msq-07 - financial statement analysisfgjhfgxhsn f

8/12/2019 MSQ-07 - Financial Statement Analysisfgjhfgxhsn f

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CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila

MANAGEMENT ADVISORY SERVICES

FINANCIAL STATEMENT ANALYSIS

THEORY

1. When a balance sheet amount is related to an income statement amount in computing a ratio,a. The income statement amount should be converted to an average for the year.b. Comparisons with industry ratios are not meaningful.c. The balance sheet amount should be converted to an average for the year.d. The ratio loses its historical perspective because a beginning-of-the-year amount is

combined with an end-of-the-year amount.

2. How are financial ratios used in decision maing!

a. They can help identify the reasons for success and failure in business, but decisionmaing re"uires information beyond the ratios.b. They remove the uncertainty of the business environment.c. They aren#t useful because decision maing is too comple$.d. They give clear signals about the appropriate action to tae.

%. & useful tool in financial statement analysis is the common-si'e financial statement. Whatdoes this tool enable the financial analyst to do!a. (valuate financial statements of companies within a given industry of appro$imately the

same value.b. )etermine which companies in the same industry are at appro$imately the same stage of

development.c. Compare the mi$ of assets, liabilities, capital, revenue, and e$penses within a companyover time or between companies within a given industry without respect to relative si'e.

d. &scertain the relative potential of companies of similar si'e in different industries.

*. Which of the following is not revealed on a common si'e balance sheet!a. The debt structure of a firm.b. The capital structure of a firm.c. The peso amount of assets and liabilities.d. The distribution of assets in which funds are invested.

+. f a transaction causes total liabilities to decrease but does not affect the owners# e"uity, whatchange if any, 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, a business had no long-term investments0 this year long term investments amountto 1,. n a hori'ontal analysis the change in long-term investments should bee$pressed asa. &n absolute value of 1,, and an increase of 13b. &n absolute value of 1, and an increase of 1,3c. &n absolute value of 1, and no value for a percentage changed. o change in any terms because there was no investment in the previous year.

4. n a set of comparative financial statements, you observed a gradual decline in the net of


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7. Which of these ratios are measures of a company#s profitability!1. (arnings per share +. 8eturn on assets2. 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 is most helpful in appraising the li"uidity of current assets!a. Current ratio. c. )ebt ratio.b. &cid-test ratio. d. &ccounts receivable turnover.

1. Which one of the following ratios would provide a best measure of li"uidity!&. 6ales minus returns to total debt.:. Total assets minus goodwill to total e"uity.C. Current assets minus inventories to current liabilities.

). et profit minus dividends to interest e$pense.

11. orth :an is analy'ing :elle Corp.#s financial statements for a possible e$tension of credit.:elle#s "uic ratio is significantly better than the industry average. Which of the followingfactors should orth consider as possible limitation of using this ratio when evaluating:elle#s creditworthiness!a. ;luctuating maret prices of short-term investments may adversely affect the ratio.b. ncreasing maret prices for :elle#s inventory may adversely affect the ratio.c. :elle may need to sell its available-for-sale investments to meet its current obligations.d. :elle may need to li"uidate its inventory to meet its long-term obligations.

12. The ratio of analytical measurements which measures the productivity of assets regardless ofcapital structure isa. Current ratio. c. ratio.b. )ebt ratio. d. 8eturn on total assets.

1%. How are the following used in the calculation of the dividend-pay-out ratio for a companywith only common stoc outstanding!

a. b. c. d.)ividends per share )enominator )enominator umerator umerator (arnings per share umerator ot used )enominator ot used:oo value per share ot used umerator ot used )enominator

1*. &n investor has been given several financial ratios for an enterprise but none of the financialreports. Which combination of ratios can be used to derive return on e"uity!&. ?aret-to-boo-value ratio and total-debt-to-total-assets ratio.:. rice-to-earnings ratio, earnings per share, and net profit margin.C. rice-to-earnings ratio and return-on-assets ratio.). et profit margin, total assets turnover, and e"uity multiplier.

