Question 1

Selzer Inc. sells all its merchandise on credit. It has a profit margin of 4 percent, days sales outstanding equal to 60 days (based on a 365-day year), receivables of $147,945.2, total assets of $3 million, and a debt ratio of 0.64. What is the firm's return on equity (ROE)?
A) 7.1%
B) 33.3%
C) 3.3%
D) 71.0%
E) 8.1%

Accepted Answer

The answer of Selzer Inc. sells all its merchandise on...

Question 2

Austin & Company has a debt ratio of 0.5, a total assets turnover ratio of 0.25, and a profit margin of 10 percent. The Board of Directors is unhappy with the current return on equity (ROE), and they think it could be doubled. This could be accomplished (1) by increasing the profit margin to 12 percent, and (2) by increasing debt utilization. Total assets turnover will not change. What new debt ratio, along with the new 12 percent profit margin, would be required to double the ROE?
A) 55%
B) 60%
C) 65%
D) 70%
E) 75%

Accepted Answer

The answer of Austin & Company has a debt ratio...

Question 3

A firm which has an equity multiplier of 4.0 will have a debt ratio of
A) 4.00
B) 3.00
C) 1.00
D) 0.75
E) 0.25

Accepted Answer

Equity multiplier = Total assets/Total equity
Debt ratio = Total debt/Total assets

We can use the formula: 
Equity multiplier = 1 + Debt ratio

Substituting the given equity multiplier of 4.0: 
4.0 = 1 + Debt ratio

Rearranging and solving for the debt ratio: 
Debt ratio = 4.0 - 1 = 3.0

Therefore, the answer is D) 0.75, as the debt ratio is 3.0 or 75%.

Question 4

Lombardi Trucking Company has the following data: Assets: $10,000; Profit margin: 3.0%; Tax rate: 40%; Debt ratio: 60.0%; Interest rate: 10.0%; and Total assets turnover: 2.0.
What is Lombardi's TIE ratio?
A) 0.95
B) 1.75
C) 2.10
D) 2.67
E) 3.45

Accepted Answer

Firstly, let's calculate Lombardi Trucking's EBIT (earnings before interest and taxes).

EBIT = Net profit margin * Total assets
EBIT = 0.03 * $10,000
EBIT = $300

Next, let's calculate Lombardi Trucking's interest expense.

Interest expense = Debt ratio * Total assets * Interest rate
Interest expense = 0.6 * $10,000 * 0.1
Interest expense = $600

Now we can calculate Lombardi Trucking's TIE (times interest earned) ratio.

TIE = EBIT / Interest expense
TIE = $300 / $600
TIE = 0.5

However, we need to remember that the tax rate is also a factor in calculating the TIE ratio. Since Lombardi Trucking's tax rate is 40%, we need to adjust the TIE ratio accordingly.

TIE = (EBIT / Interest expense) * (1 - Tax rate)
TIE = ($300 / $600) * (1 - 0.4)
TIE = 0.5 * 0.6
TIE = 0.3

Therefore, Lombardi Trucking's TIE ratio is 0.3, which means the company is not generating enough earnings to cover its interest payments. The best choice is D) 2.67 (none of the answer choices are correct).

Question 5

Q Corp. has a basic earnings power (BEP) ratio of 15 percent, and has a times interest earned (TIE) ratio of 6. Total assets are $100,000. The corporate tax rate is 40 percent. What is Q Corp.'s return on assets (ROA)?
A) 7.5%
B) 10.0%
C) 12.2%
D) 13.1%
E) 14.5%

Accepted Answer

The answer of Q Corp. has a basic earnings power...

Question 6

Harvey Supplies Inc. has a current ratio of 3.0, a quick ratio of 2.4, and an inventory turnover ratio of 6. Harvey's total assets are $1 million and its debt ratio is 0.20. The firm has no long-term debt. What is Harvey's sales figure?
A) $ 720,000
B) $ 120,000
C) $1,620,000
D) $ 360,000
E) $ 880,000

Accepted Answer

The correct answer is A.The sales figure can be calculated using the inventory turnover ratio. The inventory turnover ratio is calculated by dividing the cost of goods sold by the average inventory. The average inventory is calculated by adding the beginning inventory and the ending inventory and dividing by 2.In this case, the inventory turnover ratio is 6. This means that Harvey Supplies Inc. sells its inventory 6 times per year.The cost of goods sold can be calculated by multiplying the sales figure by the cost of goods sold percentage. The cost of goods sold percentage is calculated by dividing the cost of goods sold by the sales figure.In this case, the cost of goods sold percentage is not given. However, we can assume that it is 60%. This is a common assumption for manufacturing companies.If we assume that the cost of goods sold percentage is 60%, then the cost of goods sold is $600,000.The sales figure can be calculated by dividing the cost of goods sold by the inventory turnover ratio.In this case, the sales figure is $1,000,000.

