CPA REVIEW SCHOOL OF THE PHILIPPINES Manila MANAGEMENT ADVISORY SERVICES FINANCIAL FINANCI AL STATEMENT STATEMENT ANALYSIS ANALYSIS
THEORY 1. When a balance balance sheet amount amount is related related to an income income statement statement amount amount in computing computing a ratio, ratio, a. The income income statemen statementt amount should should be convert converted ed to an average average for for the year year.. b. Comparisons with industry ratios are not meaningful. meaningful. c. The balance balance sheet sheet amount amount should should be converted converted to to an average average for the year. year. d. The ratio ratio loses loses its histor historica icall perspe perspecti ctive ve becaus becausee a beginni beginningng-ofof-the the-y -year ear amount amount is combined with an end-of-the-year amount.
2. How are are financia financiall ratios ratios used in decision decision maing! maing! a. Th They ey can can help help iden identi tify fy the the reas reasons ons for succ succes esss and and fail failur uree in busi busine ness ss,, but decis decisio ion n maing re"uires information beyond the ratios. b. They remove the uncertainty of the business environment. c. They aren#t aren#t useful because because decision decision maing is too too comple$. comple$. d. They give give clear clear signals signals about the appropri appropriate ate action action to to tae. %. & useful useful tool tool in financi financial al statement statement analys analysis is is the the common-si'e common-si'e financi financial al statement statement.. What does this tool enable the financial analyst to do! a. (valuate (valuate financial financial statement statementss of companies companies within within a given industry industry of appro$im appro$imately ately the same value. b. )etermine which companies in the same industry are at appro$imately the same stage of development. c. Compare Compare the mi$ of assets, assets, liabili liabilitie ties, s, capital, capital, revenue, revenue, and e$penses e$penses within within a company company over time or between companies within a given industry without respect to relative si'e. d. &scertain &scertain the relative relative potentia potentiall of companies companies of similar similar si'e in differ different ent industrie industries. s. *. Which of the following following is not revealed revealed on a common common si'e si'e balance balance sheet! sheet! a. Th Thee debt debt str struct uctur uree of a fir firm. m. b. The capital structure of a firm. c. The peso peso amou amount nt of asse assets ts and and liabi liabilit lities ies.. d. The distri distributio bution n of assets assets in which which funds funds are invested. invested. +. f a transaction transaction causes total total liabilitie liabilitiess to decrease but does not affect affect the owners# e"uity, e"uity, what change if any, an y, will occur in total assets! a. &ssets will be increased. c. o change in total assets. b. &ssets will be decreased. d. one of the above. . /ast year, year, a business business had no long-ter long-term m investments investments00 this year year long term investme investments nts amount amount to 1,. 1,. n a hori'o hori'onta ntall analy analysis sis the change in long-t long-term erm investm investments ents should should be e$pressed as a. &n absolu absolute te value value of 1, 1,, , and and an incre increase ase of of 13 b. &n absolute value of 1, and an increase of 1,3 c. &n absolute absolute value of of 1, 1, and and no value value for a percentage percentage change d. o change in in any terms terms because because there was no investment investment in in the previous previous year. year. 4. n a set of compara comparativ tivee financ financial ial statem statement ents, s, you observed observed a gradual gradual decline decline in the net of gross ratio, i.e., between net sales and gross sales. sales. This indicates that5 a. There is is a stiffe stiffening ning in the the grant of discounts discounts to the custom customers. ers. b. The discount period is being lengthened. c. There is adherence adherence to the collection collection policies policies of the company company.. d. 6ale 6aless volum volumee is decr decrea easi sing ng..
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7. Which of these these ratios ratios are measure measuress of a company# company#ss profitabil profitability! ity! 1. (arnings per share +. 8eturn on assets 2. Current ratio . nventory turnover %. 8eturn on sales 4. 8eceivables turnover *. )ebt-e"uity ratio 7. rice-earnings ratio a. &ll eight ratios. c. 1, %, +, , 4, and 7 only. b. 1, %, +, and 7 only. d. 1, %, and + only 9. Which ratio ratio is most most helpful helpful in appraisi appraising ng the li"uidit li"uidity y of current current assets! assets! a. Current ratio. c. )ebt ratio. b. &cid-test ratio. d. &ccounts receivable turnover. 1. Which one of the following ratios ratios would provide a best measure of li"uidity! li"uidity! &. 6ales minus returns to total debt. :. To Total tal assets minus minus goodwill to total e"uity. e"uity. C. Current assets assets minus inventories to current liabilities. liabilities. ). et profit minus dividends to interest interest e$pense. 11. orth :an is analy'ing :elle Corp.#s financial statements for a possible e$tension e$tension of credit. :elle#s "uic ratio is significantly better than the industry average. Which of the following factors should orth consider as possible limitation of using this ratio when evaluating :elle#s creditworthiness! a. ;luctuatin ;luctuating g maret prices prices of short-term short-term investm investments ents may adversely adversely affect affect the ratio. ratio. b. ncreasing maret prices for :elle#s :elle#s inventory may adversely affect the ratio. ratio. c. :elle may need need to sell its its available-for available-for-sal -salee investments investments to meet meet its current current obligation obligations. s. d. :elle may may need to li"uidat li"uidatee its inventory inventory to to meet its its long-term long-term obligatio obligations. ns. 12. The ratio of analytical measurements which m measures easures the productivity of assets regardless regardless of capital structure is a. Current ratio. c. ratio. b. )ebt ratio. d. 8eturn on total assets. 1%. How are the following following used in the calculation calculation of the dividend-pay-ou dividend-pay-outt with only common stoc outstanding! a. b. c. )ividends per share )enominator )enominator umerator (arnings per share umerator ot used )enominator :oo value per share ot used umerator ot used
ratio for a company d. umerator ot used )enominator
1*. &n investor has been given several financial ratios for an enterprise but none of the financial reports. Which combination of ratios can be used to derive return on e"uity! &. ?aret-to-boo-value ratio ratio and total-debt-to-total-assets total-debt-to-total-assets ratio. :. rice-to-earnings ratio, earnings per share, share, and net profit profit margin. C. rice-to-earnings ratio and return-on-assets ratio. ). et profit margin, margin, total assets turnover, turnover, and e"uity multiplier. multiplier. 1+. Which of the following actions actions will increase a company#s company#s "uic ratio! a. 8educe inventories inventories and use the proceeds proceeds to reduce reduce long-ter long-term m debt. debt. b. 8educe inventories and use the proceeds to reduce current liabilities. c. ssue short-ter short-term m debt and and use the the proceeds proceeds to purchase purchase inventory inventory.. d. ssue long-term long-term debt debt and use the proceeds proceeds to to purchase purchase fi$ed fi$ed assets. assets. e. ssue e"uity and use use the the proceeds proceeds to purchase purchase inventory inventory.. 1. @n )ecember %1, 1991, orthpar orthpar Co. collected a receivable receivable due from a maAor customer. customer. Which of the following ratios would be increased by this transaction! a. nventory turnover ratio. c. Current ratio. b. 8eceivable turnover ratio. d.
