1. Info Technics Inc. has an equity multiplier of 2.75. The company’s assets are financed with some combination of long-term debt and common equity. What is the company’s debt ratio?
a. 25.00% b. 36.36% c. 52.48% d. 63.64% e. 75.00%
2. Refer to Self-Test Problem 1. What is the company’s common equity ratio?
a. 25.00% b. 36.36% c. 52.48% d. 63.64% e. 75.00%
3. Cutler Enterprises has current assets equal to $4.5 million. The company’s current ratio is 1.25. What is the firm’s level of current liabilities (in millions)?
a. $0.8 b. $1.8 c. $2.4 d. $2.9 e. $3.6
4. Jericho Motors has $4 billion in total assets. The other side of its balance sheet consists of $0.4 billion in current liabilities, $1.2 billion in long-term debt, and $2.4 billion in common equity. The company has 500 million shares of common stock outstanding, and its stock price is $25 per share. What is Jericho’s market-to-book ratio?
a. 2.00 b. 4.27 c. 5.21 d. 3.57 e. 1.42
5. Taylor Toys Inc. has $6 billion in assets, and its tax rate is 35 percent. The company’s basic earning power (BEP) is 10 percent, and its return on assets (ROA) is 2.5 percent. What is Taylor’s times-interest-earned (TIE) ratio?
a. 1.625 b. 2.000 c. 2.433 d. 2.750 e. 3.000
(The following financial statements apply to the next six Self-Test Problems.)
Roberts Manufacturing Balance Sheet
December 31, 2002
(Dollars in Thousands)
Cash $ 200 Accounts payable $ 205
Receivables 245 Notes payable 425
Inventory 625 Other current liabilities 115
Total current assets $1,070 Total current liabilities $ 745
Net fixed assets 1,200 Long-term debt 420
Common equity 1,105
Total assets $2,270 Total liabilities and equity $2,270
Roberts Manufacturing Income Statement
for Year Ended December 31, 2002
(Dollars in Thousands)
Sales $2,400
Cost of goods sold:
Materials $1,000
Labor 600
Heat, light, and power 89
Indirect labor 65
Depreciation 80 1,834
Gross profit $ 566
Selling expenses 175
General and administrative expenses 216
Earnings before interest and taxes (EBIT) $ 175
Interest expense 35
Earnings before taxes (EBT) $ 140
Taxes (40%) 56
Net income (NI) $ 84
6. Calculate the current ratio.
a. 1.20 b. 1.33 c. 1.44 d. 1.51 e. 1.60
7. Calculate the asset management ratios, that is, the inventory turnover ratio, fixed assets turnover, total assets turnover, and days sales outstanding. Assume a 365-day year.
a. 3.84; 2.00; 1.06; 37.26 days d. 3.84; 2.00; 1.24; 34.10 days
b. 3.84; 2.00; 1.06; 35.25 days e. 3.84; 2.20; 1.48; 34.10 days
c. 3.84; 2.00; 1.06; 34.10 days
8. Calculate the debt and times-interest-earned ratios.
a. 0.39; 3.16 b. 0.39; 5.00 c. 0.51; 3.16 d. 0.51; 5.00 e. 0.73; 3.16
9. Calculate the profitability ratios, that is, the profit margin on sales, return on total assets, return on common equity, and basic earning power of assets.
a. 3.50%; 4.25%; 7.60%; 8.00% d. 3.70%; 3.50%; 8.00%; 8.00%
b. 3.50%; 3.70%; 7.60%; 7.71% e. 4.25%; 3.70%; 7.60%; 8.00%
c. 3.70%; 3.50%; 7.60%; 7.71%
10. Calculate the market value ratios, that is, the price/earnings ratio, the price/cash flow ratio, and the market/book value ratio. Roberts had an average of 10,000 shares outstanding during 2002, and the stock price on December 31, 2002, was $40.00.
a. 4.21; 2.00; 0.36 d. 4.76; 2.44; 1.54
b. 3.20; 1.75; 1.54 e. 4.76; 2.44; 0.36
c. 3.20; 2.44; 0.36
11. Use the Extended Du Pont Equation to determine Roberts’ return on equity.
a. 6.90% b. 7.24% c. 7.47% d. 7.60% e. 8.41%
12. Lewis Inc. has sales of $2 million per year, all of which are credit sales. Its days sales outstanding is 42 days. What is its average accounts receivable balance? Assume a 365-day year.
a. $230,137 b. $266,667 c. $333,333 d. $350,000 e. $366,750
13. Southeast Jewelers Inc. sells only on credit. Its days sales outstanding is 73 days, and its average accounts receivable balance is $500,000. What are its sales for the year? Assume a 365-day year.
a. $1,500,000 b. $2,500,000 c. $2,000,000 d. $2,750,000 e. $3,000,000
14. A firm has total interest charges of $20,000 per year, sales of $2 million, a tax rate of 40 percent, and a profit margin of 6 percent. What is the firm’s times-interest-earned ratio?