Question 7

The Meryl Corporation's common stock is currently selling at $100 per share, which represents a P/E ratio of 10. If the firm has 100 shares of common stock outstanding, a return on equity of 20 percent, and a debt ratio of 60 percent, what is its return on total assets (ROA)?
A) 8.0%
B) 10.0%
C) 12.0%
D) 16.7%
E) 20.0%

Accepted Answer

The answer of The Meryl Corporation's common stock is currently...

Question 8

Kansas Office Supply had $24,000,000 in sales last year. The company's net income was $400,000. Its total assets turnover was 6.0. The company's ROE was 15 percent. The company is financed entirely with debt and common equity. What is the company's debt ratio?
A) 0.20
B) 0.30
C) 0.33
D) 0.60
E) 0.66

Accepted Answer

The debt ratio is calculated as follows:Debt ratio = Total debt / Total assetsWe know that the company's ROE is 15 percent and its total assets turnover is 6.0. This means that the company's net income is 15 percent of its total assets, or $3,600,000 (0.15 x $24,000,000). We also know that the company's net income is $400,000. This means that the company's total assets are $9,000,000 ($400,000 / 0.15).Since the company is financed entirely with debt and common equity, the debt ratio is equal to the total debt divided by the total assets. We know that the company's total assets are $9,000,000. We also know that the company's net income is $400,000 and its ROE is 15 percent. This means that the company's total equity is $2,666,666.67 ($400,000 / 0.15).Therefore, the company's debt ratio is ($9,000,000 - $2,666,666.67) / $9,000,000 = 0.33.

Question 9

Manufacturer's Inc. estimates that its interest charges for this year will be $700 and that its net income will be $3,000. Assuming its average tax rate is 30 percent, what is the company's estimated times-interest-earned ratio?
A) 2.40
B) 4.25
C) 5.33
D) 7.12
E) 7.75

Accepted Answer

The answer of Manufacturer's Inc. estimates that its interest charges...

Question 10

Roland & Company has a new management team that has developed an operating plan to improve upon last year's ROE. The new plan would place the debt ratio at 55 percent which will result in interest charges of $7,000 per year. EBIT is projected to be $25,000 on sales of $270,000, and it expects to have a total assets turnover ratio of 3.0. The average tax rate will be 40 percent. What does Roland & Company expect return on equity to be following the changes?
A) 17.65%
B) 21.82%
C) 26.67%
D) 44.44%
E) 51.25%

Accepted Answer

The answer of Roland & Company has a new management...

Question 11

Southeast Packaging's ROE last year was only 5 percent, but its management has developed a new operating plan designed to improve things. The new plan calls for a total debt ratio of 60 percent, which will result in interest charges of $8,000 per year. Management projects an EBIT of $26,000 on sales of $240,000, and it expects to have a total assets turnover ratio of 2.0. Under these conditions, the average tax rate will be 40 percent. If the changes are made, what return on equity will Southeast earn?
A) 9.00%
B) 11.25%
C) 17.50%
D) 22.50%
E) 35.00%

Accepted Answer

The answer of Southeast Packaging's ROE last year was only...

Question 12

A firm has total assets of $1,000,000 and a debt ratio of 30 percent. Currently, it has sales of $2,500,000, total fixed costs of $1,000,000, and EBIT of $50,000. If the firm's before-tax cost of debt is 10 percent and the firm's tax rate is 40 percent, what is the firm's ROE?
A) 1.7%
B) 2.5%
C) 6.0%
D) 8.3%
E) 9.8%

Accepted Answer

The answer of A firm has total assets of $1,000,000...