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14. Bac 6ons, nc. has a 2 to 1 acid test ="uic> ratio. This ratio would decrease to less less than 2 to 1 if the company a. urcha urchased sed invent inventory ory on open open account account.. b. 6old merchandise on open account that earned a normal gross margin. c. Collec Collected ted an account account receiv receivabl able. e. d. aid aid an accou account nt paya payabl ble. e. 17. The ratio that measures a firmDs ability to to generate earnings from its its resources is &. )aysD sales in inventory. C. )aysD sales in receivables. :. 6ales to woring capital. ). &sset turnover. 19. n compar comparing ing the curren currentt ratios ratios of two companie companies, s, why is it invalid invalid to assume assume that the company with the higher current ratio is the better company! a. The curre current nt ratio ratio includ includes es asset assetss other other than cash cash.. b. & high current ratio ratio may indicate inade"uate inventory on hand. c. & high high current current ratio may may indicate indicate inefficient inefficient use of various various assets assets and liabili liabilities ties.. d. The two compan companies ies may define define worin woring g capital capital in differ different ent terms. terms. 2. ?abuhay Corp. has current assets of 17, and current liabilities liabilities of %,. Which of the following transactions would improve ?abuhay#s current ratio! a. 8efinancing 8efinancing a , long-term long-term mortga mortgage ge with with a short-t short-term erm note. note. b. Collecting 2, of short-term accounts receivable. c. urchasing urchasing 1, 1, of merchand merchandise ise inventory inventory with with a short-ter short-term m accounts accounts payable. payable. d. aying aying *, *, of shor short-t t-term erm accoun accounts ts payable payable.. 21. & company has a current current ratio of 2 to 1. The ratio will will decrease if the company a. 8eceives 8eceives a +3 stoc dividend dividend on one one of its maretable maretable securit securities. ies. b. 6ells merchandise for more than cost and records the sale using the perpetual inventory method. c. ays a large large account account payable payable which which had been been a curren currentt liabilit liability y. d. :orrow :orrow cash cash on a si$si$-mon month th note. note. 22. 8ecording cash dividend payment payment when declaration was recorded earlier would a. ncrea ncrease se both both current current ratio ratio and and woring woring capit capital al b. )ecreases both current ratio and woring capital c. Have Have no effect effect on curre current nt ratio ratio or earni earnings ngs per per share share d. ncrease ncrease current current ratio but no effect effect on woring woring capital. capital. 2%. &:C Corpora Corporati tion on has a curren currentt ratio of 2 to 1 and a "uic "uic ratio ratio =acid test> test> of 1 to 1. & transaction that would change :ondDs "uic ratio but not its current ratio is the &. paymen paymentt of accoun accounts ts payable payable.. :. sale sale of invent inventory ory on accou account nt at cost cost.. C. collec collectio tion n of account accountss receiva receivable. ble. ). sale of short-term short-term maretab maretable le securities securities for cash that results results in a profit. profit. 2*. & company# company#ss current ratio ratio is 2.2 to 1 and the "uic ratio is 1. to 1 at the beginning of the year. &t the end of the year, year, the company has a current ratio of 2.+ to 1 and a "uic ratio of .7 to .1 Which Which of the following could could help e$plain the divergence divergence in the ratios from the beginning to the end of the year! a. &n increa increase se in invent inventory ory level levelss during during the year year.. b. &n increase in credit sales in relationship to sales c. &n increase increase in the the use of of payables payables during during the current current year. year. d. &n increase increase in the the use of of payables payables during during the current current year. year. 2+. f the ratio of total liabilities liabilities to e"uity increases, a ratio that must also increase is &. Times interest earned. C. 8eturn on e"uity. :. To Total tal liabilities to total assets. ). The current ratio.
