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Fin 221 CH 4 Practice Problems
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5/21/2018 Fin 221 CH 4 Practice Problems
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(Difficulty Levels: Easy, Easy/Medium, Medium, Medium/Hard, and Hard)
PART I !e" and Revised #arry$ver Pr$%lems and &uesti$ns
Multi'le #$ice: Pr$%lems
Notes to Professors: A good bit of relatively simple arithmetic is involved in some of theseproblems, and although the calculations are simple, it will take students time to set up theproblems and do the arithmetic. Please allow for this when assigning problems for a timed test.Also, note that students must know the definitions of a number of ratios to answer the questions.We recommend allowing them to use a formula sheet on eams, and we use the relevant sections ofAppendi ! at the end of the tet.
"he difficulty of the problems depends significantly on #$% whether or not students are
provided with a formula sheet and #&% the amount of time they have to work the problems. 'urdifficulty assessments assume that they have a formula sheet and a (reasonable( amount of timefor the test. Note that problems designated )A*+ are really trivially easy if students have formulasheets, and we use them for inclass qui--es but only on real eams if we want to give out someeasy points.
"o work many of the problems, students must transpose equations and solve for items thatare normally inputs. or eample, the equation for the profit margin is given as Profit margin /Net income 0 *ales . We might have a problem where sales and the profit margin are given andthen require students to find the firm1s net income. Please eplain to students in class before theeam that they will have to transpose terms in the formulas to work some of the eam problems."his should be obvious, but it doesn1t hurt to point it out before the first eam.
Note too that problems $ to 23 are all standalone problems with individuali-ed data, butproblem 2$ has parts a through w, where students are required to calculate ratios based on a given
set of financial statements. "he statements can be changed algorithmically, and this changes thecalculated ratios.
Total assets turnover Answer: a EASY
1. Ramala Corp's sales last year were $48,000, and its total assets were
$25,500. What was its total assets turnover ratio !"!#%
a. 1.88&. 1.
(. 1.10d. 1.21
e. 1.)2
Chapter 4: Analysis of Financial Statements Page 199
#HAPTER A!AL*+I+ - -I!A!#IAL +TATEME!T+
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Times interest earned Answer: c EASY
2. Ru&y Corp's sales last year were $4)5,500, its operatin* (osts were
$)50,000, and its interest (har*es were $10,000. What was the +irm'stimes interest earned !- ratio%
a. 8.2
&. 8.42(. 8.55
d. 8.8e. 8.81
Profit margin on sales Answer: e EASY
). Ro&erts Corp's sales last year were $)00,000, and its net in(ome a+terta/es was $25,000. What was its pro+it mar*in on sales%
a. .5
&. .82(. .
d. 8.1e. 8.))
Return on total assets (ROA) Answer: b EASY
4. Reynolds Corp's total assets at the end o+ last year were $)00,000 and its
net in(ome a+ter ta/es was $25,000. What was its return on total assets%
a. 8.15&. 8.))
(. 8.51d. 8.
e. 8.8
Basic earning ower (BEP) Answer: d EASY
5. Rollins Corp's total assets at the end o+ last year were $)00,000 and its
-! was $5,000. What was its &asi( earnin* power -3%
a. 1.50&. 20.00
(. 22.50d. 25.00
e. 2.50
Return on e!uit" (ROE) Answer: a EASY
. Ralei*h Corp's total (ommon euity at the end o+ last year was $)00,000and its net in(ome a+ter ta/es was $55,000. What was its R#-%
a. 18.))&. 18.
(. 1.00d. 1.))e. 1.
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Price#earnings ratio (P#E) Answer: c EASY
. Rutland Corp's sto( pri(e at the end o+ last year was $)0.25 and its
earnin*s per share +or the year were $2.45. What was its 36- ratio%
a. 11.5&. 12.00
(. 12.)5d. 12.0
e. 1).05
Price#earnings ratio (P#E) Answer: e EASY
8. Rand Corp's sto( pri(e at the end o+ last year was $40.00, and its &oo
value per share was $24.50. What was its 7aret6oo ratio%
a. 1.0)&. 1.18
(. 1.))d. 1.48
e. 1.)
$u Pont e!uation: basic calculation Answer: b EASY
. 7idwest um&er had a pro+it mar*in o+ 5.1, a total assets turnover o+1., and an euity multiplier o+ 1.8. What was the +irm's R#-%
a. 14.)&. 14.(. 14.
d. 15.2e. 15.5
Return on e!uit" (ROE): finding net income Answer: d EASY
10. "n investor is (onsiderin* startin* a new &usiness. !he (ompany wouldreuire $500,000 o+ assets, and it would &e +inan(ed entirely with (ommon
sto(. !he investor will *o +orward only i+ she thins the +irm (anprovide a 15.0 return on the invested (apital, whi(h means that the +irm
must have an R#- o+ 15.0. 9ow mu(h net in(ome must &e e/pe(ted towarrant startin* the &usiness%
a. $45,000
&. $55,000(. $5,000
d. $5,000e. $85,000
Chapter 4: Analysis of Financial Statements Page 201
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$ebt ratio: find t%e debt& given t%e $#A ratio Answer: a EASY
11. Rolle Corp has $500,000 o+ assets, and it uses no de&t::it is +inan(ed
only with (ommon euity. !he new C;# wants to employ enou*h de&t to &rin*the
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Effect of lowering t%e $SO on net income Answer: d 'E$'
15. >ir&y ndustries has sales o+ $110,000 and a((ounts re(eiva&le o+ $12,500,
and it *ives its (ustomers )0 days to pay. !he industry avera*e
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Total assets turnover ratio (TATO) Answer: e 'E$'
18. Ran*oon Corp's sales last year were $400,000, and its year:end total
assets were $)00,000. !he avera*e +irm in the industry has a totalassets turnover ratio !"!# o+ 2.5. !he new C;# &elieves the +irm has
e/(ess assets that (an &e sold so as to &rin* the !"!# down to theindustry avera*e without a++e(tin* sales. y how mu(h must the assets &e
redu(ed to &rin* the !"!# to the industry avera*e%
a. $100,000&. $110,000
(. $120,000d. $1)0,000e. $140,000
'a+imum debt ratio consistent wit% a given TE ratio Answer: b 'E$'
1. " new +irm is developin* its &usiness plan. t will reuire $00,000 o+assets, and it proBe(ts $4)5,000 o+ sales and $)50,000 o+ operatin* (osts
+or the +irst year. !he +irm is uite sure o+ these num&ers &e(ause o+
(ontra(ts with its (ustomers and suppliers. t (an &orrow at a rate o+.5, &ut the &an reuires it to have a !- o+ at least 4.0, and i+ the!- +alls &elow this level the &an will (all in the loan and the +irm
will *o &anrupt. What is the ma/imum de&t ratio the +irm (an use%9int? ;ind the ma/imum dollars o+ interest, then the de&t that produ(esthat interest, and then the related de&t ratio.
a. 4.1&. 4.2
(. 48.d. 50.5e. 51.