a. 10 b. 11 c. 12 d. 13 e. 14
15. Refer to Self-Test Problem 14. What is the firm’s TIE, if its profit margin decreases to
3 percent and its interest charges double to $40,000 per year?
a. 3.0 b. 2.5 c. 3.5 d. 4.2 e. 3.7
16. Wilson Watercrafts Company has $12 billion in total assets. The company’s basic earning power (BEP) is 15 percent, and its times-interest-earned ratio is 4.0. Wilson’s depreciation and amortization expense totals $1.28 billion. It has $0.8 billion in lease payments and $0.4 billion must go towards principal payments on outstanding loans and long-term debt. What is Wilson’s EBITDA coverage ratio?
a. 1.00 b. 1.33 c. 1.50 d. 2.10 e. 2.35
17. A fire has destroyed many of the financial records at Anderson Associates. You are assigned to piece together information to prepare a financial report. You have found that the firm’s return on equity is 12 percent and its debt ratio is 0.40. What is its return on assets?
a. 4.90% b. 5.35% c. 6.60% d. 7.20% e. 8.40%
18. Refer to Self-Test Problem 17. What is the firm’s debt ratio if its ROE is 15 percent and its ROA is 10 percent?
a. 67% b. 50% c. 25% d. 33% e. 45%
19. Rowe and Company has a debt ratio of 0.50, a total assets turnover of 0.25, and a profit margin of 10 percent. The president is unhappy with the current return on equity, and he thinks it could be doubled. This could be accomplished (1) by increasing the profit margin to 14 percent and (2) by increasing debt utilization. Total assets turnover will not change. What new debt ratio, along with the 14 percent profit margin, is required to double the return on equity?
a. 0.55 b. 0.60 c. 0.65 d. 0.70 e. 0.75
20. Altman Corporation has $1,000,000 of debt outstanding, and it pays an interest rate of 12 percent annually. Altman’s annual sales are $4 million, its federal-plus-state tax rate is 40 percent, and its net profit margin on sales is 10 percent. If the company does not maintain a TIE ratio of at least 5 times, its bank will refuse to renew the loan, and bankruptcy will result. What is Altman’s TIE ratio?
a. 9.33 b. 4.44 c. 2.50 d. 4.00 e. 6.56
21. Refer to Self-Test Problem 20. What is the maximum amount Altman’s EBIT could decrease and its bank still renew its loan?
a. $186,667 b. $45,432 c. $66,767 d. $47,898 e. $143,925
22. Pinkerton Packaging’s ROE last year was 2.5 percent, but its management has developed a new operating plan designed to improve things. The new plan calls for a total debt ratio of 50 percent, which will result in interest charges of $240 per year. Management projects an EBIT of $800 on sales of $8,000, and it expects to have a total assets turnover ratio of 1.6. Under these conditions, the federal-plus-state tax rate will be 40 percent. If the changes are made, what return on equity will Pinkerton earn?
a. 2.50% b. 13.44% c. 13.00% d. 14.02% e. 14.57%
(The following financial statement applies to the next three Self-Test Problems.)
Baker Corporation Balance Sheet
December 31, 2002
Cash and marketable securities $ 50 Accounts payable $ 250
Accounts receivable 200 Accrued liabilities 250
Inventory 250 Notes payable 500
Total current assets $ 500 Total current liabilities $1,000
Net fixed assets 1,500 Long-term debt 250
Common stock 400
Retained earnings 350
Total assets $2,000 Total liabilities and equity $2,000
23. What is Baker Corporation’s current ratio as of December 31, 2002?
a. 0.35 b. 0.65 c. 0.50 d. 0.25 e. 0.75
24. If Baker uses $50 of cash to pay off $50 of its accounts payable, what is its new current ratio after this action?
a. 0.47 b. 0.44 c. 0.54 d. 0.33 e. 0.62
25. If Baker uses its $50 cash balance to pay off $50 of its long-term debt, what will be its new current ratio?
a. 0.35 b. 0.50 c. 0.55 d. 0.60 e. 0.45
(The following financial statements apply to the next Self-Test Problem.)
Whitney Inc. Balance Sheet
December 31, 2002
Total current liabilities $100
Long‑term debt 250
Common stockholders’ equity 400
Total assets $750 Total liabilities and equity $750
Whitney Inc. Income Statement
for Year Ended December 31, 2002
Sales $1,000
Cost of goods sold (excluding depreciation) $550
Other operating expenses 100
Depreciation 50
Total operating costs 700
Earnings before interest and taxes (EBIT) $ 300
Interest expense 25
Earnings before taxes (EBT) $ 275
Taxes (40%) 110
Net income $ 165
26. What are Whitney Inc.’s basic earning power and ROA ratios?
a. 30%; 22% b. 40%; 30% c. 50%; 22% d. 40%; 22% e. 40%; 40%
(The following financial statements apply to the next Self-Test Problem.)