1+. Which of the following actions will increase a company#s "uic ratio!a. 8educe inventories and use the proceeds to reduce long-term debt.b. 8educe inventories and use the proceeds to reduce current liabilities.c. ssue short-term debt and use the proceeds to purchase inventory.d. ssue long-term debt and use the proceeds to purchase fi$ed assets.e. ssue e"uity and use the proceeds to purchase inventory.


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14. Bac 6ons, nc. has a 2 to 1 acid test ="uic> ratio. This ratio would decrease to less than 2to 1 if the companya. urchased inventory on open account.b. 6old merchandise on open account that earned a normal gross margin.c. Collected an account receivable.

d. aid an account payable.

17. The ratio that measures a firmDs ability to generate earnings from its resources is&. )aysD sales in inventory. C. )aysD sales in receivables.:. 6ales to woring capital. ). &sset turnover.

19. n comparing the current ratios of two companies, why is it invalid to assume that thecompany with the higher current ratio is the better company!a. The current ratio includes assets other than cash.b. & high current ratio may indicate inade"uate inventory on hand.c. & high current ratio may indicate inefficient use of various assets and liabilities.

d. The two companies may define woring capital in different terms.

2. ?abuhay Corp. has current assets of 17, and current liabilities of %,. Which ofthe following transactions would improve ?abuhay#s current ratio!a. 8efinancing a , long-term mortgage with a short-term note.b. Collecting 2, of short-term accounts receivable.c. urchasing 1, of merchandise inventory with a short-term accounts payable.d. aying *, of short-term accounts payable.

21. & company has a current ratio of 2 to 1. The ratio will decrease if the companya. 8eceives a +3 stoc dividend on one of its maretable securities.b. 6ells merchandise for more than cost and records the sale using the perpetual inventory

method.c. ays a large account payable which had been a current liability.d. :orrow cash on a si$-month note.

22. 8ecording cash dividend payment when declaration was recorded earlier woulda. ncrease both current ratio and woring capitalb. )ecreases both current ratio and woring capitalc. Have no effect on current ratio or earnings per shared. ncrease current ratio but no effect on woring capital.

2%. &:C Corporation has a current ratio of 2 to 1 and a "uic ratio =acid test> of 1 to 1. &transaction that would change :ondDs "uic ratio but not its current ratio is the&. payment of accounts payable.:. sale of inventory on account at cost.C. collection of accounts receivable.). sale of short-term maretable securities for cash that results in a profit.

2*. & company#s current ratio is 2.2 to 1 and the "uic ratio is 1. to 1 at the beginning of theyear. &t the end of the year, the company has a current ratio of 2.+ to 1 and a "uic ratio of.7 to .1 Which of the following could help e$plain the divergence in the ratios from thebeginning to the end of the year!a. &n increase in inventory levels during the year.b. &n increase in credit sales in relationship to salesc. &n increase in the use of payables during the current year.


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2. The maret value of a firmDs outstanding common shares will be higher, everything elsee"ual, if&. nvestors have a lower re"uired return on e"uity.:. nvestors e$pect lower dividend growth.C. nvestors have longer e$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 substantiallyalthough sales and inventory amounts were essentially unchanged. Which of the followingstatements e$plains the increased inventory turnover ratio!a. Cost of goods sold decreased.b. &ccounts receivable turnover increased.c. Total asset turnover increased.d. Eross profit percentage decreased.

27. ?ini$ Co. has a high sales-to-woring-capital ratio. This could indicate

a. The firm is undercapitali'ed.b. The firm is liely to have li"uidity problems.c. Woring capital is not profitably utili'ed.d. The firm is not profitable.

29. f, Aust prior to the period of rising prices, a company changed its inventory measurementfrom ;;@ to /;@, the effect in the ne$t period would be to

a. b. c. d.Current ratio ncrease )ecrease ncrease )ecreasenventory turnover ncrease )ecrease )ecrease ncrease

%. When compared to a debt-to-assets ratio, a debt-to-e"uity ratio would&. :e about the same as the debt-to-assets ratio.:. :e higher than the debt-to-assets ratio.C. :e lower than the debt-to-assets ratio.). Have no relationship at all to the debt-to-assets ratio.