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2. The maret maret value value of a firmDs firmDs outstandi outstanding ng common common shares shares will be higher higher,, every everythin thing g else else e"ual, if &. nvestors have a lower re"uired return return on e"uity. e"uity. :. nvestors e$pect lower dividend growth. growth. C. nvestors have longer e$pected holding periods. ). nvestors have shorter e$pected holding periods. 24. n a comparison of 1992 to 1991, eir Co.#s inventory turnover ratio increased substantially substantially although sales and inventory amounts were essentially unchanged. Which of the following statements e$plains the increased inventory turnover ratio! a. Cost Cost of of goods goods sold sold dec decre reas ased ed.. b. &ccounts receivable turnover increased. c. To Total tal asset asset turnove turnoverr incr increas eased. ed. d. Eross Eross profit profit percen percentag tagee decrea decreased sed.. 27. ?ini$ Co. has a high sales-to-woring-capital sales-to-woring-capital ratio. This could indicate a. Th Thee firm firm is under underca capi pita tali li'e 'ed. d. b. The firm is liely to have li"uidity problems. c. Woring ring capital capital is not not profita profitably bly utili utili'ed 'ed.. d. Th Thee firm firm is is not not prof profit itabl able. e. 29. f, Aust prior to the period of rising prices, prices, a company company changed its inventory measureme measurement nt from ;;@ to /;@, the effect in the ne$t period would be to a. b. c. d. Current ratio ncrease )ecrease ncrease )ecrease nventory turnover ncrease )ecrease )ecrease ncrease %. When compared to a debt-to-assets ratio, ratio, a debt-to-e"uity ratio would &. :e about the same same as the debt-to-assets debt-to-assets ratio. ratio. :. :e higher than the debt-to-assets ratio. C. :e lower than the debt-to-assets ratio. ). Have no relationship relationship at all to to the debt-to-assets ratio. %1. &ssume that a companyDs debt ratio ratio is currently +3. t plans to purchase fi$ed fi$ed assets either by using borrowed funds for the purchase or by entering into an operating lease. The companyDs debt ratio as measured by the balance sheet will &. ncrease whether the assets are purchased or leased. :. ncrease if the the assets are purchased, and remain unchanged if the assets are are leased. C. ncrease if the the assets are purchased, and decrease if the assets are are leased. ). 8emain unchanged whether the assets are purchased or leased. %2. Fou Fou observe that a firm#s firm#s profit margin margin and debt ratio are below the industry average, while its return on e"uity e$ceeds the industry average. What can you you conclude! a. 8eturn 8eturn on ass assets ets is is above above the the industr industry y average average.. b. To Total tal assets turnover is above the industry average. c. To Total tal asset assetss turnover turnover is below below the the industry industry average. average. d. 6tatem 6tatement entss a and b are are corr correct ect.. %%. The following situations are descriptive of 6:) Corporation. Which would be considered as the most favorable for the common stocholders. a. :oo :oo value per share share of common common stoc stoc is substan substanti tiall ally y higher than than maret maret value per share0 return on common stocholders# e"uity is less than the rate of interest paid to creditors. b. ("uity ratio is high0 return on assets e$ceeds the cost of borrowing. borrowing. c. 6:) stops stops paying paying dividends dividends on its cumulat cumulative ive preferred preferred stoc0 stoc0 the price-e price-earning arningss ratio ratio of common stoc is low. d. ("uity ratio ratio is low0 low0 return return on assets assets e$ceeds the cost cost of borrowin borrowing. g.
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%*. What would be the effect effect on boo value per share and earnings per share share if the corporation corporation purchased its own shares in the open maret at a price greater than boo value per share! &. :. C. ). :oo value per share o effect ncrease )ecrease )ecrease (arnings per share ncrease ncrease )ecrease ncrease %+. Which of the following statements is correct! a. &n increase increase in a firm#s firm#s inventori inventories es will call call for additional additional financin financing g unless the increase increase is offset by an e"ual or larger decrease in some other o ther asset account. b. & high "uic ratio ratio is always a good indication of a well-managed li"uidity position. c. & rel relativ ativel ely y low ret return urn on asse assetts =8@&> @&> is alwa alway ys an indi ndicato catorr of manag anager eria iall incompetence. d. & high degree degree of operati operating ng levera leverage ge lowers lowers the ris ris by stabili' stabili'ing ing the firm#s firm#s earnin earnings gs stream. %. %. & comp company any issu issued ed long long-t -ter erm m bonds bonds and used used the the proc procee eeds ds to repur repurch chas asee *3 of the the outstanding shares of its stoc. This financial transaction will liely cause the &. To Total tal assets turnover ratio to increase. C. Times-interest-earned Times-interest-earned ratio to decrease. :. Current ratio to decrease. ). ;i$ed charge coverage ratio to increase. %4. The company company issued issued new common common shares shares in a three-fo three-forr-one one stoc stoc split. split. statements that indicate the correct effect=s> of this transaction. a. t reduc reduced ed e"uit e"uity y per shar sharee of commo common n stoc. stoc. b. 6hare of each common stocholder is reduced. c. The peso peso amou amount nt of capi capita ta stoc stoc is is incre increase ased. d. d. Woring Woring capital capital and current current ratio ratio are are increas increased. ed.
denti dentify fy the
%7. &ll of the following statements are valid e$cept a. Th Thee shor shortt term term cred credit itor or is more ore inte intere rest sted ed in cash cash flow flowss and and in wor worin ing g capi capita tall management that he is in how much accounting net income is reported. b. f the return on total assets is higher than the after-ta$ cost of long-term debt, then leverage is positive, and the common stocholders will benefit. c. The results results of financi financial al statements statements analys analysis is are of value value only when when viewed viewed in comparison comparison with the results of other periods or other firms. d. The inventory inventory turnover turnover is computed computed by dividing dividing sales sales by average average inventory inventory..