Cotner Enterprises Balance Sheet
December 31, 2002
Total current liabilities $ 300
Long-term debt 500
Common stockholders’ equity 450
Total assets $1,250 Total liabilities and equity $1,250
Cotner Enterprises Income Statement
for Year Ended December 31, 2002
Sales $1,700
Cost of goods sold (excluding depreciation) $1,190
Other operating expenses 135
Depreciation 75
Total operating costs 1,400
Earnings before interest and taxes (EBIT) $ 300
Interest expense 54
Earnings before taxes (EBT) $ 246
Taxes (35%) 86
Net income $ 160
27. What are Cotner Enterprise’s basic earning power and ROA ratios?
a. 20%; 12.8% d. 17.5%; 12.8%
b. 24%; 12.8% e. 24%; 10.5%
c. 24%; 15.8%
28. Dauten Enterprises is just being formed. It will need $2 million of assets, and it expects to have an EBIT of $400,000. Dauten will own no securities, so all of its income will be operating income. If it chooses to, Dauten can finance up to 50 percent of its assets with debt that will have a 9 percent interest rate. Dauten has no other liabilities. Assuming a 40 percent federal-plus-state tax rate on all taxable income, what is the difference between the expected ROE if Dauten finances with 50 percent debt versus the expected ROE if it finances entirely with common stock?
a. 7.2% b. 6.6% c. 6.0% d. 5.8% e. 9.0%
29. Helen’s Fashion Designs recently reported net income of $3,500,000. The company has 700,000 shares of common stock, and it currently trades at $25 a share. The company continues to expand and anticipates that one year from now its net income will be $4,500,000. Over the next year the company also anticipates issuing an additional 100,000 shares of stock, so that one year from now the company will have 800,000 shares of common stock. Assuming the company’s price/earnings ratio remains at its current level, what will be the company’s stock price one year from now?
a. $25.25 b. $27.50 c. $28.125 d. $31.00 e. $33.00
30. Henderson Chemical Company has $5 million in sales. Its ROE is 10 percent and its total assets turnover is 2.5´. The company is 60 percent equity financed. What is the company’s net income?
a. $95,750 b. $105,300 c. $110,250 d. $120,000 e. $145,000
31. Bradberry Bolts Inc. recently reported the following information:
Net income $750,000
ROA 6%
Interest expense $210,000
The company’s tax rate is 35 percent. What is the company’s basic earning power (BEP)?
a. 7.25% b. 8.33% c. 9.45% d. 10.00% e. 10.91%
ANSWERS
1. d. 2.75 = A/E
E/A = 1/2.75
E/A = 36.36%.
D/A = 1 – E/A
= 1 – 36.36%
= 63.64%.
2. b. From Self-Test Problem #1 above, E/A = 36.36%.
3. e. CA = $4.5 million; CA/CL = 1.25.
$4.5/CL = 1.25
1.25(CL) = $4.5
CL = $3.6 million.
4. c. TA = $4,000,000,000; CL = $400,000,000; LT debt = $1,200,000,000; CE = $2,400,000,000; Shares outstanding = 500,000,000; P0 = $25; M/B = ?
Book value = ![clip_image002[3]](https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhLi3pqW6-ypcvCSaooPljgOs3ZoVwReSsMeXYYU_Q4In9JZt_pRnWGazieE5bhJRY61RKV1u_r6l_-LlgyDmNahNmEivD6uZaeWewH1S3eGz4X27wv147IgLx-I8f8kYsYNQzlRKy3Hy4/s1600-h/clip_image002%25255B3%25255D%25255B2%25255D.gif "clip_image002[3]"){kind=small}
M/B = ![clip_image004[3]](https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgRZEtYDENpphSGl0ylc9fFHShK0dWAhVMUGV_Fh1LGuK2RVWmYNm2E6Nsn10ThgfbslZXByJccsWJ8-iz7GGOHsEytl57GXDt2gS64NN2eYOAa3w1xX-uXrMMi-4-PgqtqXLJGVVvCORs/s1600-h/clip_image004%25255B3%25255D%25255B2%25255D.gif "clip_image004[3]"){kind=small}
5. a. TA = $6,000,000,000; T = 35%; EBIT/TA = 10%; ROA = 2.5%; TIE = ?
![clip_image006[3]](https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj00aB_PoN8dFWTT_91Ny02m7QkEF4TCy7R63LRjQQy8JvquTigFzDNKE4vo47ev7ehra2VMkLaCzvyicq69p_NdzlkuPahjdbCAehzNW38D56k2nnfYOo8o_o5SWFvpHP_II3oeFQju7A/s1600-h/clip_image006%25255B3%25255D%25255B2%25255D.gif "clip_image006[3]"){kind=small}
EBIT = $600,000,000.
