALYSIS OF FINANCIAL STATEMENTS
94. Hoagland Corp’s stock price at the end of last year was $33.50, and its book value per share was $25.00. What was its
market/book ratio?
a.
1.34
b.
1.41
c.
1.48
d.
1.55
e.
1.63
a
EASY
95. Precision Aviation had a profit margin of 6.25%, a total assets turnover of 1.5, and an equity multiplier of 1.8. What
was the firm’s ROE?
a.
15.23%
b.
16.03%
c.
16.88%
d.
17.72%
e.
18.60%
c
EASY
CHAPTER 04—ANALYSIS OF FINANCIAL STATEMENTS
96. Meyer Inc’s total invested capital is $625,000, 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.
$158,750
b.
$166,688
c.
$175,022
d.
$183,773
e.
$192,962
a
EASY/MODERATE
97. Helmuth Inc’s latest net income was $1,250,000, and it had 225,000 shares outstanding. The company wants to pay out
45% of its income. What dividend per share should it declare?
a.
$2.14
b.
$2.26
c.
$2.38
d.
$2.50
e.
$2.63
EASY/MODERATE
CHAPTER 04—ANALYSIS OF FINANCIAL STATEMENTS
98. Garcia Industries has sales of $200,000 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?
a.
$241.45
b.
$254.16
c.
$267.54
d.
$281.62
e.
$296.44
e
MODERATE
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.
a.
21.27
b.
22.38
CHAPTER 04—ANALYSIS OF FINANCIAL STATEMENTS
c.
23.50
d.
24.68
e.
25.91
MODERATE
100. Han Corp’s sales last year were $425,000, 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.
a.
12.94
b.
13.62
c.
14.33
d.
15.09
e.
15.84
MODERATE
CHAPTER 04—ANALYSIS OF FINANCIAL STATEMENTS
101. Wie Corp’s sales last year were $315,000, 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?
a.
$201,934
b.
$212,563
c.
$223,750
d.
$234,938
e.
$246,684
c
MODERATE
102. A new firm is developing its business plan. It will require $615,000 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.)
a.
41.94%
b.
44.15%
c.
46.47%
d.
48.92%
e.
51.49%
e
CHAPTER 04—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%
4-5 Profitability Ratios
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – OH – DISC.FOFM.BRIG.16.05 – Financial analysis and cash flows
4-4 Debt Management Ratios
FOFM.BRIG.16.04.04 – Debt Management Ratios
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – OH – DISC.FOFM.BRIG.16.05 – Financial analysis and cash flows
Debt management
Bloom’s: Analysis
Multiple Choice: Problem
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 $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%
a
MODERATE
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%
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 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
e
MODERATE
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%
MODERATE
CHAPTER 04—ANALYSIS OF FINANCIAL STATEMENTS
a
MODERATE
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%
MODERATE
4-7
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 $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%
c
MODERATE
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%
CHAPTER 04—ANALYSIS OF FINANCIAL STATEMENTS
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%
c
MODERATE
Comprehensive
MODERATE