Profit margin and ROE Answer: d 'E$'
20. ur*er Corp has $500,000 o+ assets, and it uses only (ommon euity (apitalero de&t. ts sales +or the last year were $00,000, and its net
in(ome a+ter ta/es was $25,000. =to(holders re(ently voted in a newmana*ement team that has promised to lower (osts and *et the return oneuity up to 15. What pro+it mar*in would ur*er need in order to
a(hieve the 15 R#-, holdin* everythin* else (onstant%
a. 8.00&. .50
(. 11.00d. 12.50
e. 14.00
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EBT$A coverage Answer: a 'E$'
21. Re/ Corp's -!
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$u Pont e!uation: effect of reducing costs on ROE Answer: b 'E$'
24. ast year #liver n( had a total assets turnover o+ 1.0 and an euity
multiplier o+ 1.85. ts sales were $200,000 and its net in(ome was$10,000. !he C;# &elieves that the (ompany (ould have operated more
e++i(iently, lowered its (osts, and in(reased its net in(ome &y $5,000without (han*in* its sales, assets, or (apital stru(ture. 9ad it (ut
(osts and in(reased its net in(ome in this amount, &y how mu(h would theR#- have (han*ed%
a. .20
&. .40(. .0d. .80
e. 8.00
Reducing assets to increase t%e turnover and ROE Answer: d 'E$'
25. ast year ell Corp had $200,000 o+ assets, $)00,000 o+ sales, $20,000 o+
net in(ome, and a de&t:to:total:assets ratio o+ 40. !he new C;# &elieves
the +irm has e/(essive +i/ed assets and inventory that (ould &e sold,ena&lin* it to redu(e its total assets to $150,000. =ales, (osts, and netin(ome would not &e a++e(ted, and the +irm would maintain the 40 de&t
ratio. y how mu(h would the redu(tion in assets improve the R#-%
a. 4.&. 4.
(. 5.2d. 5.5
e. 5.8
Effect of reducing costs on ROE Answer: a 'E$'
2
. ast year, Candle Corp had $200,000 o+ assets, $)00,000 o+ sales, $20,000o+ net in(ome, and a de&t:to:total:assets ratio o+ 40. !he new C;#
&elieves a new (omputer pro*ram will ena&le it to redu(e (osts and thusraise net in(ome to $)0,000. "ssets, sales, and the de&t ratio would not
&e a++e(ted. y how mu(h would the (ost redu(tion improve the R#-%
a. 8.))&. 8.
(. .00d. .))e. .
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$u Pont e!uation: c%anging t%e debt ratio Answer: c 'E$'
2. ast year Chantler Corp. had $200,000 o+ assets, $20,000 o+ net in(ome,
and a de&t:to:total:assets ratio o+ )0. Eow suppose the new C;#(onvin(es the president to in(rease the de&t ratio to 45. =ales and
total assets will not &e a++e(ted, &ut interest e/penses would in(rease.9owever, the C;# &elieves that &etter (ost (ontrols would &e su++i(ient to
o++set the hi*her interest e/pense and thus eep net in(ome un(han*ed. yhow mu(h would the (han*e in the (apital stru(ture improve the R#-%
a. ).51
&. ).8(. ).0d. 4.1)
e. 4.4
ROE c%anging wit% debt ratio Answer: e ,AR$
28. ast year Charter Corp. had sales o+ $)00,000, operatin* (osts o+
$25,000, and year:end assets o+ $200,000. !he de&t:to:total:assets ratio
was 25, the interest rate on the de&t was 10, and the +irm's ta/ ratewas )5. !he new C;# wants to see how the R#- would have &een a++e(ted i+the +irm had used a 0 de&t ratio. "ssume that sales and total assets
would not &e a++e(ted, and that the interest rate and ta/ rate would &othremain (onstant. y how mu(h would the R#- (han*e in response to the(han*e in the (apital stru(ture%
a. 5.01&. 5.20
(. 5.)5d. 5.5e. 5.
TE: ma+imum debt constrained b" TE Answer: b ,AR$
2. Cooper n(. e/pe(ts sales ne/t year to &e $)00,000 and operatin* (osts to&e $20,000. !he (ompany will have $200,000 o+ assets, and under the
(urrent plan they will &e +inan(ed with )0 de&t and 0 (ommon euity.!he interest rate on the de&t will &e 10, &ut the !- ratio must &e eptat 4.0 or more. !he +irm's ta/ rate is 40. !he new C;# wants to see how
the R#- would &e a++e(ted i+ the +irm in(reased its de&t ratio to thema/imum (onsistent with the reuired !- ratio. "ssume that sales,
operatin* (osts, assets, the interest rate, and the ta/ rate would allremain (onstant. y how mu(h would the R#- (han*e in response to the
(han*e in the (apital stru(ture%
a. 0.))&. 0.51
(. 0.82d. 1.1
e. 1.)
Chapter 4: Analysis of Financial Statements Page 20
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$SO and its effect on net income Answer: d ,AR$
)0. n*ram n( has the +ollowin* &alan(e sheet?
Cash $10,000 "((ounts paya&le $)0,000
Re(eiva&les 50,000 #ther (urrent lia&ilities 20,000nventories 150,000 on*:term de&t 50,000
Eet +i/edassets
0,000 Common euity 200,000
!otal assets $)00,000 !otal lia&ilities Feuity
$)00,000
ast year the +irm had $15,000 o+ net in(ome on $200,000 o+ sales.
9owever, the new C;# thins that inventories are e/(essive and (ould &elowered su++i(iently to (ause the (urrent ratio to eual the industry
avera*e, 2.5, without a++e(tin* either sales or net in(ome. "ssumeinventories are sold o++ and not repla(ed to *et the (urrent ratio to 2.5,
and the +unds *enerated are used to &uy &a( (ommon sto( at &oo valuewithout (han*in* anythin* else. y how mu(h will the R#- (han*e%
a. 4.0
&. 4.(. 5.28d. 5.54
e. 5.1
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Multi.'art Pr$%lem
!he &alan(e sheet and in(ome statement shown &elow are +or yrd n(, and thedata are to &e used +or the +ollowin* uestions. Eote that the +irm has no
amortiation (har*es, it does not lease any assets, and none o+ its de&t must&e retired durin* the ne/t 5 years notes paya&le will &e rolled over.
"ssume a )0:day year.