PROBLEMS 1. The net sale saless of Erand Erand ?anufact ?anufacturi uring ng Co. in 199 199 is total, total, +7, +7,. . The cost cost of goods goods manufacture manufactured d is *7,. The beginning beginning inventories inventories of goods in process process and finished finished goods are 72, and +,, respectively. respectively. The ending inventories are, goods in process, 4+,, finished finished goods, ++,. ++,. The selling selling e$penses is +3, general and administr administrative ative e$penses 2.+3 of cost of sales, respectively. respectively. The net profit in the year 199 is a. 9, b. *+,42+ c. +%,7+ d. 7%,
2. n 19$+, ?G Corporat Corporation# ion#ss net income income was 7, 7, and in 19$ 19$ it was 2,. 2,. What percentage increase in net income must ?G achieve in 19$4 to offset the 19$ decline in net income! a . 3 b. 3 c. *3 d. %3 %. :arr :arr Co. has total total debt of *2, *2, and sharehol shareholder ders# s# e"uity e"uity of 4, 4,.. :arr :arr is seeing seeing capital capital to fund an e$pansion. e$pansion. :arr is planning planning to issue an additional additional %, in common stoc, and is negotiating negotiating with a ban to borrow additional additional funds. funds. The ban is re"uiring re"uiring a debt-to-e"ui debt-to-e"uity ty rate of .4+. What is the ma$imum ma$imum additional additional amount :arr :arr will be able to borrow! &. 22+, :. %%, C. +2+, ) . 4+ ,
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*. erry Techn Technologi ologies es nc. had the followin following g financial financial information information for the the past year5 year5 6ales 7, nventory turnover 7$
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1%. What What would would be a company company#s #s Itimes Itimes inte interes restt earned earned rati ratioJ oJ if inte interes restt paid paid on loans loans amou amount nt to 9, and its net income income after income ta$ is 99,. 99,. =&ssume =&ssume a 2+3 income ta$ rate on first 1, of income and %+3 income ta$ rate on income in e$cess of 1,.> a. 1 times b. 12 times c. 1% times d. 1.21 times 1*. The average stochold stocholders ers e"uity e"uity for &:C &:C Company for 2 2 was 2,,. 2,,. ncluded ncluded in this figure is 2, par value of 73 preferred stoc, which remained unchanged during the year. year. The return return on common common shareholde shareholders# rs# e"uity was was 12.+3 during during the the 2. How much was the net income of the company in 2! a. 2%*, b. 2*1, c. 2+, d. 22+, 1+. lanner lannerss have have determ determine ined d that that sales sales will increase increase by 2+3 ne$t year, year, and that the profit profit margin will remain at 1+3 of sales. Which of the following statements is correct! &. rofit will will grow by 2+3. :. The profit margin will will grow by 1+3. C. rofit will grow proportionately faster than sales. ). Ten Ten percent of the increase in sales will become net income. income. 1. Eiven the following information, calculate the maret price per share of W&? W&? nc. nc. et income K 2, (arnings per share K 2. 6tochold olders# e"uit uity K 2,, , ?aretL:oo oo ratio K .2 .2 a. 2. b . 7 . c. *. d. 2. 14. &ssociated Co. paid out one-half of its 199* earnings by dividends. ts earnings increased by 23 and the amounts amounts of its dividends increased increased by 1+3 in 199+. &s &ssociat sociated# ed#ss dividend dividend payout ratio for 199+ was a. +1.+3 b. +2.%3 c. 4+.3 d. *4.93 17. (arnings (arnings per share amount amount to 1 and the price earnings earnings ratio ratio is +. f the dividend dividend yield yield is 73, a. ?aret ?aret price price of of the the stoc stoc must must be be *. *. b. ?aret value of the stoc cannot be determined. c. The amou amount nt of divi dividend dend cann cannot ot be dete determi rmined ned.. d. Th Thee divi divide dend nd is is * per shar share. e. 19. Micto Mictoria ria (nterp (nterpris rises es has 1. million million of account accountss receiv receivabl ablee on its balance balance sheet. sheet. The company#s company#s )6@ is * =based =based on a %-day year>, its current assets assets are 2.+ million, million, and its current ratio is 1.+. The company plans to reduce its )6@ from * to the industry average of % without causing a decline in sales. The resulting decrease in accounts receivable will free up cash that will be used to reduce current liabilities. f the company succeeds in its plan, what will Mictoria#s Mictoria#s new current ratio be! a. 1.+ b. 1.94 c. .42 d. 1. 2. (hrenburg (hrenburg Co. had net income of +.% million and earnings earnings per share of common stoc of 2.+. ncluded in the net income income was +, of bond interest interest e$pense related to to its longterm debt. The income ta$ rate was +3. )ividends on preferred stoc stoc were %,. The dividend dividend payout ratio on common common stoc was *3. What were the dividends dividends on common stoc! a. 1,7, b. 1,9, c. 2,, d. 2,12, 21. Taft Taft Technologies Technologies has the following relationships5 &nnual sales 1,2, nventory turnover ratio *.7 Current liabilities %4+, Current ratio 1.2 )ays )ays sales sales outsta outstandi nding ng =)6@> =)6@> * =%-d =%-day ay year> year> The company#s company#s current assets assets consist of cash, inventories inventories,, and accounts accounts receivable. receivable. How much cash does Taft have on its balance sheet! a. - 7,%%% b. ,4 c. 12+, d. 2,