%1. &ssume that a companyDs debt ratio is currently +3. t plans to purchase fi$ed assets eitherby using borrowed funds for the purchase or by entering into an operating lease. ThecompanyDs debt ratio as measured by the balance sheet will&. ncrease whether the assets are purchased or leased.:. ncrease if the assets are purchased, and remain unchanged if the assets are leased.C. ncrease if the assets are purchased, and decrease if the assets are leased.). 8emain unchanged whether the assets are purchased or leased.

%2. Fou observe that a firm#s profit margin and debt ratio are below the industry average, whileits return on e"uity e$ceeds the industry average. What can you conclude!a. 8eturn on assets is above the industry average.b. Total assets turnover is above the industry average.c. Total assets turnover is below the industry average.d. 6tatements a and b are correct.

%%. The following situations are descriptive of 6:) Corporation. Which would be considered asthe most favorable for the common stocholders.a. :oo value per share of common stoc is substantially higher than maret value per

share0 return on common stocholders# e"uity is less than the rate of interest paid to


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%*. What would be the effect on boo value per share and earnings per share if the corporationpurchased 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 in a firm#s inventories will call for additional financing unless the increase is

offset by an e"ual or larger decrease in some other asset account.b. & high "uic ratio is always a good indication of a well-managed li"uidity position.c. & relatively low return on assets =8@&> is always an indicator of managerial

incompetence.d. & high degree of operating leverage lowers the ris by stabili'ing the firm#s earnings

stream.

%. & company issued long-term bonds and used the proceeds to repurchase *3 of the

outstanding shares of its stoc. This financial transaction will liely cause the&. Total assets turnover ratio to increase. C. Times-interest-earned ratio to decrease.:. Current ratio to decrease. ). ;i$ed charge coverage ratio to increase.

%4. The company issued new common shares in a three-for-one stoc split. dentify thestatements that indicate the correct effect=s> of this transaction.a. t reduced e"uity per share of common stoc.b. 6hare of each common stocholder is reduced.c. The peso amount of capita stoc is increased.d. Woring capital and current ratio are increased.

%7. &ll of the following statements are valid e$cepta. The short term creditor is more interested in cash flows and in woring capital

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 of financial statements analysis are of value only when viewed in comparison

with the results of other periods or other firms.d. The inventory turnover is computed by dividing sales by average inventory.

PROBLEMS

1. The net sales of Erand ?anufacturing Co. in 199 is total, +7,. The cost of goodsmanufactured is *7,. The beginning inventories of goods in process and finishedgoods are 72, and +,, respectively. The ending inventories are, goods in process,4+,, finished goods, ++,. The selling e$penses is +3, general and administrativee$penses 2.+3 of cost of sales, respectively. The net profit in the year 199 isa. 9, b. *+,42+ c. +%,7+ d. 7%,

2. n 19$+, ?G Corporation#s net income was 7, and in 19$ it was 2,. Whatpercentage increase in net income must ?G achieve in 19$4 to offset the 19$ decline innet income!a. 3 b. 3 c. *3 d. %3

%. :arr Co. has total debt of *2, and shareholders# e"uity of 4,. :arr is seeingcapital to fund an e$pansion. :arr is planning to issue an additional %, in common


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*. erry Technologies nc. had the following financial information for the past year56ales 7, nventory turnover 7$


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for 1979!a. .* b.

.c.+.%

d.+.

9. /ast yearDs asset turnoverratio for Wuerffel &irlineswas 2.+. This year, salesincreased by 23 andaverage total assetsincreased by 13. What isthe new asset turnoverratio!

&. 2.+ :.

2.+9 C.

2.4% ).

%.

1. The following informationpertains to &/ Corporationas of and for the year-

ended )ecember %1, 19$4./iabilities ,6tocholders# e"uity +,

6hares of common stoc issued and outstanding1,et income %,)uring 1994,&/ officers e$ercised stoc options for 1, shares of stoc at an option price of 7 pershare. What was the effect of e$ercising the stoc option!a. o ratios were affected. c. )ebt to e"uity ratio decreased to 123.b. &sset turnover increased to +.*3 d. (arnings per share increased by .%%

11. &lumbat Corporation has 7, of debt outstanding, and it pays an interest rate of 1percent annually on its ban loan. &lumbat#s annual sales are %,2,, its average ta$ rate

is * percent, and its net profit margin on sales is percent. f the company does notmaintain a T( ratio of at least * times, its ban will refuse to renew its loan, and banruptcywill result. What is &lumbat#s current T( ratio!a. 2.* b. %.* c. %. d. +.