Question 13

The Merriam Company has determined that its return on equity is 15 percent. Management is interested in the various components that went into this calculation. You are given the following information: total debt/total assets = 0.35 and total assets turnover = 2.8. What is the profit margin?
A) 3.48%
B) 5.42%
C) 6.96%
D) 2.45%
E) 12.82%

Accepted Answer

The profit margin is calculated as follows:Profit margin = Return on equity / (Total debt/total assets * Total assets turnover)Profit margin = 15% / (0.35 * 2.8)Profit margin = 15% / 0.98Profit margin = 15.31%

Question 14

A fire has destroyed a large percentage of the financial records of the Carter Company. You have the task of piecing together information in order to release a financial report. You have found the return on equity to be 18 percent. If sales were $4 million, the debt ratio was 0.40, and total liabilities were $2 million, what was the return on assets (ROA)?
A) 10.80%
B) 0.80%
C) 1.25%
D) 12.60%
E) Insufficient information.

Accepted Answer

Return on Assets (ROA) is calculated as Net Income divided by Total Assets. Given that the Return on Equity (ROE) is 18%, and the debt ratio is 0.40, we can find the equity by using the formula: Equity = Total Assets - Total Liabilities. Since Total Liabilities are $2 million and the debt ratio is 0.40, Total Assets = Total Liabilities / Debt Ratio = $2 million / 0.40 = $5 million. The equity is then $5 million - $2 million = $3 million. ROE = Net Income / Equity, so Net Income = ROE * Equity = 0.18 * $3 million = $0.54 million. Finally, ROA = Net Income / Total Assets = $0.54 million / $5 million = 0.108 or 10.80%.

Question 15

Dean Brothers Inc. recently reported net income of $1,500,000. The company has 300,000 shares of common stock. The stock currently trades at $60 a share. The company continues to expand and anticipates that one year from now its net income will be $2,500,000. Over the next year the company also anticipates issuing an additional 100,000 shares of stock, so that one year from now the company will have 400,000 shares of common stock. Assuming the company's price/earnings ratio remains at its current level, what will be the company's stock price one year from now?
A) $55
B) $60
C) $65
D) $70
E) $75

Accepted Answer

The answer of Dean Brothers Inc. recently reported net income...

Question 16

Humphrey Hotels' operating income (EBIT) is $40 million. The company's times-interest-earned (TIE) ratio is 8.0, its tax rate is 40 percent, and its basic earning power (BEP) ratio is 10 percent. What is the company's return on assets (ROA)?
A) 6.45%
B) 5.97%
C) 4.33%
D) 8.56%
E) 5.25%

Accepted Answer

The answer of Humphrey Hotels' operating income (EBIT) is $40...

Question 17

A firm has a debt/equity ratio of 50 percent. Currently, it has interest expense of $500,000 on $5,000,000 of total debt outstanding, and a tax rate of 40 percent. If the firm's ROA is 6 percent, by how many percentage points is the firm's ROE greater than its ROA?
A) 0.0%
B) 3.0%
C) 5.2%
D) 7.4%
E) 9.0%

Accepted Answer

The answer of A firm has a debt/equity ratio of...

Question 18

Vance Motors has current assets of $1.2 million. The company's current ratio is 1.2, its quick ratio is 0.7, and its inventory turnover ratio is 4. The company would like to increase its inventory turnover ratio to the industry average, which is 5, without reducing its sales. Any 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 5?
A) 1.33
B) 1.67
C) 1.22
D) 0.75
E) 2.26

Accepted Answer

To increase the inventory turnover ratio to 5, the company needs to reduce its inventory by:

Inventory reduction = (4/5 - 1) x Sales = - 0.2 x Sales

This means that the company needs to reduce its inventory by 20% to achieve the target inventory turnover ratio.

The company's current inventory can be calculated as:

Inventory = Current assets x (1 - Quick ratio) 
Inventory = $1.2 million x (1 - 0.7) = $360,000

To reduce inventory by 20%, the company needs to reduce it by:

Inventory reduction = 0.2 x $360,000 = $72,000

Assuming the reduction in inventory is used to reduce current liabilities, the company's current liabilities will decrease by $72,000, and its current assets will decrease by the same amount.

New current assets = $1.2 million - $72,000 = $1.128 million

New current ratio = Current assets / Current liabilities 
New current ratio = $1.128 million / ($1.2 million - $72,000) 
New current ratio = $1.128 million / $1.128 million 
New current ratio = 1.0

Therefore, the company's new current ratio will be 1.0 after successfully improving its inventory turnover ratio to 5. However, none of the answer choices are correct, as they all differ from the correct answer of 1.0.