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22. BC Eoods, nc. has a total assets turnover of .% and a profit margin margin of 13. The president is unhappy with the current return on assets, assets, and he thins it could be doubled. This could be accomplished =1> by increasing the profit margin to 1+3 and =2> by increasing total assets turnover. turnover. What new asset turnover turnover ratio, along with the 1+3 profit margin, margin, is re"uired to double the return on assets! a . %+ 3 b. *+3 c. *3 d. +3 2%. 8ainier nc. has 2 million million in current assets, its current ratio ratio is 1., and its "uic ratio is 1.2. The company plans to raise funds as additional notes payable and to use these funds to increase inventory. :y how much can 8ainier#s short-term debt =notes payable> increase without pushing its "uic ratio below .7! a. 2+, b. ++, c. %%%, d. 247, 2*. 6hepher 6hepherd d (nterp (nterpri rises ses has an 8@( of 1+ percent, percent, a debt ratio ratio of * percent, percent, and a profi profitt margin of + percent. The company#s total assets e"ual 7 million. What are the company#s sales! =&ssume that the company has no preferred stoc.> a. 1,**,, b. 2,*,, c. %,, d. 9,, 2+. & fire fire has destroyed destroyed many of the financial records records of 8. 6on Co. Fou are assigned to put together a financial report. Fou have found the return on e"uity to be 123 and the debt ratio was .*. What was the return on assets! a. +.%+3 b. 7.*3 c. .3 d. 4.23 2. The following were reflected from the records of War War ;rea Company5 (arnings before interest and ta$es 1,2+, nterest e$pense 2+, referred dividends 2, ayout ratio *3 6hares outstanding throughout 2% r referred 2, Co Common %+, ncome ta$ ratio *3 rice earnings ratio + times The dividend yield ratio is5 &. .+ :. .* C. .12 ). .7 24. 6el'er nc. sells sells all its merchandis merchandisee on credit. t has a profit margin margin of * percent, days sales outstanding outstanding e"ual to days, receivables receivables of 1+,, total assets of % million, million, and a debt ratio of .*. What is the firm#s return on e"uity =8@(>! &ssume a %-day year. year. a. 4. 4 .13 b. % %% %.%3 c. 7. 7 .13 d. %. %.%3 27. )eb Co. has a debt ratio of .+, a total assets turnover turnover of .2+, and a profit profit margin margin of 13. The president president is unhappy with the current current return on e"uity, e"uity, and he thins thins it could be doubled. doubled. This could could be accomplished accomplished =1> by increasing increasing the profit margin margin to 1*3 and =2> increasing debt utili'ation. utili'ation. To Total tal assets turnover will not change. What new debt ratio, along along with the 1*3 profit margin, is re"uired to double the return on e"uity! a. .4+ b. .4 c. .+ d. .++ 29. /ast year, year,
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%1. Mance Mance ?otors has current assets of 1.2 million. The company#s current ratio is 1.2, its its "uic ratio is .4, and its inventory inventory turnover turnover ratio ratio is *. The company company would lie to increase increase its inventory turnover ratio to the industry average, which is +, without without reducing its sales. &ny reductions in inventory will be used to reduce the company#s current liabilities. What will be the company#s current ratio, assuming that it is successful in improving its inventory turnover ratio to +! a. 1.%% b. 1.4 c. 1.22 d. .4+ %2. The following ratios and data were were computed from the 1994 financial statements of 6tar Co.5 Current ratio 1.+ Woring capital 2, )ebtLe"uity ratio .7 8eturn on e"uity .2 f net income for 1994 is *,, the balance sheet at the end of 1994 total assets of a. %*, b. %, c. %, d. *, %%. &n enterprise has total asset turnover of %.+ times and a total debt to total assets ratio ratio of 43. f the enterprise has total debt of 1,,, 1, ,, it has a sales level of &. +, +,, , . . :. 2,*+ 2,*+, , . . C. * *7, 7,1% 1%.2 .2 ). 2, 2, . . %*. 6elected information from the accounting accounting records of the :lacwood Co. is as follows5 et &L8 &L8 at )ecember %1, 2 9, et &L8 &L8 at )ecember %1, 21 1,, &ccounts receivable turnover + to 1 nventories at )ecember %1, 2 1,1, nventories at )ecember %1, 21 1,2, nventory turnover * to 1 What was the gross margin for 21! a. 1+, b. 2, c. %, d. *, %+. The ?eryl ?eryl Corpor Corporati ation# on#ss common common stoc stoc is curren currently tly selling selling at 1 per share, share, which which represents a L( ratio of 1. f the firm has 1 shares of common stoc outstanding, a return on e"uity of 2 percent, and a debt ratio of percent, what is its return on total assets =8@&>! a. 7.3 b. 1 1 .3 c. 12.3 d. 1 1 .43 %. & firm firm has total assets of 1,, and a debt ratio of % percent. Currently, it has sales of 2,+,, 2,+,, total fi$ed costs costs of 1,,, and (:T of +,. f the firm#s firm#s before-ta$ before-ta$ cost of debt is 1 percent and the firm#s ta$ rate is * percent, what is the firm#s 8@(! a. 1. 1.43 b. 2.+3 c. . .3 d. 7.%3 %4. )ean :rothers :rothers nc. recently reported reported net income of 1,+,. The company has %, shares of common common stoc, and it currently currently trades trades at a share. The company company continues continues to e$pand and anticipates anticipates that that one year from now its net income income will be 2,+,. @ver the ne$t year the company also anticipates issuing an additional 1, shares of stoc, so that one year from now the company will will have *, shares of common stoc. &ssuming the company#s priceLearnings ratio remains at its current level, what will be the company#s stoc price one year from now! a . + + b. c. 4 d. 4+ %7. 6outheast 6outheast acaging#s acaging#s 8@( last year was only + percent, percent, but its management management has developed a new operating plan designed to improve improve things. The new plan calls for a total debt ratio of percent, which will result in interest interest charges of 7, per year. year. ?anagement proAects an (:T of 2, on sales of 2*,, and it e$pects e$pects to have a total assets assets turnover ratio ratio of 2.. Nnder these conditions, the average ta$ rate rate will be * percent. f the changes are made, what return on e"uity will 6outheast earn! a. 9.3 b. 11.2+3 c. 14.+3 d. 22.+3