""EC- =9--! millions o+ dollars
Cash $ 140.0 "((ounts paya&le $ 800.0"((ts. re(eiva&le 880.0 Eotes paya&le 00.0
nventories 1,)20.0 "((ruals 400.0
!otal (urrentassets
$2,)40.0 !otal (urrent lia&ilities $1,800.0
on*:term &onds 1,000.0
!otal de&t $2,800.0Common sto( 200.0
Retained earnin*s 1,000.0
Eet plant F euip. 1,0.0 !otal (ommon euity $1,200.0
!otal assets $4,000.0 !otal lia&ilities F euity $4,000.0
EC#7- =!"!-7-E! millions o+ dollarsEet sales $ ,000.0
#peratin* (osts 5,5.8
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-alculating ratios given financial statements Answer: c 'ulti.Part
)2. What is the +irm's (urrent ratio%
a. 1.10&. 1.20(. 1.)0
d. 1.40e. 1.50
-alculating ratios given financial statements Answer: e 'ulti.Part
)). What is the +irm's ui( ratio%
a. 0.25&. 0.))
(. 0.41d. 0.4
e. 0.5
-alculating ratios given financial statements Answer: b 'ulti.Part)4. What is the +irm's R#"%
a. 2.0
&. ).0(. ).24
d. ).41e. ).5
-alculating ratios given financial statements Answer: d 'ulti.Part
)5. What is the +irm's R#-%
a. .45&. .)
(. .84d. 10.20
e. 10.4)
-alculating ratios given financial statements Answer: a 'ulti.Part
). What is the +irm's -3%
a. .50&. .5
(. 8.00
d. 8.25e. 8.50
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-alculating ratios given financial statements Answer: c 'ulti.Part
). What is the +irm's !-%
a. 2.82&. 2.8(. ).1)
d. ).)0e. ).4
-alculating ratios given financial statements Answer: e 'ulti.Part
)8. What is the +irm's -!
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-alculating ratios given financial statements Answer: c 'ulti.Part
42. What is the +irm's de&t ratio%
a. 0.0&. 5.0(. 0.0
d. 5.0e. 80.0
-alculating ratios given financial statements Answer: e 'ulti.Part
4). What is the +irm's euity multiplier%
a. 2.&. 2.84
(. ).00d. ).1
e. ).))
-alculating ratios given financial statements Answer: b 'ulti.Part44. What is the +irm's inventory turnover%
a. 4.41
&. 4.55(. 4.
d. 4.8)e. 4.
-alculating ratios given financial statements Answer: e 'ulti.Part
45. What is the +irm's dividends per share%
a. $0.)1&. $0.41
(. $0.51d. $0.1
e. $0.1
-alculating ratios given financial statements Answer: a 'ulti.Part
4. What is the +irm's (ash +low per share%
a. $).1&. $).8
(. $4.01
d. $4.1e. $4.)1
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-alculating ratios given financial statements Answer: c 'ulti.Part
4. What is the +irm's 36- ratio%
a. 10.0&. 12.5(. 15.0
d. 1.5e. 20.0
-alculating ratios given financial statements Answer: e 'ulti.Part
48. What is the +irm's &oo value per share%
a. $1.00&. $1.00
(. $18.00d. $1.00
e. $20.00
-alculating ratios given financial statements Answer: b 'ulti.Part4. What is the +irm's maret:to:&oo ratio%
a. 1.)8
&. 1.5)(. 1.8
d. 1.8)e. 1.8
Multi'le #$ice: #$nce'tual
Note to Professors: We designated many of these questions as being 4)!564. 7owever, theirdifficulty as seen by students will depend on #$% whether they are provided with a formula sheetthat lists the ratio definitions and #&% how long they have to answer the questions. 5f time is notan issue, then many of the questions should be classified as )A*+, but under eam conditions,especially with time pressure, they might be regarded as being 7A8!. *o, consider the amountof time students have when selecting questions for an eam.
5t is important that students understand the relationships between different accountingnumbers, and also how to relate the levels of and changes in various ratios to a company9sfinancial health. 5f one provides students with a list of the ratios and their definitions, such asthe section on hapter ; in Appendi ! , they will spend more time learning relationships andless time memori-ing ratios. "herefore, we recommend providing students with use such a list onthe eams, and letting them know before they read the chapter that this will be done. 'therwise,they will think the questions are relatively hard, and the eam scores will be relatively low. Also,even if provided with the list, most students remember key items like the 8') and the current,P0), and "5) ratios, and the idea behind the !u Pont equation, and that knowledge will be
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Note that the best way for most people to think about answers to some of the questions isto set up simple financial statements and then use those statements to see how certain changeswould affect the ratios. "his procedure should be eplained to students before the eam so theycan practice using it. 7owever, going through this procedure takes more time than workingproblems that >ust involve inserting inputs into a calculator. Please take this into account whenmaking up your eams.
-urrent ratio Answer: a EASY
50. Considered alone, whi(h o+ the +ollowin* would in(rease a (ompanyHs(urrent ratio%
a. "n in(rease in a((ounts re(eiva&le.&. "n in(rease in a((ounts paya&le.
(. "n in(rease in net +i/ed assets.d. "n in(rease in notes paya&le.
e. "n in(rease in a((rued lia&ilities.
'iscellaneous ratios Answer: d EASY
51. " +irmHs new president wants to stren*then the (ompanyHs +inan(ialposition. Whi(h o+ the +ollowin* a(tions would mae it +inan(iallystron*er%
a. n(rease a((ounts paya&le while holdin* sales (onstant.
&. n(rease a((ounts re(eiva&le while holdin* sales (onstant.(. n(rease inventories while holdin* sales (onstant.
d. n(rease -! while holdin* sales (onstant.e. n(rease notes paya&le while holdin* sales (onstant.
'iscellaneous ratios Answer: e EASY
52. + the C-# o+ a +irm were +illin* out a +itness report on a division
mana*er i.e., I*radin*J the mana*er, whi(h o+ the +ollowin* situationswould &e liely to (ause the mana*er to *et a -!!-R KR"
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-urrent ratio Answer: b EASY
5). Whi(h o+ the +ollowin* would indi(ate an improvement in a (ompanyHs
+inan(ial position, holdin* other thin*s (onstant%
a. !he (urrent and ui( ratios &oth de(line.&. !he -!
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'ar*et value ratios Answer: c EASY
5. Whi(h o+ the +ollowin* statements is C#RR-C!%
a. + a +irm has the hi*hest maret6&oo ratio o+ any +irm in itsindustry, then, other thin*s held (onstant, this su**ests that the&oard o+ dire(tors should +ire the president.