![clip_image008[3]](https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhUEw4QxdsRI3nVost7P4E0ynrG15B5Rhyphenhyphen2z1I0TbWvUY7-7dzuaITNA886iXhNJsOUhcA0rRM5B7UUTjn4EO1rj9B3Wz6wTqOV1OjSYwdlywUuTHXshmpXXssDZ5yghy3VC38rKZFGlTs/s1600-h/clip_image008%25255B3%25255D%25255B2%25255D.gif "clip_image008[3]"){kind=small}
NI = $150,000,000.
Now use the income statement format to determine interest so you can calculate the firm’s TIE ratio.
|
![clip_image009[3]](https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhp5URy0nhR3chBsvx76ENo2d_iKHFdCke9-t_XxijSeSsiLEpj8FNEwdx9NeQorI4HEbDEHGlM9egNuycY8S5h-87NSIX7Kas2swx2BpgWU-CUCnsVD6U2TxPFoJCxgfedpTHAXq_dmJw/s1600-h/clip_image009%25255B3%25255D%25255B2%25255D.gif "clip_image009[3]"){kind=small}
INT 369,230,769
EBT $230,769,231 EBT = $150,000,000/0.65
Taxes (35%) 80,769,231
NI $150,000,000 See above.
TIE = EBIT/INT
= $600,000,000/$369,230,769
= 1.625.
6. c.
![clip_image011[3]](https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjffnAn3q8aYcwLJJoMnyN3ZittX7GopfjMxNP90p0DCTZDaNOGnNuh_oxEHXHcUrp2BkFIb0z7ZiBZ2B4338iQB0PPP2pa0vlm-zKc92oavZ5U1zJu53_-BdPcolQKai4VsQIWQvycaXw/s1600-h/clip_image011%25255B3%25255D%25255B2%25255D.gif "clip_image011[3]")
7. a.
![clip_image013[3]](https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgeFQFMIdvlvnda12vi5rsX8PSyPLugDp9Pecb5L7n3xBxuPRU-DJJRJUvQn-mnr-JEPUq_2FuH7YMuJB9cWKdHoFYBsh3bzxQYOaUoqKsLPK-mY1j4m_eTqCbCgxGj1ISPLi98sFaFnLY/s1600-h/clip_image013%25255B3%25255D%25255B2%25255D.gif "clip_image013[3]")
![clip_image015[3]](https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgBSrpsPvglwJKPuFO0U0Onx6-nQKowF__KUH5oBBLWxDifQyJvco4DkvarBBZLf64rIM3Bd0_I13gTKcwDjx8HIYi578ROHuOccwT_haUfbwz4INs120bYYH9xTt0uUUr7vNP7krl33Ms/s1600-h/clip_image015%25255B3%25255D%25255B2%25255D.gif "clip_image015[3]")
![clip_image017[3]](https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEitQN4hd9WlGWua2sGcz9dWkL2oRLgwULAkEj5QzqOP89uCFNWP8xTDNXWusIH1EC72N0X5hxEb25EWQpkY3I1Bew-aMe2WB7Zb4QekvIQwjcnhyphenhyphensahdLRrkG_nRDwiehp5QjsIzWu-XEI/s1600-h/clip_image017%25255B3%25255D%25255B2%25255D.gif "clip_image017[3]")
![clip_image019[3]](https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhJuF9TIWrt-8iRIfi1dadlfigoT-IWpOlrjpopQsr8vNaS-L2vdF5H17Wb92tinA2uM1MIvflkjHhUIwm2V7QmPxpJwKu5lZJy7ISmYifgfZ3cfo96NayT1Ck1OKRJ8A_0n_rIj50db0w/s1600-h/clip_image019%25255B3%25255D%25255B2%25255D.gif "clip_image019[3]")
8. d. Debt ratio = Total debt/Total assets = $1,165/$2,270 = 0.51 = 51%.
TIE ratio = EBIT/Interest = $175/$35 = 5.00´.
9. b.
![clip_image021[3]](https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh55cv_sktDhCZq6G1Nnj5S-NPfkoC8GGx9cZizj5b8I4asiBobf49LOHB8umhDzoj7MHeF4fEYqW3lMEnjJ0O6GRenJB59Wxd7pHO3j5hvWEyWWPexqM0dPNhjBPEvnetZYIVr45x52OE/s1600-h/clip_image021%25255B3%25255D%25255B2%25255D.gif "clip_image021[3]")
![clip_image023[3]](https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhyTMYd46LM_xhlf2MTcbrA2HG39cjEG9KBNrOqTDVKrdIB3uaTug5niceFhv8fNaGF5xFADb1gs2HI0kYgnXVlNyPM9jTBfMSwfsBPnhUtKA9A3piZ1XyC2RNDIUedkdg1NuTjb-PKj9k/s1600-h/clip_image023%25255B3%25255D%25255B2%25255D.gif "clip_image023[3]")
![clip_image025[3]](https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEimEFu1E1igDmBSJP5TLiIChazMcdg6YYaIie1ogYTdmGCIPRDnWpAAmP0M36v5XS9KJL9pk_JYSPMEnwVdyLAqvuOe9iB01Tg0yEQhp1i3hyphenhypheneQInGelp56-jtEbd3_szEHFKdUOLRYx4c/s1600-h/clip_image025%25255B3%25255D%25255B2%25255D.gif "clip_image025[3]")
![clip_image027[3]](https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjekHPLgsybIbplVVvaqBfCDBuMjtQIv4eyswB0MRJ0E-aBAo1dyLRz3FQ-uxWusBFNXCfYcEqL5akzLFgnbNRmiNrwzXOyqsuz8zpJaQ5Fbh3pBchIo7UP-RoMnILlna3SykJBMPQxibI/s1600-h/clip_image027%25255B3%25255D%25255B2%25255D.gif "clip_image027[3]")
10. e.