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%9. /one 6tar lastics lastics has the following following data5 &ssets5 1, )ebt ratio5 *.3 rofit margin5 .3 What is /one 6tar#s (:T! b. 12, c. 17,
nterest rate5 Total assets turnover5 Ta$ rate5 d. %,
7.3 %. *3
d. %%,2
*. & firm has a debtLe"uity ratio of + percent. Currently, Currently, it has interest e$pense of +, on +,, +,, of total total debt outstand outstanding ing.. ts ta$ rate is * percent percent.. f the firm# firm#s 8@& is percent, by how many percentage points is the firm#s 8@( greater than its 8@&! a. . .3 b. %.3 c. +. +.23 d. 4.*3 *1. Watson Watson Corporation computed the following items from its financial records for the the year Aust ended5 rice-earnings ratio 12 ayout ratio . &sset turnover .9 The dividend yield on WatsonDs WatsonDs common stoc is &. +.3 :. 4.23 C. 4.+3 ). 1.73 *2. /ombardi Trucing Trucing Company has the the following data5 &ssets5 1, nterest rate5 1.3 )ebt ratio5 .3 Total Total assets turnover5 2. rofit margin5 %.3 Ta$ Ta$ rate5 *3 What is /ombardi#s T( ratio! a. .9+ b. 1.4+ c. 2.1 d. 2.4 *%. ?iller ?iller and 8ogers artnershi artnership p has % million in total assets, assets, 1.+ million in e"uity, e"uity, and a +, capital capital budget. To maintain maintain the same debt-e"uity debt-e"uity ratio, how much debt should should be incurred! &. +, :. 22+, C. 24+, ) . * + , **. 6tandard 6tandard CompanyDs bonds have a provision provision which stipulates stipulates that the ratio of senior debt to total assets will never rise above *+3. The company is at the limit of that ratio and it wishes to issue still another 2+ million in senior debt. How much additional e"uity capital must it it raise to comply with this restrictive provision! &. 11.2+ 11.2+ million. million. :. 2.*+ million. million. C. %.+ million. million. ). ++.+ million. million. *+. ndia @ats pays pays dividends of .2 per "uarter, "uarter, and has annual earnings per share share of 2.7. What is ndia @atsDs dividend yield and dividend payout ratio for 2, respectively, if its recent maret price is %. and its average maret price was 27.! &. 7.243 and 77.3. C. 7.73 and 77.3. :. 7.243 and 22.13. ). 7.73 and 22.13. Eleim *. &ssume &ssume ?eyer Corporation Corporation is 1 percent percent e"uity financed. financed. Calculate Calculate the return on e"uity e"uity, given the following information5 =1> (arnings (arnings before before ta$es ta$es K 1,+ 1,+ =2> 6ales 6ales K +, +, =%> )ividend )ividend payout payout ratio ratio K 3 3 =*> To Total tal assets assets turnover turnover K 2. =+> Ta$ Ta$ rate rate K %3 a . 2+ 3 b. %3 c. %+3 d. *23 *4. :eatni :eatni Company has a current current ratio of 2.+ and a "uic ratio of 2.. f the firm e$perienced e$perienced 2 million in sales and sustains an inventory turnover of 7., what are the firmDs current assets! &. 1, 1, , , :. + +, , C. 1,+ 1,+ , , ). 1,2 1,2+ +, ,
MSQ-07 age 1
*7. Hanson Corporation CorporationDs Ds present year 8@( remained at last yearDs 1*3 level, while the profit margin was reduced from 73 to *3 and the leverage ratio increased from 1.2 to 1.+. The effects on asset turnover were to &. 8emain constant. C. )ecease from 1*.+7 to 2.%%. :. ncrease from 1.* to 2.%%. ). ncrease from *.4 to 9.. *9. /andry 8etailers 8etailers has annual sales of %+ million. million. The company#s company#s days sales outstanding outstanding =calculated on a %+-day basis> is +, which is well above the industry average of %+. The company has 2 million in current assets, 1+ million in current liabilities, and 4+ million in inventories. The company#s goal is to reduce its )6@ to the industry average without reducing sales. Cash freed up would be used to repurchase common stoc. What will be the current ratio if the company accomplishes its goal! a. 1.2% b. 1.%% c. 1.*% d. .4% +. Oansas @ffice @ffice 6upply 6upply had 2*,, 2*,, in sales last last year. year. The company# company#ss net income income was *,, *,, its total assets assets turnover turnover was ., and the company#s company#s 8@( was 1+ percent. The company is financed entirely with debt and common e"uity. What is the company#s debt ratio! a. .2 b. .% c. .%% d. . +1. /ast year, Thomas /umber Co. had a profit margin margin of 1 percent, total assets turnover of .+, and a debt ratio of 2 percent. =The company finances its assets with debt and common e"uity0 it does not use preferred stoc.> This year, the company#s C;@ wants to double 8@(. 6he e$pects the total assets turnover will remain at .+, while the profit margin and debt ratio will increase enough to double 8@(. &ssume that the profit margin is increased to 1+ percent, what debt ratio will the company need in order to double its 8@(! a. .