&. + a +irm has the hi*hest pri(e6earnin* ratio o+ any +irm in itsindustry, then, other thin*s held (onstant, this su**ests that the
&oard o+ dire(tors should +ire the president.(. !he hi*her the maret6&oo ratio, then, other thin*s held (onstant,
the hi*her one would e/pe(t to +ind the 7aret Malue "dded 7M".d. + a +irm has a history o+ hi*h -(onomi( Malue "dded -M" num&ers
ea(h year, and i+ investors e/pe(t this situation to (ontinue, then
its maret6&oo ratio and 7M" are liely to &e &elow avera*e.e. #ther thin*s held (onstant, the hi*her a +irmHs e/pe(ted +uture *rowth
rate, the lower its 36- ratio is liely to &e.
nventories Answer: e EASY
5. Whi(h o+ the +ollowin* statements is C#RR-C!%
a. #ther thin*s held (onstant, a redu(tion in the inventory turnoverratio will in(rease the R#-.
&. + a +irm in(reases its sales while holdin* its inventories (onstant,then, other thin*s held (onstant, its inventory turnover ratio will
de(rease.(. " redu(tion in inventories held would have no e++e(t on the (urrent
ratio.
d. "n in(rease in inventories held would have no e++e(t on the (urrentratio.
e. + a +irm in(reases its sales while holdin* its inventories (onstant,then, other thin*s held (onstant, its inventory turnover ratio will
in(rease.
0inancial statement anal"sis Answer: a EASY
58. Companies N and > ea(h reported the same earnin*s per share -3=, &ut
Company NHs sto( trades at a hi*her pri(e. Whi(h o+ the +ollowin*statements is C#RR-C!%
a. Company N must have a hi*her 36- ratio.&. Company N must have a hi*her maret:to:&oo ratio.
(. Company N must &e risier.d. Company N must have +ewer *rowth opportunities.
e. Company N must pay a lower dividend.
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'iscellaneous ratios Answer: e EASY
5. 7aple ;urniture re(ently issued new (ommon sto( and used the pro(eeds to
pay o++ some o+ its short:term notes paya&le. !his a(tion had no e++e(ton the (ompanyHs total assets or operatin* in(ome. Whi(h o+ the
+ollowin* e++e(ts would o((ur as a result o+ this a(tion%
a. !he (ompanyHs euity multiplier in(reased.&. !he (ompanyHs &asi( earnin* power ratio in(reased.(. !he (ompanyHs times interest earned ratio de(reased.
d. !he (ompanyHs de&t ratio in(reased.e. !he (ompanyHs (urrent ratio in(reased.
Effects of leverage Answer: a EASY
0. Whi(h o+ the +ollowin* statements is C#RR-C!%
a. " +irm that employs +inan(ial levera*e will have a hi*her euitymultiplier than an otherwise identi(al +irm that has no de&t in its
(apital stru(ture.
&. ond +inan(in* is &etter than sto( +inan(in* +or investors &e(ausein(ome +rom &onds is ta/ed on a more +avora&le &asis than in(ome +romsto(.
(. !he use o+ de&t +inan(in* will tend to lower the &asi( earnin* powerratio, other thin*s held (onstant.
d. "ll else eual, in(reasin* the de&t ratio will in(rease the R#".
e. + two +irms have identi(al sales, interest rate paid, operatin*(osts, and assets, &ut they di++er in the way they are +inan(ed, the
+irm with less de&t will *enerally have the hi*her e/pe(ted R#-.
-urrent ratio Answer: e EASY
1. " +irm wants to stren*then its +inan(ial position. Whi(h o+ the
+ollowin* a(tions would ECR-"=- its (urrent ratio%
a. orrow usin* short:term de&t and use the pro(eeds to repay de&t thathas a maturity o+ more than one year.
&. Redu(e the (ompanyHs daysH sales outstandin* ratio to the industryavera*e and use the resultin* (ash savin*s to pur(hase plant and
euipment.(. Lse (ash to in(rease inventory holdin*s.
d. Lse (ash to repur(hase some o+ the (ompanyHs own sto(.e. ssue new sto( and use some o+ the pro(eeds to pur(hase additional
inventory and hold the remainder o+ the +unds re(eived as (ash.
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Accounts receivable Answer: b EASY
2. Whi(h o+ the +ollowin* statements is C#RR-C!%
a. + a +irm in(reases its sales while holdin* its a((ounts re(eiva&le(onstant, then, other thin*s held (onstant, its daysH salesoutstandin*
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$u Pont anal"sis Answer: a EASY#'E$'
5. Companies 9< and < are &oth pro+ita&le, and they have the same total
assets !", =ales =, return on assets R#", and pro+it mar*in 37.9owever, Company 9< has the hi*her de&t ratio. Whi(h o+ the +ollowin*
statements is C#RR-C!%
a. Company 9< has a hi*her R#- than Company
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2everage effects3 debt management Answer: a 'E$'
8. Whi(h o+ the +ollowin* statements is C#RR-C!%
a. + two +irms di++er only in their use o+ de&tOi.e., they haveidenti(al assets, sales, operatin* (osts, interest rates on theirde&t, and ta/ ratesO&ut one +irm has a hi*her de&t ratio, the +irm
that uses more de&t will have a lower pro+it mar*in on sales.&. + two +irms di++er only in their use o+ de&tOi.e., they have
identi(al assets, sales, operatin* (osts, and ta/ ratesO&ut one +irmhas a hi*her de&t ratio, the +irm that uses more de&t will have a
hi*her pro+it mar*in on sales.(. " +irmHs use o+ de&t will have no e++e(t on its pro+it mar*in on
sales.
d. + one +irm has a hi*her de&t ratio than another, we (an &e (ertainthat the +irm with the hi*her de&t ratio will have the lower !-
ratio, as that ratio depends entirely on the amount o+ de&t a +irmuses.
e. !he de&t ratio as it is *enerally (al(ulated maes an adBustment +orthe use o+ assets leased under operatin* leases, so the de&t ratios o++irms that lease di++erent per(enta*es o+ their assets are still(ompara&le.
0inancial statement anal"sis Answer: c 'E$'
. Whi(h o+ the +ollowin* statements is C#RR-C!%
a. "n in(rease in the
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-as% flows Answer: a 'E$'
1. #ther thin*s held (onstant, whi(h o+ the +ollowin* alternatives would
in(rease a (ompanyHs (ash +low +or the (urrent year%
a. Redu(e the daysH sales outstandin*
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'ar*et value ratios Answer: c 'E$'
5. Whi(h o+ the +ollowin* statements is C#RR-C!%
a. + ;irms " and have the same earnin*s per share and maret:to:&oo
ratio, they must have the same pri(e earnin*s ratio.&. + ;irms " and have the same net in(ome, num&er o+ shares
outstandin*, and pri(e per share, then their maret:to:&oo ratiosmust also &e the same.
(. + ;irms " and have the same net in(ome, num&er o+ shares
outstandin*, and pri(e per share, then their 36- ratios must also ðe same.
d. + ;irms " and have the same 36- ratios, then their maret:to:&ooratios must also &e the same.
e. + ;irm "Hs 36- ratio e/(eeds that o+ ;irm , then is liely to &eless risy and also to &e e/pe(ted to *row at a +aster rate.