![clip_image029[3]](https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEifS6Uu5ZB9nEAqHT0ZDvCNId0TSCj_inRdyPmbtoNPVu8Mq3ilR1Ktq1TuNusYy3R0Vgj67zp2KdFsTIkRCBISV4hQAjTRakp24SouSdtCkDlbyIpN-VzOqaAPEjPtk4ng0oUs3uT7L9M/s1600-h/clip_image029%25255B3%25255D%25255B2%25255D.gif "clip_image029[3]")
P/E ratio = ![clip_image031[3]](https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgw9glzQ9XFdyiOLl8sXEluVe4BUgkQBHtxujpyWNCQ7z3IrvohAXGekPRzjHsqL2f2l0ZMHSfvJo8oJ94a02jtl6zJjA2S4l5uQtmq98mtRkc7gy95odA79OaLhE_ueZSc0QAk9WIZXZA/s1600-h/clip_image031%25255B3%25255D%25255B2%25255D.gif "clip_image031[3]"){kind=small}
![clip_image033[3]](https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhtkO1GzbClkSOlX2nE-XU4mGZBjtKvIP2p3tAGdfPIvkcIZZ0Yt6NmBjWK08rfVgffp1TtZ0c7gVr3kPbcchUNkgbiv8j94yGBNqtjlRzf9ugsrRETAi8x_ejkpV4VGU641KQKSntUrZE/s1600-h/clip_image033%25255B3%25255D%25255B2%25255D.gif "clip_image033[3]"){kind=small}
Cash flow/share = ![clip_image035[3]](https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjif2XbEpdZznWv3qxQp0LRtbgnuNvPrBlNdqQWzKzFZzaKOaI-kxdVO4ciMhXm9v0d1VIdTwCAY1lrWA7sU4M4MXDNCjnMNn8enrFAPu3p6qjCUjcWVBk9CrPDTjG7OwaEIG3YFQtJ_tk/s1600-h/clip_image035%25255B3%25255D%25255B2%25255D.gif "clip_image035[3]"){kind=small}
![clip_image037[3]](https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjtMGQfW-Mmkl9j807B4pzLs6b7zV-TMSnFoIbmyJ10RNqUto2e0JJJkc4_de6RY8avYDs6M2g3NLw3Hwc4B6N6TS4LM4dhMy5IRFDyMA-zRmqe4IBKSLyDuS8VlvU3mjqZ2uJlbfa0cP0/s1600-h/clip_image037%25255B3%25255D%25255B2%25255D.gif "clip_image037[3]"){kind=small}
Price/cash flow = ![clip_image039[3]](https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhAorYZdGEzfHqseoRfOZg-uaGXuC80Fl9_roG6GERc41ZhQ0slDqpG-qq8EtUp0LilJP2Az9kdB3aW05VJFOdkQ8yIOYjyNlkUlAonWlNj3cbVJlXje0HtiSA3aLjzBG2i2Yh6IkWpu_M/s1600-h/clip_image039%25255B3%25255D%25255B2%25255D.gif "clip_image039[3]"){kind=small}
![clip_image041[3]](https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhO4HovEISmZRx_3-r5MOlCe4nvTh3tkQnn-jGBGpzsDz88FpkPYVfllq98GETrQmkujVJdjyKvkCDfdV06wXkfgzbCLNCEsF9wO-jtRKXSMjyxR8IFz4VSkEmmTRsx_8awVQp2mNUa1Sg/s1600-h/clip_image041%25255B3%25255D%25255B2%25255D.gif "clip_image041[3]")
11. d. ROE = Profit margin × Total assets turnover × Equity multiplier
=
![clip_image043[3]](https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgs38_jGg6tOCaEOgtal68jfiWDPUhQ6gcr9H0CZB02hMIPayZ91NUWtA5oa4aDiy4Sqp5BkcnV9ePU4Rzyr6MVnvnBoSFDSByHzAG6Rkz_Gm3iYKtHFHHPbgHvUX81PwCjJFfV6OtLbeo/s1600-h/clip_image043%25255B3%25255D%25255B2%25255D.gif "clip_image043[3]")
= 0.0760 = 7.60%.