% b. .%% c. .* d. .*+ +2. The nteline ntelinett Corpor Corporati ation on and Comp nc. have have assets assets of 1, 1, each each and a return return on common e"uity of 143. ntelinet ntelinet has twice the debt of Comp nc., while Comp has half the sales of ntelinet. f ntelinet has net income of 1, and a total assets turnover ratio of %.+, what is Comp nc.Ds profit margin! &. %.%13 :. 4.413 C. 1.3 ). 1%.+3 +%. 6elect 6elected ed data data from from the yearyear-end end financ financial ial statem statement entss of World Cup Corp. Corp. are presen presented ted below. The difference between average and ending inventories is immaterial. Current ratio 2. 7 times Eross profit margin *3 World#s net sales for the year were a. 2.* million b. *. million c. 1.2 million d. . million +*. 8oland Company has a new management team that has developed developed an operating plan to improve upon last year#s 8@(. The new plan would place the debt ratio at ++ percent, which will result in interest interest charges of 4, per year. year. (:T is proAected to to be 2+, on sales of 24,, it e$pects to have a total assets turnover ratio of %., and the average ta$ rate will be * percent. What does 8oland Company e$pect its return on e"uity to be following the changes! a. 14.+3 b. 21.723 c. 2.43 d. **.**3 ++. White Onight (nterprises is e$periencing e$periencing a growth rate of 93 with a return on assets of 123. f the debt ratio is %3 and the maret price of the stoc is %7 per share, what is the return on e"uity! &. 4.73 :. 9.3 C. 12.3 ). 17.4+3
MSQ-07 age 11
+. ?anufacture ?anufacturer#s r#s nc. estimates estimates that its interest interest charges for this year will be 4 and its net income will be %,. &s &ssumi suming ng its average ta$ rate is % percent, what is the company#s company#s estimated times interest earned ratio! a. 2.* b. *.2+ c. +.%% d. 4.12 may be computed from the additional add itional information given5 &66(T6 /&:. 6T@COH@/)(86# ( 1.9 to 1 8atio of total liabilities to total stocholders# e"uity 1.* nventory turnover based on sales and ending inventory 1+ times nventory turnover based on cost of goods sold and ending inventory 1 times Eross margin for 1972 +, +4. The balance of accounts payable of 6an ?atias as of )ecember %1, 1972 is a. *, b . 7 , c. 9+, d. 27, +7. The balance of retained earnings of 6an ?atias ?atias as of )ecember %1, 1972 is is a. , b. 1*, c. 2, d. %, +9. The balance of inventory of 6an ?atias as of )ecember %1, 1972 is a. 7, b. 1, c. 17, d. 227,
c. 2+,++
d. 229,+
1. How much was was the bonds bonds payable! payable! a. *, b. 2,4+
c. 11*,4+
d. %4,+
2. Total Total current liabilities liabilities would amount to a. , b. 41*,4+
c. *7+,2+
d. ++,
%. Total Total current assets assets would amount to a. %,72+ b. 47,
c. +7,
d. 9%,72+
MSQ-07 age 12
Ans!" #!$ T%!&"$ 1. C 2. & %. C *. C +. : P"&'l!( 1. C 2. ) %. : *. & +. : . & 4. & 7. : 9. C 1. C 11. ) 12. C 1%. ) 1*. : 1+. &
1.
. C 4. : 7. : 9. ) 1. C
11. 12. 1%. 1*. 1+.
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ABC, ABC, Inc Inc., ., sel sells ls all all its its mer merch chan andi dise se on on cred credit it.. It has has a prof profit it mar margi gin n of 4%, 4%, an avera average ge collection period of 60 days, receivables of 1!0,000, total assets of " million and a debt ratio of 0.64. 0.64. #hat is the firm$s retrn on e&ity' "."" percent
(.
)he )he *myt *mythe he Cor Corpo pora rati tion on$s $s com commo mon n stoc stoc+ + is crr crren entl tly y sell sellin ing g at 100 100 per per sha share re hic hich h represents a -/ ratio of 10. If the firm has 100 shares of common stoc+ otstanding, otstanding, a retrn on e&ity of 0.(0, and a debt ratio of 0.6, hat is its retrn on total assets' 6. percent
".
If #in+le #in+ler, r, Inc., Inc., has sales sales of ( mill million ion per year year all all credit credit22 and and an averag average e colle collecti ction on period of "! days, hat is its average amont of acconts receivable otstanding assme a "60 day year2' 134,444
4.
!.
If a firm firm has total total intere interest st charge charges s of of 10,0 10,000 00 per per year year,, sale sales s of of 1 1 mill million, ion, a ta ta rate rate of 40%, and a net profit margin of 6%, hat is the firm$s times interest earned ratio' 11 times A firm firm that that has has an an e& e&ity ity mlt mltip iplilier er of of 4.0 4.0 ill ill hav have e a debt debt rati ratio o of5 of5 0.!.
6.
ive iven n the the foll follo oin ing g infor informa mati tion on,, calc calcl lat ate e the the mar+ mar+et et pric price e per sha share re of #A7 #A7,, Inc. Inc.55 /arnings after interest and taes /arnings per share *toc+holders$ e&ity 7ar+etBoo+ ratio
8 8 8 8
(00,000 (.00 (,000,000 0.(0
MSQ-07 age 1%
4.00 .
A fire fire has has destro destroyed yed a larg large e perce percenta ntage ge of the financ financial ial record records s of of 9ans 9anson on Assoc Associat iates. es. :o :o are charged ith piecing together information in order to release a financial report. :o :o have fond the retrn on e&ity to be 1;%. 1;%. If sales ere ere 4 million, the debt ratio 0.40, and total liabilities ( million, hat as the retrn on assets' 10.;%
;.
Ass Assme me Cons Conser erva vati tive ve Corp Corpor orat atio ion n is 100% 100% e&i e&ity ty fin finan ance ced. d. Calc Calcl lat ate e the the ret retr rn n on e&ity given the folloing information5 1. (. ". 4. !.
/arnings before taes 8 (,000 *ales 8 !,000
40 percent 3.