Effects of financial leverage Answer: d 'E$'#,AR$
. Companies 9< and < have the same total assets, sales, and operatin*
(osts, and they pay the same interest rate on their de&t. 9owever,(ompany 9< has a hi*her de&t ratio. Whi(h o+ the +ollowin* statements is
C#RR-C!%
a. Company < has a hi*her &asi( earnin* power ratio -3.&. Company 9< has a hi*her &asi( earnin* power ratio -3.
(. + the interest rate the (ompanies pay on their de&t is more thantheir &asi( earnin* power -3, then Company 9< will have the hi*herR#-.
d. + the interest rate the (ompanies pay on their de&t is less thantheir &asi( earnin* power -3, then Company 9< will have the hi*her
R#-.e. Kiven this in+ormation, < must have the hi*her R#-.
'iscellaneous ratios Answer: d 'E$'#,AR$
. + a &an loan o++i(er were (onsiderin* a (ompanyHs reuest +or a loan,whi(h o+ the +ollowin* statements would you (onsider to &e C#RR-C!%
a. !he lower the (ompanyHs !- ratio, other thin*s held (onstant, thelower the interest rate the &an would (har*e the +irm.
&. !he lower the (ompanyHs -!
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-urrent ratio Answer: c 'E$'#,AR$
8. Walter ndustriesH (urrent ratio is 0.5. Considered alone, whi(h o+ the
+ollowin* a(tions would ECR-"=- the (ompanyHs (urrent ratio%
a. Lse (ash to redu(e short:term notes paya&le.&. Lse (ash to redu(e a((ounts paya&le.
(. orrow usin* short:term notes paya&le and use the (ash to in(reaseinventories.
d. Lse (ash to redu(e lon*:term &onds outstandin*.e. Lse (ash to redu(e a((ruals.
-urrent ratio Answer: d 'E$'#,AR$
. =a+e(oHs total (urrent assets are $20 million versus $10 million o+(urrent lia&ilities, while Ris(oHs (urrent assets are $10 million versus$20 million o+ (urrent lia&ilities. oth +irms would lie to IwindowdressJ their end:o+:year +inan(ial statements, and to do so theytentatively plan to &orrow $10 million on a short:term &asis and to thenhold the &orrowed +unds in their (ash a((ounts. Whi(h o+ the statements
&elow &est des(ri&es the results o+ this transa(tion%
a. !he transa(tion would have no e++e(t on the +irmH +inan(ial stren*thas measured &y their (urrent ratios.
&. !he transa(tion would improve &oth +irmsH +inan(ial stren*th asmeasured &y their (urrent ratios.
(. !he transa(tion would lower &oth +irmH +inan(ial stren*th as measured
&y their (urrent ratios.d. !he transa(tions would lower =a+e(oHs +inan(ial stren*th as measured
&y its (urrent ratio &ut raise Ris(oHs (urrent ratio.e. !he transa(tion would raise =a+e(oHs +inan(ial stren*th as measured
&y its (urrent ratio &ut lower Ris(oHs (urrent ratio.
PART II &uesti$ns and Pr$%lems fr$m Pri$r Test an0 n$t used in Part I
Multi'le #$ice: Pr$%lems
EASY#'E$' (456 t%roug% 457)
0inancial statement anal"sis Answer: a
80. Russell =e(urities has $100 million in total assets and its (orporate ta/rate is 40. !he (ompany re(ently reported that its &asi( earnin* power
-3 ratio was 15 and its return on assets R#" was . What was the(ompanyHs interest e/pense%
a. $ 0&. $ 2,000,000(. $ ,000,000
d. $15,000,000e. $18,000,000
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'ar*et rice er s%are Answer: b
81. Gou are *iven the +ollowin* in+ormation? =to(holdersH euity @ $1,250P
pri(e6earnin*s ratio @ 5P shares outstandin* @ 25P and maret6&oo ratio@ 1.5. Cal(ulate the maret pri(e o+ a share o+ the (ompanyHs sto(.
a. $ )).))
&. $ 5.00(. $ 10.00
d. $1.e. $1)).)2
'ar*et#boo* ratio Answer: c
82. 7eyersdale #++i(e =upplies has (ommon euity o+ $40 million. !he(ompanyHs sto( pri(e is $80 per share and its maret6&oo ratio is 4.0.
9ow many shares o+ sto( does the (ompany have outstandin*%
a. 500,000
&. 125,000
(. 2,000,000d. 800,000,000
e. nsu++i(ient in+ormation.
'ar*et#boo* ratio Answer: e
8). =tra( 9ouseware =upplies n(. has $2 &illion in total assets, $0.2
&illion in (urrent lia&ilities, $0. &illion in lon*:term de&t, and $1.2&illion in (ommon euity. !he (ompanyHs )00 million shares o+ (ommonsto( are sellin* at $20 per share. What is =tra(Hs maret6&oo ratio%
a. 1.25
&. 2.5
(. ).15d. 4.40e. 5.00
ROA Answer: d
84. " +irm has a pro+it mar*in o+ 15 on sales o+ $20,000,000. + the +irmhas de&t o+ $,500,000, total assets o+ $22,500,000, and an a+ter:ta/
interest (ost on total de&t o+ 5, what is the +irmHs R#"%
a. 8.4&. 10.
(. 12.0d. 1).)e. 15.1
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TE ratio Answer: b
85. Culver n(. has -! o+ $)00. !he (ompanyHs times interest earned ratio
is .00. Cal(ulate the (ompanyHs interest (har*es.
a. $42.8&. $50.00
(. $40.00d. $0.00
e. $5.)
ROE Answer: c
8. !apley
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'E$' (455 t%roug% 4869)
Profit margin Answer: c
88. Gour (ompany had the +ollowin* &alan(e sheet and in(ome statementin+ormation +or 2005?
alan(e =heet?Cash $ 20"6R 1,000nventories 5,000!otal (urrent assets $,020
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P#E ratio and stoc* rice Answer: b
0. !he Charleston Company is a relatively small, privately owned +irm. ast
year the (ompany had net in(ome o+ $15,000 and 10,000 shares wereoutstandin*. !he owners were tryin* to determine the euili&rium maret
value +or the sto( prior to tain* the (ompany pu&li(. " similar +irmthat is pu&li(ly traded had a pri(e6earnin*s ratio 36- o+ 5.0. Lsin*
only the in+ormation *iven, estimate the maret value o+ one share o+CharlestonHs sto(.