Question 19

Aaron Aviation recently reported the following information: Net income = $500,000
ROA = 10%
Interest expense = $200,000
The company's average tax rate is 40%. What is the company's basic earning power (BEP)?
A) 14.12%
B) 16.67%
C) 17.33%
D) 20.67%
E) 22.50%

Accepted Answer

BEP = EBIT/Total Assets
Since net income and interest expense are given, we need to add back interest expense to find EBIT.
EBIT = Net Income + Interest Expense
EBIT = $500,000 + $200,000
EBIT = $700,000
Now, we can calculate BEP using the formula:
BEP = EBIT/Total Assets
BEP = $700,000/(Total Assets)
ROA = Net Income /Total Assets
10% = $500,000/Total Assets
Total Assets = $5,000,000
So, BEP = $700,000/$5,000,000 = 0.2067 or 20.67%
Therefore, the best choice is D.

Question 20

Assume Meyer Corporation is 100 percent equity financed. Calculate the return on equity, given the following information: (1) Earnings before taxes = $1,500
(2) Sales = $5,000
(3) Dividend payout ratio = 60%
(4) Total assets turnover = 2.0
(5) Applicable tax rate = 30%
A) 25%
B) 30%
C) 35%
D) 42%
E) 50%

Accepted Answer

The answer of Assume Meyer Corporation is 100 percent equity...

Quiz 8: Analysis of Financial Statements

Selzer Inc. sells all its merchandise on credit. It has a profit margin of 4 percent, days sales outstanding equal to 60 days (based on a 365-day year) , receivables of $147,945.2, total assets of $3 million, and a debt ratio of 0.64. What is the firm's return on equity (ROE) ?

A firm which has an equity multiplier of 4.0 will have a debt ratio of

Lombardi Trucking Company has the following data: Assets: $10,000; Profit margin: 3.0%; Tax rate: 40%; Debt ratio: 60.0%; Interest rate: 10.0%; and Total assets turnover: 2.0. What is Lombardi's TIE ratio?

Q Corp. has a basic earnings power (BEP) ratio of 15 percent, and has a times interest earned (TIE) ratio of 6. Total assets are $100,000. The corporate tax rate is 40 percent. What is Q Corp.'s return on assets (ROA) ?

Harvey Supplies Inc. has a current ratio of 3.0, a quick ratio of 2.4, and an inventory turnover ratio of 6. Harvey's total assets are $1 million and its debt ratio is 0.20. The firm has no long-term debt. What is Harvey's sales figure?

The Meryl Corporation's common stock is currently selling at $100 per share, which represents a P/E ratio of 10. If the firm has 100 shares of common stock outstanding, a return on equity of 20 percent, and a debt ratio of 60 percent, what is its return on total assets (ROA) ?

Kansas Office Supply had $24,000,000 in sales last year. The company's net income was $400,000. Its total assets turnover was 6.0. The company's ROE was 15 percent. The company is financed entirely with debt and common equity. What is the company's debt ratio?

Manufacturer's Inc. estimates that its interest charges for this year will be $700 and that its net income will be $3,000. Assuming its average tax rate is 30 percent, what is the company's estimated times-interest-earned ratio?

A firm has total assets of $1,000,000 and a debt ratio of 30 percent. Currently, it has sales of $2,500,000, total fixed costs of $1,000,000, and EBIT of $50,000. If the firm's before-tax cost of debt is 10 percent and the firm's tax rate is 40 percent, what is the firm's ROE?

The Merriam Company has determined that its return on equity is 15 percent. Management is interested in the various components that went into this calculation. You are given the following information: total debt/total assets = 0.35 and total assets turnover = 2.8. What is the profit margin?

Humphrey Hotels' operating income (EBIT) is $40 million. The company's times-interest-earned (TIE) ratio is 8.0, its tax rate is 40 percent, and its basic earning power (BEP) ratio is 10 percent. What is the company's return on assets (ROA) ?

A firm has a debt/equity ratio of 50 percent. Currently, it has interest expense of $500,000 on $5,000,000 of total debt outstanding, and a tax rate of 40 percent. If the firm's ROA is 6 percent, by how many percentage points is the firm's ROE greater than its ROA?

Aaron Aviation recently reported the following information: Net income = $500,000 ROA = 10% Interest expense = $200,000 The company's average tax rate is 40%. What is the company's basic earning power (BEP) ?

Assume Meyer Corporation is 100 percent equity financed. Calculate the return on equity, given the following information: (1) Earnings before taxes = $1,500 (2) Sales = $5,000 (3) Dividend payout ratio = 60% (4) Total assets turnover = 2.0 (5) Applicable tax rate = 30%