Chapter 2 CFIN5
Chapter 2 Solutions
2-1 Publically-traded companies are required to provide adequate financial information to their shareholders.
Information generally is provided through financial reports that a company periodically produces, which
2-2 (a) The balance sheet shows, at a particular point in time, the amount the firm has invested in assets and
how much of those investments are financed with loans (liabilities) and how much are financed with equity
(stock). (b) The income statement shows the revenues (sales) that the firm generated during a particular
2-3 The most important aspect of ratio analysis is the judgment used when interpreting the results to reach
conclusions concerning a firm’s current financial position and the direction in which the firm is headed in
the future. The analyst should be aware of, and include in the interpretation, the fact that: (1) large firms
with many different divisions are difficult to categorize in a single industry; (2) financial statements are
2-4 Shares issued = 100,000 Price per share = $7 Par value per share = $3
Common stock at par = $300,000 = $3 x 100,000
2-5 Net cash flow = Net income + Depreciation = $90,000 + $25,000 = $115,000
2-6 The income statement for HighTech Wireless with the information that is given in the problem:
Sales ?
Operating expenses, excluding depreciation $(500,000)
Depreciation (100 ,000)
EBIT ?
Starting with net income and working up the income statement to solve for sales, we have the
following computations:
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whole or in part.
Chapter 2 CFIN5
1. NI = EBT(1 – 0.4)
Thus,
Net income $240,000
EBT $400,000
1 Tax rate 1 0.40
= = =
– –
Taxes = $400,000 – $240,000 = $160,000
2. EBIT = EBT + Interest = $400,000 + 0 = $400,000
3. Sales = EBIT + Operating expenses, excluding depreciation + Depreciation
To show that this is the correct result, let’s start with sales equal to $1,000,000 and compute the
net income:
Sales $1,000,000
2-7 a.
Current assets $73,500
Current 3.5
ratio Current liabilities Current liabilities
= = =
$73,500
Current liabilities = =$21,000
3.5
b.
–
= = =
Current assets – Inventory $73,500 Inventory
Quick 3.0
ratio Current liabilities $21,000
Inventory = $73,500 – 3.0($21,000) = $10,500
2-8 a.
Sales Sales
Total assets turnover 2.0
Total assets $150,000
= = =
Sales = 2.0($150,000) = $300,000
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whole or in part.
Chapter 2 CFIN5
b.
Net income Net income
Return on assets 0.06
Total assets $150,000
= = =
Chapter 2 CFIN5
Total assets Sales Sales
= = =3.0
turnover Total assets $750,000
Sales =3($750,000)=$2,250,000
Net income Net income
ROA 0.06
Total assets $750,000
Net income 0.06($750,000) $45,000
= = =
= =
Net profit Net income $45,000
= = =0.02=2.0%
margin Sales $2,250,000
2-11 a.
Sales Sales
Total assets turnover 2.5
Total assets $10,000
= = =
b.
Net income Net income
Return on assets = = = 0.04
Total assets $10,000
= = = =
Net income $400
Net profit margin 0.016 1.6%
Sales $25,000
Alternative solution:
Sales Net income
Return on assets Total assets Sales
Net income
2.5 0.04
Sales
Net income 0.04 0.016 1.6% Net profit margin
Sales 2.5
= ´
= ´ =
= = = =
2-12 (1) Current ratio:
Current assets $340,000
5.0
Current liabilities Current liabilities
= ´ =
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whole or in part.
Chapter 2 CFIN5
(2) Quick ratio:
Current assets-Inventories $340,000 Inventories
1.8
Current liabilities $68,000
–
= ´ =
(3) Current assets = (Cash & Equivalents) + Accounts receivable + Inventories
(4) Inventory turnover:
Cost of goods sold CGS
7.0
Inventory $217,600
= ´ =
Chapter 2 CFIN5
a. EPS = $14,000,000/7,000,000 = $2
b. Book value per share = $35,000,000/7,000,000 = $5
2-15 We are given: ROE = 15% TA turnover = Sales/Total assets = 2.0x
a. From DuPont equation: ROE = ROA x Equity multiplier
Recognize that Total assets/Common equity is simply the inverse of the proportion of the firm that is
b. ROA = (Net profit margin) x (Total assets turnover)
0.06 = Net profit margin x 2.0
Net profit margin = 0.06/2.0 = 0.03 = 3.0%
Chapter 2 CFIN5
a.
Net income
ROA Total assets
=
Net income
0.08 $440,000
=
b. From DuPont equation: ROE = ROA x Equity multiplier
Total assets 1 1
Equity multiplier 1.25
Common equity 1 Debt ratio 1 0.20
= = = =
– –
Chapter 2 CFIN5
Total liabilities $100,000 $60,000
Debt ratio 0.40 40%
Total assets $100,000
–
= = = =
2-19 We are given: % assets financed with equity = 60% Current ratio = 5.0
Total assets turnover = 4.0 Current assets = $150,000
2-20 We are given: P/E ratio = 15.0 Price per share = $30
(1)
Pr ice per share $30
P/E ratio 15.0
EPS EPS
= = =
; EPS = $30/15 = $2
(2)
Net income $120,000
Net profit margin 0.04
Sales Sales
= = =
; Sales = $120,000/0.04 = $3,000,000
Fixed assets Sales $3,000,000 8.0
turnover Net fixed assets Fixed assets
= = =
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whole or in part.
Chapter 2 CFIN5
(4)
Current Current assets CA 5.0
ratio Current liabilities $300,000
= = =
; Current assets = $300,000(5) = $1,500,000