12. @TW Corporation has current assets totaling 1+ million and a current ratio of 2.+ to 1.What is @TW#s current ratio immediately after it has paid 2million of its accounts payable!a. %.4+ to 1 b. 2.4+ to 1 c. %.2+ to 1 d. *.4+ to 1


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1%. What would be a company#s Itimes interest earned ratioJ if interest paid on loans amount to9, and its net income after income ta$ is 99,. =&ssume a 2+3 income ta$ rate onfirst 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 stocholders e"uity for &:C Company for 2 was 2,,. ncluded inthis figure is 2, par value of 73 preferred stoc, which remained unchanged duringthe year. The return on common shareholders# e"uity was 12.+3 during the 2. Howmuch was the net income of the company in 2!a. 2%*, b. 2*1, c. 2+, d. 22+,

1+. lanners have determined that sales will increase by 2+3 ne$t year, and that the profitmargin will remain at 1+3 of sales. Which of the following statements is correct!&. rofit will grow by 2+3.:. The profit margin will grow by 1+3.C. rofit will grow proportionately faster than sales.

). Ten percent of the increase in sales will become net income.

1. Eiven the following information, calculate the maret price per share of W&? nc.et income K 2, (arnings per share K 2.6tocholders# e"uity K 2,, ?aretL:oo ratio K .2

a. 2. b. 7. c. *. d. 2.

14. &ssociated Co. paid out one-half of its 199* earnings by dividends. ts earnings increased by23 and the amounts of its dividends increased by 1+3 in 199+. &ssociated#s dividendpayout ratio for 199+ wasa. +1.+3 b. +2.%3 c. 4+.3 d. *4.93

17. (arnings per share amount to 1 and the price earnings ratio is +. f the dividend yield is73,a. ?aret price of the stoc must be *.b. ?aret value of the stoc cannot be determined.c. The amount of dividend cannot be determined.d. The dividend is * per share.

19. Mictoria (nterprises has 1. million of accounts receivable on its balance sheet. Thecompany#s )6@ is * =based on a %-day year>, its current assets are 2.+ million, and itscurrent 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 freeup cash that will be used to reduce current liabilities. f the company succeeds in its plan,what will Mictoria#s new current ratio be!a. 1.+ b. 1.94 c. .42 d. 1.

2. (hrenburg Co. had net income of +.% million and earnings per share of common stoc of2.+. ncluded in the net income was +, of bond interest e$pense related to its long-term debt. The income ta$ rate was +3. )ividends on preferred stoc were %,. Thedividend payout ratio on common stoc was *3. What were the dividends on commonstoc!a. 1,7, b. 1,9, c. 2,, d. 2,12,

21. Taft Technologies has the following relationships5&nnual sales 1,2, nventory turnover ratio *.7


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22. BC Eoods, nc. has a total assets turnover of .% and a profit margin of 13. The presidentis unhappy with the current return on assets, and he thins it could be doubled. This could beaccomplished =1> by increasing the profit margin to 1+3 and =2> by increasing total assetsturnover. What new asset turnover ratio, along with the 1+3 profit margin, is re"uired todouble the return on assets!

a. %+3 b. *+3 c. *3 d. +3

2%. 8ainier nc. has 2 million in current assets, its current 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 toincrease inventory. :y how much can 8ainier#s short-term debt =notes payable> increasewithout pushing its "uic ratio below .7!a. 2+, b. ++, c. %%%, d. 247,

2*. 6hepherd (nterprises has an 8@( of 1+ percent, a debt ratio of * percent, and a profitmargin of + percent. The company#s total assets e"ual 7 million. What are the company#ssales! =&ssume that the company has no preferred stoc.>

a. 1,**,, b. 2,*,, c. %,, d. 9,,

2+. & fire has destroyed many of the financial records of 8. 6on Co. Fou are assigned to puttogether a financial report. Fou have found the return on e"uity to be 123 and the debt ratiowas .*. 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 ;rea Company5(arnings before interest and ta$es 1,2+,nterest e$pense 2+,referred dividends 2,ayout ratio *36hares outstanding throughout 2% referred 2, Common %+,ncome ta$ ratio *3rice earnings ratio + times

