CHAPTER 7—ANALYSIS OF FINANCIAL STATEMENTS
d.
10.88%
e.
11.42%
77. Stewart Inc.’s latest EPS was $3.50, its book value per share was $22.75, it had 215,000 shares outstanding, and its
debt-to-assets ratio was 46%. How much debt was outstanding?
a.
$3,393,738
b.
$3,572,356
c.
$3,760,375
d.
$3,958,289
e.
$4,166,620
e
CHAPTER 7—ANALYSIS OF FINANCIAL STATEMENTS
78. Last year Vaughn Corp. had sales of $315,000 and a net income of $17,832, and its year-end assets were $210,000.
The firm’s total-debt-to-total-assets ratio was 42.5%. Based on the DuPont equation, what was Vaughn‘s ROE?
a.
14.77%
b.
15.51%
c.
16.28%
d.
17.10%
e.
17.95%
a
79. Last year Central Chemicals had sales of $205,000, assets of $127,500, a profit margin of 5.3%, and an equity
multiplier of 1.2. The CFO believes that the company could reduce its assets by $21,000 without affecting either sales or
costs. Had it reduced its assets in this amount, and had the debt-to-assets ratio, sales, and costs remained constant, by how
much would the ROE have changed?
a.
1.81%
b.
2.02%
c.
2.22%
d.
2.44%
e.
2.68%
CHAPTER 7—ANALYSIS OF FINANCIAL STATEMENTS
80. Last year Mason Inc. had a total assets turnover of 1.33 and an equity multiplier of 1.75. Its sales were $195,000 and
its net income was $10,549. The CFO believes that the company could have operated more efficiently, lowered its costs,
and increased its net income by $5,250 without changing its sales, assets, or capital structure. Had it cut costs and
increased its net income in this amount, by how much would the ROE have changed?
a.
5.66%
b.
5.95%
c.
6.27%
d.
6.58%
e.
6.91%
c
CHAPTER 7—ANALYSIS OF FINANCIAL STATEMENTS
81. Last year Rosenberg Corp. had $195,000 of assets, $18,775 of net income, and a debt-to-total-assets ratio of 32%.
Now suppose the new CFO convinces the president to increase the debt ratio to 48%. Sales and total assets 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.
4.36%
b.
4.57%
c.
4.80%
d.
5.04%
e.
5.30%
a
82. Last year Altman Corp. had $205,000 of assets, $303,500 of sales, $18,250 of net income, and a debt-to-total-assets
ratio of 41%. The new CFO believes the firm has excessive fixed assets and inventory that could be sold, enabling it to
reduce its total assets to $152,500. Sales, costs, and net income would not be affected, and the firm would maintain the
41% debt ratio. By how much would the reduction in assets improve the ROE?
a.
4.69%
b.
4.93%
c.
5.19%
d.
5.45%
e.
5.73%
CHAPTER 7—ANALYSIS OF FINANCIAL STATEMENTS
83. Muscarella Inc. has the following balance sheet and income statement data:
Cash
$ 14,000
Accounts payable
$ 42,000
Receivables
70,000
Other current liabilities
28,000
Inventories
210,000
Total CL
$ 70,000
Total CA
$294,000
Long-term debt
70,000
Net fixed assets
126,000
Common equity
280,000
Total assets
$420,000
Total liab. and equity
$420,000
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, 2.70, 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.
4.28%
b.
4.50%
c.
4.73%
d.
4.96%
e.
5.21%
c
Difficulty: Moderate
INTE.GENE.16.49 – LO: 7-5
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
Asset reduction: turnover and ROE
TYPE: Multiple Choice: Problem
CHAPTER 7—ANALYSIS OF FINANCIAL STATEMENTS
84. Last year Swensen Corp. had sales of $303,225, operating costs of $267,500, and year-end assets of $195,000. The
debt-to-total-assets ratio was 27%, the interest rate on the debt was 8.2%, and the firm’s tax rate was 37%. The new CFO
wants to see how the ROE would have been affected if the firm had used a 45% debt ratio. Assume that sales and total
assets would not be affected, and that the interest rate and tax rate would both remain constant. By how much would the
ROE change in response to the change in the capital structure?
a.
2.08%
b.
2.32%
c.
2.57%
d.
2.86%
e.
3.14%
CHAPTER 7—ANALYSIS OF FINANCIAL STATEMENTS
85. For the coming year, Crane Inc. is considering two financial plans. Management expects sales to be $301,770,
operating costs to be $266,545, assets to be $200,000, and its tax rate to be 35%. Under Plan A it would use 25% debt and
75% common equity. The interest rate on the debt would be 8.8%, but the TIE ratio would have to be kept at 4.00 or
more. Under Plan B the maximum debt that met the TIE constraint would be employed. Assuming that sales, operating
costs, assets, 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.
3.83%
b.
4.02%
c.
4.22%
d.
4.43%
e.