a. $10.00&. $ .50
(. $ 5.00d. $ 2.50
e. $ 1.50
P#E ratio and stoc* rice Answer: e
1. Cleveland Corporation has 100,000 shares o+ (ommon sto( outstandin*, its
net in(ome is $50,000, and its 36- is 8. What is the (ompanyHs sto(
pri(e%
a. $20.00&. $)0.00
(. $40.00d. $50.00
e. $0.00
-urrent ratio and inventor" Answer: b
2. en erry ;arms has $5 million in (urrent assets, $) million in (urrent
lia&ilities, and its initial inventory level is $1 million. !he (ompanyplans to in(rease its inventory, +unded &y additional short:term de&t
notes paya&le. "ssume that the value o+ the remainin* (urrent assetswill not (han*e. !he (ompanyHs &ond (ovenants reuire a (urrent ratio*reater than or eual to 1.5. 9ow mu(h inventory (an &e pur(hased &e+ore
the (ovenants are violated%
a. $0.50 million
&. $1.00 million(. $1.)) milliond. $1. million
e. $2.)) million
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Accounts receivable increase Answer: b
). Cannon Company has enBoyed a rapid in(rease in sales in re(ent years,
+ollowin* a de(ision to sell on (redit. 9owever, the +irm has noti(ed anin(rease in its (olle(tion period. ast year, total sales were $1 million,
and $250,000 o+ these sales were on (redit.
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ROA Answer: e
. 9umphrey 9otelsH operatin* in(ome -! is $40 million. !he (ompanyHs
times interest earned !- ratio is 8.0, its ta/ rate is 40, and its&asi( earnin* power -3 ratio is 10. What is the (ompanyHs return on
assets R#"%
a. .45&. 5.(. 4.))
d. 8.5e. 5.25
ROE Answer: c
. =eler n(. sells all its mer(handise on (redit. t has a pro+it mar*in
o+ 4, days sales outstandin* eual to 0 days, re(eiva&les o+ $150,000,total assets o+ $) million, and a de&t ratio o+ 4. What is the +irmHsreturn on euity R#-% "ssume a )5:day year.
a. .1&. )).4(. ).4
d. 1.0e. 8.1
ROE Answer: b
8. " +irm has a de&t ratio o+ 50. Currently, its interest e/pense is$500,000 on $5,000,000 o+ total de&t outstandin*. ts ta/ rate is 40.
+ the +irmHs R#" is , &y how many per(enta*e points is the +irmHs R#-*reater than its R#"%
a. 0.0&. .0
(. 5.2d. .4
e. .0ROE Answer: d
. "ssume 7eyer Corporation is 100 euity +inan(ed. Cal(ulate the returnon euity R#-, *iven the +ollowin* in+ormation?
-arnin*s &e+ore ta/es $1,500=ales $5,000
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e. 50
TE ratio Answer: e
100. "lum&at Corporation has $800,000 o+ de&t outstandin*, on whi(h it pays
10 annual interest. "lum&atHs annual sales are $),200,000, its avera*eta/ rate is 40, and its net pro+it mar*in is . !he (ompany must
maintain a !- ratio o+ at least 4 times or its &an will re+use to renewits loan, resultin* in &anrupt(y. What is "lum&atHs (urrent !- ratio%
a. 2.4
&. ).4(. ).d. 4.0
e. 5.0
TE ratio Answer: b
101. 7oss 7otors has $8 &illion in assets, and its ta/ rate is 40. !he
(ompanyHs &asi( earnin* power -3 ratio is 12, and its return on
assets R#" is ). What is 7ossH times interest earned !- ratio%
a. 2.25
&. 1.1(. 1.00d. 1.))
e. 2.50
TE ratio Answer: b
102. an(aster 7otors has total assets o+ $20 million. ts &asi( earnin* power
is 25, its return on assets R#" is 10, and the (ompanyHs ta/ rate is40. What is an(asterHs !- ratio%
a. 2.5&. ).0
(. 1.5d. 1.2
e. 0.
EBT$A coverage ratio Answer: a
10). 3eterson 3a(a*in* Corp. has a &asi( earnin* power o+ -3 o+ on $
&illion o+ total assets, and its times interest earned !- ratio is).0. 3etersonHs depre(iation and amortiation e/pense totals $1 &illion.
t has $0. &illion in lease payments and $0.) &illion must *o towards
prin(ipal payments on outstandin* loans and lon*:term de&t. What is3etersonHs -!
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e. 2.
$ebt ratio Answer: c
104. ast year, >ansas #++i(e =upply had $400,000 o+ net in(ome on $24,000,000
o+ sales, its total assets turnover was .0, and the (ompanyHs R#- was15. + the (ompany only +inan(es with de&t and euity, what is the
(ompanyHs de&t ratio%
a. 0.20&. 0.)0
(. 0.))d. 0.0
e. 0.
Profit margin Answer: a
105. !he 7erriam Company has determined that its return on euity R#- is 15.
+ its de&t ratio is 0.)5 and its total assets turnover is 2.8, what isthe pro+it mar*in%
a. ).48
&. 5.42(. .
d. 2.45e. 12.82
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'E$'#,AR$ (486 t%roug% 4887)
0inancial statement anal"sis Answer: e
10. Collins Company had the +ollowin* partial &alan(e sheet and (ompletein(ome statement in+ormation +or 2005?
3artial alan(e =heet?
Cash $ 20"6R 1,000
nventories 2,000!otal (urrent assets $ ),020
Eet +i/ed assets 2,80!otal assets $ ,000
n(ome =tatement?
=ales $10,000Cost o+ *oods sold ,200
-! $ 800
nterest 10 400-! $ 400
!a/es 40 10Eet in(ome $ 240
!he industry avera*e
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e. $)1,
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Basic earning ower Answer: d
108. "aron "viation re(ently reported the +ollowin* in+ormation?
Eet in(ome $500,000R#" 10nterest e/pense $200,000
!he (ompanyHs avera*e ta/ rate is 40. What is the (ompanyHs &asi(
earnin* power -3%
a. 14.12
&. 1.(. 1.))
d. 20.e. 22.50
P#E ratio and stoc* rice Answer: e
10.
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-urrent ratio and inventor" turnover Answer: b
111. Ne++erson Co. has $2 million in total assets and $) million in sales. !he(ompany has the +ollowin* &alan(e sheet?
Cash $ 100,000 "((ounts paya&le $ 200,000
"((ounts re(eiva&le 200,000 "((ruals 100,000nventories 500,000 Eotes paya&le 200,000Eet +i/ed assets 1,200,000 on*:term de&t 00,000
Common euity 800,000!otal lia&ilities
!otal assets $2,000,000 and euity $2,000,000
Ne++erson wants to improve its inventory turnover to the industry avera*eo+ 10.0. !he (han*e is not e/pe(ted to have an e++e(t on sales. +su((ess+ul, the (ompany would use the +reed:up (ash +rom the redu(tion in
inventories and use hal+ o+ it to redu(e notes paya&le and the other hal+to redu(e (ommon euity. + su((ess+ul, what will &e Ne++ersonHs (urrent
ratio%
a. 1.4)&. 1.50(. 2.50
d. 2.00e. 1.20
-redit olic" and ROE Answer: c
112.