The dividend yield ratio is5&. .+ :. .* C. .12 ). .7

24. 6el'er nc. sells all its merchandise on credit. t has a profit margin of * percent, days salesoutstanding e"ual to days, receivables of 1+,, total assets of % million, and a debtratio of .*. What is the firm#s return on e"uity =8@(>! &ssume a %-day year.a. 4.13 b. %%.%3 c. 7.13 d. %.%3

27. )eb Co. has a debt ratio of .+, a total assets turnover of .2+, and a profit margin of13. The president is unhappy with the current return on e"uity, and he thins it could bedoubled. This could be accomplished =1> by increasing the profit margin to 1*3 and =2>increasing debt utili'ation. Total assets turnover will not change. What new debt ratio, alongwith the 1*3 profit margin, is re"uired to double the return on e"uity!a. .4+ b. .4 c. .+ d. .++

29. /ast year,


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%1. Mance ?otors has current assets of 1.2 million. The company#s current ratio is 1.2, its"uic ratio is .4, and its inventory turnover ratio is *. The company would lie to increaseits inventory turnover ratio to the industry average, which is +, without reducing its sales.&ny reductions in inventory will be used to reduce the company#s current liabilities. Whatwill 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 computed from the 1994 financial statements of 6tar Co.5Current ratio 1.+Woring capital 2,)ebtLe"uity ratio .78eturn on e"uity .2

f net income for 1994 is *,, the balance sheet at the end of 1994 total assets ofa. %*, b. %, c. %, d. *,

%%. &n enterprise has total asset turnover of %.+ times and a total debt to total assets ratio of 43.f the enterprise has total debt of 1,,, it has a sales level of&. +,,. :. 2,*+,. C. *7,1%.2 ). 2,.

%*. 6elected information from the accounting records of the :lacwood Co. is as follows5et &L8 at )ecember %1, 2 9,et &L8 at )ecember %1, 21 1,,&ccounts receivable turnover + to 1nventories 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 Corporation#s common stoc is currently selling at 1 per share, whichrepresents a L( ratio of 1. f the firm has 1 shares of common stoc outstanding, a returnon e"uity of 2 percent, and a debt ratio of percent, what is its return on total assets=8@&>!a. 7.3 b. 1.3 c. 12.3 d. 1.43

%. & firm has total assets of 1,, and a debt ratio of % percent. Currently, it has sales of2,+,, total fi$ed costs of 1,,, and (:T of +,. f the firm#s before-ta$cost of debt is 1 percent and the firm#s ta$ rate is * percent, what is the firm#s 8@(!a. 1.43 b. 2.+3 c. .3 d. 7.%3

%4. )ean :rothers nc. recently reported net income of 1,+,. The company has %,shares of common stoc, and it currently trades at a share. The company continues toe$pand and anticipates that one year from now its net income will be 2,+,. @ver thene$t year the company also anticipates issuing an additional 1, shares of stoc, so thatone year from now the company will have *, shares of common stoc. &ssuming thecompany#s priceLearnings ratio remains at its current level, what will be the company#s stocprice one year from now!a. ++ b. c. 4 d. 4+

%7. 6outheast acaging#s 8@( last year was only + percent, but its management has developeda new operating plan designed to improve things. The new plan calls for a total debt ratio of


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%9. /one 6tar lastics has the following data5&ssets5 1, nterest rate5 7.3)ebt ratio5 *.3 Total assets turnover5 %.rofit margin5 .3 Ta$ rate5 *3What is /one 6tar#s (:T!

b. 12, c. 17, d. %, d. %%,2

*. & firm has a debtLe"uity ratio of + percent. Currently, it has interest e$pense of +,on +,, of total debt outstanding. ts ta$ rate is * percent. f the 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 Corporation computed the following items from its financial records for the year Austended5

rice-earnings ratio 12ayout ratio .