12. a. DSO =
![clip_image045[3]](https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjJiNp3z622ezrfXQwpksyQvga4iizCb-fu14QZWBgZ-fQOHFOQnoix_cll6S-rI3GRsq5rdvPZV_yKbNun0c5M2uYj8gktUJzRHdFpY7crkQSJpeMG1-e_k6UBwa_gebV6ScWhaSvEeNQ/s1600-h/clip_image045%25255B3%25255D%25255B2%25255D.gif "clip_image045[3]"){kind=small}
42 days =
![clip_image047[3]](https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjSchWtEdhsgIhlf5Y3VCcAwBaIchxzvAmBgV633k2w7sXQ3qOD5yhg1KtNwwZcVstP3afpGzrTL9ndxanVhjO4LG3QxJseFN8Qy8VCCPGeeqqzVbsML0l7dJDmTudNaqbQRCqG1jHXaeU/s1600-h/clip_image047%25255B3%25255D%25255B2%25255D.gif "clip_image047[3]"){kind=small}
AR = $230,137.
13. b. DSO = Accounts receivable/(Sales/365)
73 days = $500,000/(Sales/365)
73(Sales/365) = $500,000
Sales = $2,500,000.
14. b. Net income = $2,000,000(0.06) = $120,000.
Earnings before taxes = $120,000/(1 – 0.4) = $200,000.
EBIT = $200,000 + $20,000 = $220,000.
TIE = EBIT/Interest = $220,000/$20,000 = 11´.
15. c. Net income = $2,000,000(0.03) = $60,000.
Earnings before taxes = $60,000/(1 – 0.4) = $100,000.
EBIT = $100,000 + $40,000 = $140,000.
TIE = EBIT/Interest = $140,000/$40,000 = 3.5´.
16. e. TA = $12,000,000,000; EBIT/TA = 15%; TIE = 4; DA = $1,280,000,000; Lease payments = $800,000,000; Principal payments = $400,000,000; EBITDA coverage = ?
EBIT/$12,000,000,000 = 0.15
EBIT = $1,800,000,000.
4 = EBIT/INT
4 = $1,800,000,000/INT
INT = $450,000,000.
EBITDA = EBIT + DA
= $1,800,000,000 + $1,280,000,000
= $3,080,000,000.
EBITDA coverage ratio =
![clip_image049[3]](https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhWYG053NWeZvqIbVp_nhjQi5idP5xcA6GzQI_ulRAZ5FC_9nAGTdUbB71N88jJ3K7dDFlv789VXdoMCd7MHmcv2FywMwiy5XttgjxsR4_U3NdbPHhs6qHzdceOdpvLnletoOCqntDWFMA/s1600-h/clip_image049%25255B3%25255D%25255B2%25255D.gif "clip_image049[3]"){kind=small}
=
![clip_image051[3]](https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhaP8dV-kKv9mQwez2I5KMWDa84YJM0m3gPk4F5uD7ghXkzHRiKxjoNDIcpYryLKutfqbpjVbyo-_XDpfxNDu1M0cD06Cc89lSISUMbjYex-wVPf795SKJjIXgvggwovOYYvIVslf_I7Ks/s1600-h/clip_image051%25255B3%25255D%25255B2%25255D.gif "clip_image051[3]")
= ![clip_image053[3]](https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiIj8LC1maeSVIozXk9r50T0blYoMiN45uowdoWQHL-0HW37f7pex5Hoe2BaRAFTDBQFDk_t3X4tYjwR5Ez9AZbSCqlMn4_cWAWcP_juS5VoD_NzofONNzqJA4dqWLeVgr7qEqgTEQr0FY/s1600-h/clip_image053%25255B3%25255D%25255B2%25255D.gif "clip_image053[3]"){kind=small}
17. d. If Total debt/Total assets = 0.40, then Total equity/Total assets = 0.60, and the equity multiplier (Assets/Equity) = 1/0.60 = 1.667.
![clip_image055[3]](https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg9b4CaVhhJotesWZItJSurSk8FV9CTfRHf9Rgl9rNUutJcd3maBWizpfVXcLXQ2zJym-zbKwijwVgMksH1IyuX_9dt0yO7FyFcmaQCpPbe98I2_nT9u_hYsUdF-9iexlziBSjy1dHF7F0/s1600-h/clip_image055%25255B3%25255D%25255B2%25255D.gif "clip_image055[3]"){kind=small}
![clip_image057[3]](https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjv-5iltChpxupqnRUVrJKtXqIK3XdoM0q6khEfv3H8XgYwic_-MDQnbSIKaI_Uow27cf196pVsMYG9kKZ7E-rBN7-CHnysXGvbC08fuY_M4sy2IXFBA6rQX4WpoLFHs2XwMbyAQoZLwTA/s1600-h/clip_image057%25255B3%25255D%25255B2%25255D.gif "clip_image057[3]"){kind=small}
![clip_image059[3]](https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiiY4lrEBam21b6xgCaeY8w4FKZplSk1r4TbxTr2muHay6LfenVnl-CQnXE4PAUmVVh0XdmDPinPwkz-YBB4CyqBEBUd33gqeCYWhm_wgCZBvHlggXnF9IEjok33PewWs_HVvAnycjHg2I/s1600-h/clip_image059%25255B3%25255D%25255B2%25255D.gif "clip_image059[3]"){kind=small}
ROE = ROA × EM
12% = ROA × 1.667
ROA = 7.20%.