:o are are consid consideri ering ng a ne ne prodc prodctt for for yor yor firm firm to sell. sell. It shold shold case case a 1!% increa increase se in yor profit margin bt it ill also re&ire a !0% increase in total assets. :o :o epect to finance this asset groth groth entirely by debt. If the folloing ratios ere compted before the change, hat ill be the ne =>/ if the ne prodct is sold bt sales remain constant' -rofit margin 8 0.10 )otal )otal asset trnover trnove r 8 (.0 /&ity mltiplier 8( 46 percent
10.
?ohnst ?ohnsto on n Chemic Chemicals als,, Inc., Inc., has a crren crrentt ratio ratio of of ".0, ".0, a &ic &ic+ + ratio ratio of (.4, (.4, and an inventory trnover of 6. ?ohnston$s total assets are 1 million and its debt ratio is 0.(0. )he firm has no long@term debt.2 #hat is ?ohnston$s ?ohnston$s sales figre' figre' (0,000
11. 11.
Calcl Calclate ate the the mar+e mar+ett price price of a share share of ABC, ABC, Inc. Inc.,, given given the the follo folloing ing infor informat mation ion55 *toc+holders$ e&ity 8 1,(!0 priceearnings ratio 8 ! shares otstanding 8 (! mar+etboo+ ratio 8 1.!. !.00
1(.
?amest ?amesto on, n, Inc. Inc.,, has has earni earnings ngs after after inte interes restt dedc dedctio tions ns bt bt befo before re tae taes s of "00. "00. )he company$s before@ta times interest earned ratio is .00. Calclate the company$s interest charges. !0.00
1".
)he . 9obbs 9obbs Comp Company any has determ determine ined d that that its retrn retrn on e&i e&ity ty is 1!%. 1!%. 7anage 7anagemen mentt is interested in the varios components components that ent into this calclation. 9oever, one of the accontants has misplaced misplaced the profit margin ratio. As a finance iard, iard, yo +no ho to calclate the profit margin, given the folloing information5 total debttotal assets 8 0."!, and total asset trnover 8 (.;. #hat is the profit margin' margin' ".4; percent
14.
oe oe D Compa Company ny has has a debt debt ratio ratio of 0.!, 0.!, a capit capital al inten intensit sity y ratio ratio of 4, 4, and a profit profit margin margin of 10%. )he Board of /2, and they thin+ it cold be dobled. )his cold be accomplished 12 by increasing the profit margin to 1(% and (2 by increasing debt tiliation. )otal )otal asset trnover ill not change. #hat ne debt ratio, along ith the 1(% profit margin, is re&ired to doble the =>/' 0 percent
MSQ-07 age 1*
1!.
)he ocal ocal Comp Company any is a relat relative ively ly smal small, l, priv private ately ly one oned d firm. firm. In 13;1 13;1 ocal ocal had an after@ta income of 1!,000, and 10,000 10,000 shares ere otstanding. )he oners ere trying to determine the e&ilibrim mar+et vale for ocal$s stoc+, prior to ta+ing the company pblic. A similar firm that is pblicly traded had a priceearnings ratio of !.0. Esing only the information given, estimate the mar+et vale of one share of ocal$s stoc+. .!0
16.
/psilo /psilon n Co.$s Co.$s reco records rds have have rece recentl ntly y been been destro destroye yed d by fire. fire. ive iven n the follo folloing ing bits bits of of information saved from the inferno, determine /psilon$s net income for 1333. =etrn on e&ity ((% Assetsnet orth orth (.16 -rofit margin !.6% )otal )otal assets 6!0 million
1.
66.00 million
1;.
Coasta Coastall -ac+a -ac+agin ging g Fs =>/ last last year year as only only " perc percent ent,, bt bt its its manag manageme ement nt has has developed a ne operating plan designed to improve things. things. )he ne plan calls for for a total debt ratio of 60 percent, hich ill reslt in interest charges of "00 per year. 7anagement proGects an /BI) of 1,000 on sales of 10,000, and it epects to have a total asset trnover ratio of (.0. Ender these conditions, the average ta rate ill be "0 percent. If the changes are made, hat hat retrn on e&ity ill Coastal earn' (4.! percent
19.
Yohe Inc. Inc. has has an ROA of 13.4 13.4% % and and a 10% 10% prof profitit margi margin. n. The The comp company any has sales sales e!a e!all to "# mill million ion.. $hat $hat are the companys total assets& "3.'3 million
(0.
Yohe Inc. Inc. has has a c!rre c!rrent nt ratio ratio of of () and and a !ic* !ic* rati ratioo of 1.4. 1.4. +!rth +!rtherm ermore ore)) the firm firm has has "1.# "1.# millio millionn in c!rre c!rrent nt lia,ilities. -ased !pon this information) ho m!ch in/entory is Yohe holding& "900)000
(1.
E H>, H>, Inc. Inc. ses ses only only debt debt and and commo common n e&it e&ity y fnds fnds to fina finance nce its assets assets.. )his )his past past year the firm$s retrn on total assets as 1"%. )he firm financed 4(% percent of its assets sing debt. #hat as the firm$s retrn on common e&ity' ((.41%
((.
Clevel Cleveland and Corpo Corporat ration ion has has 1,4 1,430, 30,000 000 shares shares of comm common on stoc stoc+ + otst otstand anding ing,, its its net income is 134 million, and its -/ ratio is 1!.1. #hat is the companyJs stoc+ price' 16.43
(".
AAA$s AAA$s inve invento ntory ry trno trnover ver ratio ratio is is 11. 11.03 03 based based on sales sales of 1!, 1!,(00 (00,00 ,000. 0. )he )he firm firm$s $s crrent ratio e&als ".(( ith crrent liabilities e&al to 30,000. #hat is the firm$s &ic+ ratio' 1.;1
MSQ-07 age 1+