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$u Pont e!uation Answer: d
11). "ustin F Company has a de&t ratio o+ 0.5, a total assets turnover ratio
o+ 0.25, and a pro+it mar*in o+ 10. !he oard o+
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ROE Answer: d
11. Keor*ia -le(tri( reported the +ollowin* in(ome statement and &alan(e
sheet +or the previous year?
alan(e =heet?Cash $ 100,000
nventories 1,000,000"((ounts re(eiva&le 500,000
Current assets $1,00,000!otal de&t $4,000,000
Eet +i/ed assets 4,400,000 !otal euity 2,000,000!otal assets $,000,000 !otal (laims $,000,000
n(ome =tatement?
=ales $),000,000#peratin* (osts 1,00,000#peratin* in(ome -! $1,400,000
nterest 400,000
!a/a&le in(ome -! $1,000,000!a/es 40 400,000Eet in(ome $ 00,000
!he (ompanyHs interest (ost is 10, so the (ompanyHs interest e/pense
ea(h year is 10 o+ its total de&t.
While the (ompanyHs +inan(ial per+orman(e is uite stron*, its C;# isalways looin* +or ways to improve. !he C;# has noti(ed that the
(ompanyHs inventory turnover ratio is (onsidera&ly weaer than theindustry avera*e, whi(h is .0. "s an e/er(ise, the C;# ass what the
(ompanyHs R#- would have &een last year i+ the +ollowin* had o((urred?
!he (ompany maintained the same sales, &ut redu(ed inventories enou*hto a(hieve the industry avera*e inventory turnover ratio.
Cash *enerated +rom the inventory redu(tion was used to redu(e the(ompanyHs outstandin* de&t. =o, the (ompanyHs total de&t would have
&een $4 million less the +reed:up (ash +rom the improvement ininventory poli(y.
"ssume euity does not (han*e and all earnin*s are paid out as
dividends.
Lnder this s(enario, what would have &een the (ompanyHs R#- last year%
a. 2.0
&. 2.5
(. )0.)d. )1.5e. )).0
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ROE Answer: c
11. Roland F Company has a new mana*ement team that has developed an
operatin* plan to improve upon last yearHs R#-. !he new plan would maethe de&t ratio 55, whi(h will result in interest (har*es o+ $,000 per
year. -! is proBe(ted to &e $25,000 on sales o+ $20,000, it e/pe(tsto have a total assets turnover ratio o+ ).0, and the avera*e ta/ rate
will &e 40. What does Roland F Company e/pe(t its R#- to &e%
a. 1.5
&. 21.82(. 2.
d. 44.44e. 51.25
,AR$ (4885 t%roug% 48
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e. 12.0
ROE and refinancing Answer: d
11. "urillo -uipment Company "-C proBe(ted ne/t yearHs R#- to &e .
9owever, the +irm (an in(rease its R#- &y re+inan(in* some hi*h interest&onds (urrently outstandin*. !he +irmHs total de&t will remain at
$200,000 and the de&t ratio will hold (onstant at 80, &ut the interestrate on the re+inan(ed de&t will &e 10. !he rate on the old de&t is14. Re+inan(in* will not a++e(t sales, whi(h are proBe(ted to &e
$)00,000. !he &asi( earnin* power will &e 11 and the +irmHs ta/ rate is40. + "-C re+inan(es, what will &e its proBe(ted new R#-%
a. ).0
&. 8.2(. 10.0d. .0
e. 18.
TE ratio Answer: d
120. om&ardi !ru(in* Company has the +ollowin* data?
"ssets $10,000
3ro+it mar*in ).0!a/ rate 40
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P#E ratio and stoc* rice Answer: b
122. GSHs &alan(e sheet and in(ome statement are *iven &elow?
alan(e =heet?
Cash $ 50 "((ounts paya&le $ 100"6R 150 Eotes paya&le 0
nventories )00 on*:term de&t 10 00;i/ed assets 500 Common euity 20 shares 200!otal assets $1,000 !otal lia&ilities and euity $1,000
n(ome =tatement?
=ales $1,000Cost o+ *oods sold 855
-! $ 145nterest 0-! $ 5
!a/es )).))) 25Eet in(ome $ 50
!he industry avera*e inventory turnover is 5, the interest rate on the
+irmHs lon*:term de&t is 10, 20 shares are outstandin*, and the sto(Hs36- is 8.0. + GS in(reased its inventory turnover to the industryavera*e, i+ it used +reed up +unds to &uy &a( (ommon sto( at the
(urrent maret pri(e and thus to redu(e (ommon euity, and i+ sales, the(ost o+ *oods sold, and the 36- ratio remained (onstant, &y what dollar
amount would its sto( pri(e in(rease%
a. $ ).))&. $ .(. $ 8.5
d. $10.00
e. $12.50
$u Pont e!uation and debt ratio Answer: e
12). Company " has sales o+ $1,000, assets o+ $500, a de&t ratio o+ )0, andan R#- o+ 15. Company has the same sales, assets, and net in(ome as
Company ", &ut its R#- is )0. What is Hs de&t ratio% 9int? e*in &ylooin* at the
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0inancial statement anal"sis Answer: a
124. " (ompany has Bust &een taen over &y new mana*ement that &elieves it (an
raise earnin*s &e+ore ta/es -! +rom $00 to $1,000, merely &y (uttin*overtime pay and redu(in* (ost o+ *oods sold. 3rior to the (han*e, the
+ollowin* data applied?
!otal assets $8,000
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Sales increase needed Answer: b
12. Ri(ardo -ntertainment re(ently reported the +ollowin* in(ome statement?
=ales $12,000,000
Cost o+ *oods sold ,500,000-! $ 4,500,000
nterest 1,500,000-! $ ),000,000!a/es 40 1,200,000
Eet in(ome $ 1,800,000
!he (ompanyHs C;#, ;red 7ert, wants to see a 25 in(rease in net in(omeover the ne/t year. n other words, his tar*et +or ne/t yearHs net
in(ome is $2,250,000. 7ert has made the +ollowin* o&servations?
Ri(ardoHs operatin* mar*in -!6=ales was ).5 this past year.7ert e/pe(ts that ne/t year this mar*in will in(rease to40.
Ri(ardoHs interest e/pense is e/pe(ted to remain (onstant.
Ri(ardoHs ta/ rate is e/pe(ted to remain at 40.
#n the &asis o+ these num&ers, what is the per(enta*e in(rease in sales
that Ri(ardo needs in order to meet 7ertHs tar*et +or net in(ome%
a. 2.2
&. .)8(. 2.50
d. 48.44e. 25.00
Multiple Part:
(The following information applies to the next two problems.)