18. d. ROE = ROA × Equity multiplier
15% = 10% × TA/Equity
1.5 = TA/Equity.
Equity/TA = 1/1.5 = 0.67.
Debt/TA = 1 – Equity/TA = 1 – 0.67 = 0.33 = 33%.
19. c. If Total debt/Total assets = 0.50, then Total equity/Total assets = 0.50 and the equity multiplier (Assets/Equity) = 1/0.50 = 2.0.
ROE = PM × Total assets turnover × EM.
Before: ROE = 10% × 0.25 × 2.00 = 5.00%.
After: 10.00% = 14% × 0.25 × EM; thus EM = 2.8571.
Equity multiplier =
![clip_image061[3]](https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjuxc0SMttrpi500ZW1YMpvGjXzWUt6Gjk2jBzcS-RVkqiTVpmmBwtpC6ll6KBvl2BTdn4yLpFVmDMr83iXk0hPQ4BDOBPp3N0WFPTrBDN5gqCIJjVwojsb7vd8Z1-Mj5tXRoECeRHVB2E/s1600-h/clip_image061%25255B3%25255D%25255B2%25255D.gif "clip_image061[3]"){kind=small}
2.8571 =
![clip_image063[3]](https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiEKwYiKOf4T99mgl8U_JK27KeguT2kfn4Q3MQT8zYT5SQk1QxrXN_OeRtUByFPugriLGMAcoCiy6iM3CJ6NKQk9wTr-21zFokUtqMnAhyphenhyphen3WJ9-GMRFStA8LSXZaGeZkGIsQ4-PoCjO4-E/s1600-h/clip_image063%25255B3%25255D%25255B2%25255D.gif "clip_image063[3]"){kind=small}
0.35 = Equity/Assets.
Debt/TA = 1 – Equity/TA = 100% – 35% = 65%.
20. e. TIE = EBIT/Interest, so find EBIT and Interest.
Interest = $1,000,000(0.12) = $120,000.
Net income = $4,000,000(0.10) = $400,000.
Pre-tax income = $400,000/(1 – T) = $400,000/0.6 = $666,667.
EBIT = $666,667 + $120,000 = $786,667.
TIE = $786,667/$120,000 = 6.56×.
21. a. TIE = EBIT/INT
5 = EBIT/$120,000
EBIT = $600,000.
From Self-Test Problem #20, EBIT = $786,667, so EBIT could decrease by $786,667 – $600,000 = $186,667.
22. b. ROE = Profit margin × Total assets turnover × Equity multiplier
= NI/Sales × Sales/TA × TA/Equity.
Now we need to determine the inputs for the equation from the data that were given. On the left we set up an income statement, and we put numbers in it on the right:
Sales (given) $8,000
Cost NA
EBIT (given) $ 800
Interest (given) 240
EBT $ 560
Taxes (40%) 224
Net income $ 336
Now we can use some ratios to get some more data:
Total assets turnover = S/TA = 1.6´ (given).
D/A = 50%, so E/A = 50%, and therefore TA/E = 1/(E/A) = 1/0.5 = 2.00´.
Now we can complete the Extended Du Pont Equation to determine ROE:
ROE = $336/$8,000 ´ 1.6 ´ 2.0 = 13.44%.
23. c. Baker Corporation’s current ratio equals Current assets/Current liabilities = $500/$1,000 = 0.50´.
24. a. Baker Corporation’s new current ratio equals ($500 – $50)/($1,000 – $50) = $450/$950 = 0.47´.
25. e. Only the current assets balance is affected by this action. Baker’s new current ratio = ($500 – $50)/$1,000 = $450/$1,000 = 0.45´.
26. d. Whitney’s BEP ratio equals EBIT/Total assets = $300/$750 = 40%.
Whitney’s ROA equals Net income/Total assets = $165/$750 = 22%.
27. b. Cotner’s BEP ratio equals EBIT/Total assets = $300/$1,250 = 24%.
Cotner’s ROA equals Net income/Total assets = $160/$1,250 = 12.8%.
28. b. Known data: Total assets = $2,000,000; EBIT = $400,000; kd = 9%, T = 40%.
D/A = 0.5 = 50%, so Equity = 0.5($2,000,000) = $1,000,000.