&sset turnover .9The dividend yield on WatsonDs common stoc is&. +.3 :. 4.23 C. 4.+3 ). 1.73

*2. /ombardi Trucing Company has the following data5&ssets5 1, nterest rate5 1.3)ebt ratio5 .3 Total assets turnover5 2.rofit margin5 %.3 Ta$ rate5 *3

What is /ombardi#s T( ratio!a. .9+ b. 1.4+ c. 2.1 d. 2.4

*%. ?iller and 8ogers artnership has % million in total assets, 1.+ million in e"uity, and a+, capital budget. To maintain the same debt-e"uity ratio, how much debt should beincurred!&. +, :. 22+, C. 24+, ). *+,

**. 6tandard CompanyDs bonds have a provision which stipulates that the ratio of senior debt tototal assets will never rise above *+3. The company is at the limit of that ratio and it wishesto issue still another 2+ million in senior debt. How much additional e"uity capital must itraise to comply with this restrictive provision!&. 11.2+ million. :. 2.*+ million. C. %.+ million. ). ++.+ million.

*+. ndia @ats pays dividends of .2 per "uarter, and has annual earnings per share of 2.7.What is ndia @atsDs dividend yield and dividend payout ratio for 2, respectively, if itsrecent 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 ?eyer Corporation is 1 percent e"uity financed. Calculate the return on e"uity,given the following information5

=1> (arnings before ta$es K 1,+=2> 6ales K +,=%> )ividend payout ratio K 3=*> Total assets turnover K 2.=+> Ta$ rate K %3

a. 2+3 b. %3 c. %+3 d. *23


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*7. Hanson CorporationDs present year 8@( remained at last yearDs 1*3 level, while the profitmargin was reduced from 73 to *3 and the leverage ratio increased from 1.2 to 1.+. Theeffects 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 has annual sales of %+ million. The company#s days sales outstanding=calculated on a %+-day basis> is +, which is well above the industry average of %+. Thecompany 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 averagewithout reducing sales. Cash freed up would be used to repurchase common stoc. What willbe the current ratio if the company accomplishes its goal!a. 1.2% b. 1.%% c. 1.*% d. .4%

+. Oansas @ffice 6upply had 2*,, in sales last year. The company#s net income was*,, its total assets turnover was ., and the company#s 8@( was 1+ percent. The

company is financed entirely with debt and common e"uity. What is the company#s debtratio!a. .2 b. .% c. .%% d. .

+1. /ast year, Thomas /umber Co. had a profit margin of 1 percent, total assets turnover of .+,and a debt ratio of 2 percent. =The company finances its assets with debt and commone"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 ratiowill 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 ntelinet Corporation and Comp nc. have assets of 1, each and a return oncommon e"uity of 143. ntelinet has twice the debt of Comp nc., while Comp has half thesales 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

+%. 6elected data from the year-end financial statements of World Cup Corp. are presentedbelow. The difference between average and ending inventories is immaterial.

Current ratio 2. 7 timesEross profit margin *3

World#s net sales for the year werea. 2.* million b. *. million c. 1.2 million d. . million

+*. 8oland Company has a new management team that has developed an operating plan toimprove upon last year#s 8@(. The new plan would place the debt ratio at ++ percent, whichwill result in interest charges of 4, per year. (:T is proAected to be 2+, on sales of24,, it e$pects to have a total assets turnover ratio of %., and the average ta$ rate willbe * percent. What does 8oland Company e$pect its return on e"uity to be following thechanges!a. 14.+3 b. 21.723 c. 2.43 d. **.**3


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+. ?anufacturer#s nc. estimates that its interest charges for this year will be 4 and its netincome will be %,. &ssuming its average ta$ rate is % percent, what is the company#sestimated times interest earned ratio!a. 2.* b. *.2+ c. +.%% d. 4.12


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Ans!" #!$

T%!&"$

1. C . C 11. & 1. : 21. ) 2. & %1. : %. C

2. & 4. : 12. ) 14. & 22. ) 24. ) %2. : %4. &

%. C 7. : 1%. C 17. ) 2%. : 27. & %%. : %7. )*. C 9. ) 1*. ) 19. C 2*. & 29. ) %*. )

+. : 1. C 1+. : 2. C 2+. : %. : %+. &

P"&'l!(

1. C 1. C %1. C *. ) 1. C

2. ) 14. ) %2. : *4. ) 2. C

%. : 17. ) %%. & *7. : %. )

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