4.65%
a
CHAPTER 7—ANALYSIS OF FINANCIAL STATEMENTS
Exhibit 7.1
The balance sheet and income statement shown below are for Pettijohn 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
$ 1,554.0
Accounts receivable
9,660.0
Inventories
13,440.0
Total current assets
$24,654.0
Net plant and equipment
17,346.0
Total assets
$42,000.0
Liabilities and Equity
Accounts payable
$ 7,980.0
Notes payable
5,880.0
Accruals
4,620.0
Total current liabilities
$18,480.0
Long-term bonds
10,920.0
Total debt
$29,400.0
Common stock
3,360.0
Retained earnings
9,240.0
Total common equity
$12,600.0
Total liabilities and equity
$42,000.0
Income Statement (Millions of $)
2015
Net sales
$58,800.0
Operating costs except depr’n
$54,978.0
Depreciation
$ 1,029.0
Earnings bef int and taxes (EBIT)
$ 2,793.0
Less interest
1,050.0
Difficulty: Challenging
INTE.GENE.16.49 – LO: 7-5
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
Maximum debt constrained by TIE
TYPE: Multiple Choice: Problem
CHAPTER 7—ANALYSIS OF FINANCIAL STATEMENTS
Earnings before taxes (EBT)
$ 1,743.0
Taxes
$ 610.1
Net income
$ 1,133.0
Other data:
Shares outstanding (millions)
175.00
Common dividends
$ 509.83
Int rate on notes payable & L-T bonds
6.25%
Federal plus state income tax rate
35%
Year-end stock price
$77.69
86. Refer to Exhibit 7.1. What is the firm’s current ratio?
a.
0.97
b.
1.08
c.
1.20
d.
1.33
e.
1.47
Current ratio = Current assets/Current liabilities = 1.33
Difficulty: Moderate
INTE.GENE.16.46 – LO: 7-2
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
Calculating ratios given financial stmts
TYPE: Multiple Choice: Multi-part
87. Refer to Exhibit 7.1. What is the firm’s quick ratio?
a.
0.49
b.
0.61
c.
0.73
d.
0.87
e.
1.05
Quick ratio = (CA − Inventory)/CL = 0.61
Difficulty: Moderate
INTE.GENE.16.46 – LO: 7-2
United States – BUSPROG: Analytic
Calculating ratios given financial stmts
CHAPTER 7—ANALYSIS OF FINANCIAL STATEMENTS
88. Refer to Exhibit 7.1. What is the firm’s days sales outstanding? Assume a 360-day year for this calculation.
a.
48.17
b.
50.71
c.
53.38
d.
56.19
e.
59.14
e
DSO = Accounts receivable/(Sales/360) = 59.14
89. Refer to Exhibit 7.1. What is the firm’s total assets turnover?
a.
0.90
b.
1.12
c.
1.40
d.
1.68
e.
2.02
c
Total assets turnover ratio = Sales/Total assets = 1.40
90. Refer to Exhibit 7.1. What is the firm’s inventory turnover ratio?
a.
4.17
b.
4.38
c.
4.59
CHAPTER 7—ANALYSIS OF FINANCIAL STATEMENTS
d.
5.82
e.
5.07
a
91. Refer to Exhibit 7.1. What is the firm’s TIE?
a.
1.94
b.
2.15
c.
2.39
d.
2.66
e.
2.93
92. Refer to Exhibit 7.1. What is the firm’s EBITDA coverage?
a.
3.29
b.
3.46
c.
3.64
d.
3.82
e.
4.01
CHAPTER 7—ANALYSIS OF FINANCIAL STATEMENTS
93. Refer to Exhibit 7.1. What is the firm’s debt-to-assets ratio?
a.
45.93%
b.
51.03%
c.
56.70%
d.
63.00%
e.
70.00%
e
Debt ratio = Total debt/Total assets = 70.0%
94. Refer to Exhibit 7.1. What is the firm’s ROA?
a.
2.70%
b.
2.97%
c.
3.26%
d.
3.59%
e.
3.95%
a
ROA = Net income/Total assets = 2.70%
CHAPTER 7—ANALYSIS OF FINANCIAL STATEMENTS
95. Refer to Exhibit 7.1. What is the firm’s ROE?
a.
8.54%
b.
8.99%
c.
9.44%
d.
9.91%
e.
10.41%
ROE = Net income/Common equity = 8.99%
96. Refer to Exhibit 7.1. What is the firm’s BEP?
a.
6.00%
b.
6.32%
c.
6.65%
d.
6.98%
e.
7.33%
c
97. Refer to Exhibit 7.1. What is the firm’s profit margin?
a.
1.40%
CHAPTER 7—ANALYSIS OF FINANCIAL STATEMENTS
b.
1.56%
c.
1.73%
d.
1.93%
e.
2.12%
Profit margin = Net income/Sales = 1.93%
98. Refer to Exhibit 7.1. What is the firm’s dividends per share?
a.
$2.62
b.
$2.91
c.
$3.20
d.
$3.53
e.
$3.88
DPS = Common dividends paid/Shares outstanding = $2.91
99. Refer to Exhibit 7.1. What is the firm’s cash flow per share?
a.
$10.06
b.
$10.59
c.
$11.15
d.
$11.74
e.
$12.35
e
CHAPTER 7—ANALYSIS OF FINANCIAL STATEMENTS
100. Refer to Exhibit 7.1. What is the firm’s EPS?
a.
$5.84
b.
$6.15
c.
$6.47
d.
$6.80
e.
$7.14
c
101. Refer to Exhibit 7.1. What is the firm’s P/E ratio?
a.
12.0
b.
12.6
c.
13.2
d.
13.9
e.
14.6
a
CHAPTER 7—ANALYSIS OF FINANCIAL STATEMENTS
102. Refer to Exhibit 7.1. What is the firm’s book value per share?
a.
$61.73
b.
$64.98
c.
$68.40
d.
$72.00
e.
$75.60
103. Refer to Exhibit 7.1. What is the firm’s market-to-book ratio?
a.
0.56
b.
0.66
c.
0.78
d.
0.92
e.
1.08
e
Market/book ratio (M/B) = Price per share/BVPS = 1.08
104. Refer to Exhibit 7.1. What is the firm’s equity multiplier?
CHAPTER 7—ANALYSIS OF FINANCIAL STATEMENTS
a.
3.33
b.
3.50
c.
3.68
d.
3.86
e.
4.05
a
Equity multiplier = Total assets/Common equity = 3.33