;amaHs ;ren(h aery has a return on assets R#" o+ 10 and a return on
euity R#- o+ 14. ;amaHs total assets eual total de&t plus (ommon euitythat is, there is no pre+erred sto(. ;urthermore, we now that the +irmHs
total assets turnover is 5.
$ebt ratio and $u Pont anal"sis Answer: c
12. What is ;amaHs de&t ratio%
a. 14.2
&. 28.00(. 28.5
d. 55.5e. 1.4)
Page 242 Chapter 4: Analysis of Financial Statements
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Profit margin and $u Pont anal"sis Answer: a
128. What is ;amaHs pro+it mar*in%
a. 2.00
&. 4.00(. 4.))
d. 5.))e. .00
(The following information applies to the next two problems.)
7iller !e(hnolo*ies re(ently reported the +ollowin* &alan(e sheet in its
annual report all num&ers are in millions o+ dollars?
Cash $ 100 "((ounts paya&le $ )00"((ounts re(eiva&le )00 Eotes paya&le 500
nventory 500 !otal (urrent lia&ilities $ 800!otal (urrent assets $ 00 on*:term de&t 1,500
!otal de&t $2,)00Common sto( 500Retained earnin*s 400
Eet +i/ed assets 2,)00 !otal (ommon euity $ 00!otal assets $),200 !otal lia&ilities and euity $),200
7iller also reported sales revenues o+ $4.5 &illion and a 20 R#- +or this
same year.
ROA Answer: d
12. What is 7illerHs R#"%
a. 2.500
&. ).125(. 4.25
d. 5.25e. .82
-urrent ratio Answer: b
1)0. 7iller !e(hnolo*ies is (onsiderin* issuin* $)00 million in notes paya&leto pur(hase new +i/ed assets +or this pro&lem, i*nore depre(iation. +this plan were (arried out, what would 7illerHs (urrent ratio &e
immediately +ollowin* the transa(tion%
a. 0.455
&. 0.818(. 1.01d. 1.125
e. 1.800
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(The following information applies to the next three problems.)
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Sales& $SO& and inventor" turnover Answer: b
1)). When reviewin* the (ompanyHs per+orman(e +or 2005, its C;# o&served that
the (ompanyHs inventory turnover ratio was &elow the industry avera*einventory turnover ratio o+ .0. n addition, the (ompanyHs ewell oomeran*s?
2005 2004
Cash $ 100,000 $ 85,000
"((ounts re(eiva&le 4)2,000 )50,000nventories 1,000,000 00,000!otal (urrent assets $1,5)2,000 $1,1)5,000
Eet +i/ed assets ),000,000 2,800,000!otal assets $4,5)2,000 $),)5,000
"((ounts paya&le $ 00,000 $ 545,000Eotes paya&le 800,000 00,000
!otal (urrent lia&ilities $1,500,000 $1,445,000on*:term de&t 1,200,000 1,200,000
Common sto( 1,500,000 1,000,000Retained earnin*s ))2,000 20,000!otal (ommon euity $1,8)2,000 $1,20,000
!otal lia&ilities and euity $4,5)2,000 $),)5,000
>ewell oomeran*s has never paid a dividend on its (ommon sto(. >ewell issued$1,200,000 o+ lon*:term de&t in 1. !his de&t was non:(alla&le and is
s(heduled to mature in 202. "s o+ the end o+ 2005, none o+ the prin(ipal onthis de&t has &een repaid. "ssume that 2004 and 2005 sales were the same in
&oth years.
0inancial statement anal"sis Answer: a
1)4. Whi(h o+ the +ollowin* statements is most (orre(t%
a. >ewellHs (urrent ratio in 2005 was hi*her than it was in 2004.&. >ewellHs inventory turnover ratio in 2005 was hi*her than it was in2004.
(. >ewellHs de&t ratio in 2005 was hi*her than it was in 2004.d. =in(e retained earnin*s in(reased, the (ompany must have paid no
dividends.
e. e(ause +i/ed assets turnover in(reased slower than total assets, thetotal assets turnover is *reater than the +i/ed assets turnover.
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-urrent ratio Answer: c
1)5. ewellHs days sales outstandin* was 40 days. !he industryavera*e
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Chapter 4: Analysis of Financial Statements Page 24
#HAPTER A!+1ER+ A!D +L2TI!+
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1= Total assets turnover Answer: a EASY
Sales 3)4,555
Total assets 367,755
TAT 8944
2
= Times interest earned Answer: c EASY
Sales 37,755
Operating costs 375,555
Operating income (EBIT) 347,755
Interest charges 385,555
TIE rati$ 4977
)= Profit margin on sales Answer: e EASY
Sales 3:55,555
Net income 367,555
Pr$fit mar;in 49::?7
Sales$ay 3589=
Company 'SO 897
In$ustry 'SO 6797
E*cess 'SO 8>95Cash lo+ rom re$ucing the 'SO 3,48795=
!lternative Calculation,
!" at in$ustry 'SO 3=,>49?
Change in !" 3,48795=
Additi$nal !et Inc$me 37=9
1= $a"s sales outstanding ($SO) Answer: a 'E$'
Cre$it perio$ 5
Sales 375,555
Sales'ay 38,6
"eceiva%les 37,555'SO >97
#redit 'eri$d . D+ >975
1= $a"s sales outstanding ($SO): da"s of free credit Answer: c 'E$'
Sales 375,555
Sales'ay 38,6
"eceiva%les 37,555
'SO >97
'ays late 85
Days $f free credit 6=
18= Total assets turnover ratio (TATO) Answer: e 'E$'
Sales 355,555
Total assets 355,555
Target T!TO 6975
Target assets # Sales Target T!TO 38>5,555
Asset reducti$n 385,555
1= 'a+imum debt ratio consistent wit% a given TE ratio Answer: b 'E$'
Assets 3>55,555
+ales 37,555
'eratin; c$sts 375,555
'eratin; inc$me (EIT) 347,555
TIE 95
MaBimum interest eB'ense 368,675
Interest rate =97
22= $u Pont e!uation: effect of reducing assets on ROE Answer: c 'E$'
Ans"er: ld !e"
Sales 3655,555 3655,555
Original assets 3867,555 3867,555
"e$uction in assets 367,555
Ne+ assets 3855,555
T!TO 89>5 6955
Proit margin 7987< 79875,555Equity 3865,555 3?5,555
"OE 8>9>>=< 6696669>>=7,555 36>7,555
EBIT 37,555 37,555
Interest pai$ 37,555 386,555
Ta*a%le income 35,555 36,555
Ta*es 385,755 34,575
Net income 38?,755 38,?75
RE 8955< 849>??
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