99. A firm has sales of $5 million, average total assets of $1.6 million, average fixed assets of
$1 million, and average current liabilities of $300,000. Given this information, answer the
following about the firm’s efficiency:
a. Calculate asset turnover, fixed asset turnover, and NWC turnover ratios.
b. Can the fixed asset turnover be considered appropriate and yet the total asset turnover be
considered low by industry standards? How?
c. What in general might improve NWC turnover?
100. If a firm’s average collection period is 42 days, and this compares favorably to the
industry average, what questions may you want to ask before assuming that the firm is
“efficient”?
101. A company has announced $50,000 in net income after paying taxes of $26,000 and
interest of $20,000. It intends to pay $17,000 of net income as dividends. Its assets have
averaged $600,000 over the past year, during which its total debt ratio has averaged 40%. Given
this information, calculate the ROA and ROE.
102. Value Corp. recently reported earnings of $2 per share and each of its 50,000 shares is
currently selling for $20. The firm’s book equity is $600,000. Given this information, answer the
following about the firm’s market-value ratios:
a. Calculate the firm’s price-to–earnings (P/E) and market–to-book ratios.
b. If the P/E ratio is said to compare favorably to that of the industry average, speculate on what
could account for this fact.
103. If a firm’s inventory level of $10,000 represents 30 days’ sales, what is the annual cost of
goods sold? What is the inventory turnover ratio?
104. Travel Corp. has net income of $1.95 million, an effective tax rate of 35%, interest
expense of $400,000, an asset turnover of 2, and $14 million in total assets, of which $7 million is
debt. Use the DuPont system to calculate its ROE, decomposed into leverage ratio, asset
turnover, profit margin, and debt burden.
105. A firm reports an ROE of 14%, a leverage ratio of 1.5, an asset turnover of 1.667, and a
profit margin of 9%. Calculate the firm’s ROA and then comment on the ROA in relation to ROE.
What is happening?
106. After calculating a firm’s financial ratios, in what manner might they be analyzed to
assess the firm’s performance?
107. What may make simple comparisons of financial ratios misleading?
108. In each of the following cases, explain briefly which of the two companies is likely to be
characterized by the higher ratio.
a. Debt-equity ratio: an electronics store or a tour operator
b. Payout ratio: BigBookstore or HomeRobots
c. Ratio of sales to assets: a restaurant or a car rental company
d. Average collection period: The Power Company or Joe’s FastFood
109. Compared to accounting profits, why is EVA a better measure of a company’s
performance? What might happen to a manager if his or her plant earns a negative EVA?
110. What are some potential pitfalls of ratio analysis based on accounting data?
111. How does the DuPont formula help identify the determinants of the firm’s return on its
assets and equity?
112. What are the standard measures of a firm’s leverage, liquidity, efficiency, and
profitability? What is the significance of each of these measures?
113. How do measures such as market value added and economic value added help assess
the firm’s performance?
114. The board of directors is dissatisfied with last year’s ROE of 15%. If the profit margin and
asset turnover remain unchanged at 8% and 1.25, respectively, by how much must the total debt
ratio increase to achieve 20% ROE?
115. Sappy Syrup has a profit margin below the industry average, but its ROA equals the
industry average. How is this possible?
116. Sappy Syrup’s ROA equals the industry average, but its ROE exceeds the industry
average. How is this possible?