D/A = 0% D/A = 50%
EBIT $400,000 $400,000
Interest 0 90,000 *
Taxable income $400,000 $310,000
Taxes (40%) 160,000 124,000
Net income (NI) $240,000 $186,000
*If D/A = 50%, then half of assets are financed by debt, so Debt = 0.5($2,000,000) = $1,000,000. At a 9 percent interest rate, INT = 0.09($1,000,000) = $90,000.
For D/A = 0%, ROE = NI/Equity = $240,000/$2,000,000 = 12%. For D/A = 50%, ROE = $186,000/$1,000,000 = 18.6%. Difference = 18.6% – 12.0% = 6.6%.
29. c. The current EPS is $3,500,000/700,000 shares or $5.00. The current P/E ratio is then $25/$5 = 5.00´. The new number of shares outstanding will be 800,000. Thus, the new EPS = $4,500,000/800,000 = $5.625. If the shares are selling for 5 times EPS, then they must be selling for $5.625(5) = $28.125.
30. d. Step 1: Calculate total assets from information given.
Sales = $5 million.
2.5´ = Sales/TA
2.5´ =
![clip_image065[3]](https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEig4ZXkSAIb6C25W-exE8zFlKiADi7rZdz8agP-obNGT7fhUrQ0IqKaaYHUyEkgaUdyBHOPS6JLWra-4-huti7AjPgECATaF5Rd2lzSGx0gJY__1ca1WYWnyZl37dYEsE0xG53MlWnfPo8/s1600-h/clip_image065%25255B3%25255D%25255B2%25255D.gif "clip_image065[3]"){kind=small}
Assets = $2,000,000.
Step 2: Calculate net income.
There is 40% debt and 60% equity, so Equity = $2,000,000 ´ 0.6 = $1,200,000.
ROE = NI/S ´ S/TA ´ TA/E
0.10 = NI/$5,000,000 ´ 2.5 ´ $2,000,000/$1,200,000
0.10 =
![clip_image067[3]](https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEienemH1JpeI096cxQaRnkpOXjXUTuNpfNULIf7WvD0iZuLVJbd-NEKd1dnI6SqnxF976udecs1mwNcCbUzD7WiqoLWRlj1MBpxu2Rw-hmXK24IF6SA6T80qGDB3Tn-THpQHziv2-ue874/s1600-h/clip_image067%25255B3%25255D%25255B2%25255D.gif "clip_image067[3]"){kind=small}
$500,000 = 4.1667(NI)
$120,000 = NI.
31. e. Given ROA = 6% and net income of $750,000, then total assets must be $12,500,000.
ROA =
![clip_image069[3]](https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjvE7HFOofi5P2QEGN3gZ55AJ0ylbTHrLkYMdjIrw0Zsup7qjfbHtFLZmk1WaakSlpzgY0qTyhU_rzKPKw1tuM4LSTA1IZ8ad_CWFh2Gdzrn6DHlzZJlXvS1jD6xgRp6t_YsZ-ZVo1yE_4/s1600-h/clip_image069%25255B3%25255D%25255B2%25255D.gif "clip_image069[3]"){kind=small}
6% =
![clip_image071[3]](https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgTbNePwwqmfmWwL4e5azFHh4_EnCkzCQKtLtiqAMjQUuqe17MQRid6Z-diWYKiKWpapz_xh9mGbg-sGtSxwTGMezKz752sf12jpWUzoVIty8PoKIHT4SAvSJNTc-Sq-Z85hpZqSsUblEs/s1600-h/clip_image071%25255B3%25255D%25255B2%25255D.gif "clip_image071[3]"){kind=small}
TA = $12,500,000.
To calculate BEP, we still need EBIT. To calculate EBIT construct a partial income statement:
EBIT $1,363,846 ($210,000 + $1,153,846)
Interest 210,000 (Given)
EBT $1,153,846 $750,000/0.65
Taxes (35%) 403,846
NI $ 750,000
BEP =
![clip_image073[3]](https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg9OGYAsBY48swdLSK512j-oFIggb359yF_tomPEuMSPSUEo3h2MBT90bhb8QRBEdXRahiZdo4e_YMc-XLh21MDPglqfoyfH9o-JtOvbr5dBRV9A63hXfBVDtEA51WDv0UYwiiYc5vYxVk/s1600-h/clip_image073%25255B3%25255D%25255B2%25255D.gif "clip_image073[3]"){kind=small}
=
![clip_image075[3]](https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhCJyXphcCu1M6wqFhtvGjwJq_swY3i9ZXL3Z-XT2c_IcoFMbRJQaQqGBQNC_hro1C90sWprNWm2aYRVmFwIpctc0PP8enj1vdYbVCo0vzuwAQ8kCZs4poNFUA1-aad2KTVUek9DOvGj9w/s1600-h/clip_image075%25255B3%25255D%25255B2%25255D.gif "clip_image075[3]"){kind=small}
= 0.1091 = 10.91%.
