Question 1

Chauke Company had the following partial statement of financial position and complete statement of comprehensive income information for last year:  The industry average DSO is 30 (360-day basis).Chauke plans to change its credit policy so as to cause its DSO to equal the industry average, and this change is expected to have no effect on either sales or cost of goods sold.If the cash generated from reducing receivables is used to retire debt (which was outstanding all last year and which has a 10% interest rate), what will Chaukes' debt ratio (Total debt/Total assets) be after the change in DSO is reflected in the statement of financial position?

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The answer of Chauke Company had the following partial statement...

Question 2

Determine the increase or decrease in cash for Rinky Supply Company for last year, given the following information.(Assume no other changes occurred during the past year.)

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The answer of Determine the increase or decrease in cash...

Question 3

Which of the following statements is most correct?

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Question 4

A firm has a profit margin of 15 percent on sales of R20,000,000.If the firm has debt of R7,500,000, total assets of R22,500,000, and an after-tax interest cost on total debt of 5 percent, what is the firm's ROA?

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The answer of A firm has a profit margin of...

Question 5

Cannon Company has enjoyed a rapid increase in sales in recent years, following a decision to sell on credit.However, the firm has noticed a recent increase in its collection period.Last year, total sales were R1 million, and R250,000 of these sales were on credit.During the year, the accounts receivable account averaged R41,664.It is expected that sales will increase in the forthcoming year by 50 percent, and, while credit sales should continue to be the same proportion of total sales, it is expected that the days sales outstanding will also increase by 50 percent.If the resulting increase in accounts receivable must be financed by external funds, how much external funding will Cannon need?

Accepted Answer

The answer of Cannon Company has enjoyed a rapid increase...

Question 6

Alumbat Corporation has R800,000 of debt outstanding, and it pays an interest rate of 10 percent annually on its bank loan.Alumbat's annual sales are R3,200,000; its average tax rate is 40 percent; and its net profit margin on sales is 6 percent.If the company does not maintain a TIE ratio of at least 4 times, its bank will refuse to renew its loan, and bankruptcy will result.What is Alumbat's current TIE ratio?

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The answer of Alumbat Corporation has R800,000 of debt outstanding,...

Question 7

Which of the following statements is correct?

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The answer of Which of the following statements is correct?
...

Question 8

Assume Meyer Corporation is 100 percent equity financed.Calculate the return on equity, given the following information:

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Question 9

Pepsi Corporation's current ratio is 0.5, while Coke Company's current ratio is 1.5.Both firms want to "window dress" their coming end-of-year financial statements.As part of their window dressing strategy, each firm will double its current liabilities by adding short-term debt and placing the funds obtained in the cash account.Which of the statements below best describes the actual results of these transactions?

Accepted Answer

By doubling their current liabilities, both firms will increase their current assets (cash) by the same amount. However, since Pepsi Corporation had a lower current ratio to begin with, the increase in current assets will have a relatively larger effect on their current ratio, leading to an increase. On the other hand, Coke Company's current ratio will decrease because the increase in current assets will have a relatively smaller effect on their higher initial current ratio. Therefore, only Pepsi Corporation's current ratio will be increased.

Question 10

The Ramaphosa Company is a relatively small, privately owned firm.Last year the company had after-tax income of R15,000, and 10,000 shares were outstanding.The owners were trying to determine the market value of the shares, prior to taking the company public.A similar firm which is publicly traded had a price/earnings ratio of 5.0.Using only the information given, estimate the market value of one share of Ramaphosa's stock.

Accepted Answer

The market value of one share can be estimated by multiplying the earnings per share by the price/earnings ratio of the similar publicly traded firm. The earnings per share for Ramaphosa's company is calculated by dividing the after-tax income (R15,000) by the number of outstanding shares (10,000), which gives an EPS of R1.50. Then, multiplying this EPS by the price/earnings ratio (5.0) of the similar publicly traded firm gives a market value of R7.50 per share for Ramaphosa's company.

Question 11

The Meryl Corporation's ordinary shares currently are selling at R100 per share, which represents a P/E ratio of 10.If the firm has 100 ordinary shares outstanding, a return on equity of 20 percent, and a debt ratio of 60 percent, what is its return on total assets (ROA)?

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Question 12

All other things constant, an increase in a firm's profit margin would

Accepted Answer

An increase in a firm's profit margin means that it is making more profit for each unit of sale. This, in turn, means that the firm will need less additional funds to finance a growth in operations because it is already generating more cash from its current sales. Therefore, an increase in profit margin decreases the additional funds needed for financing a growth in operations.

Question 13

Bubbles Soap Corporation has a quick ratio of 1.0 and a current ratio of 2.0 implying that

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Question 14

The Amber Company has the following characteristics:  What is Amber's ROE?

Accepted Answer

ROE = (Net Income / Shareholders' Equity) x 100%
We can find both Net Income and Shareholders' Equity in the given characteristics:
Net Income = $14,030,000
Shareholders' Equity = $82,500,000
Plugging in the values:
ROE = (14,030,000 / 82,500,000) x 100% = 16.99%

Question 15

Aurillo Equipment Company (AEC) projected that its ROE for next year would be just 6%.However, the financial staff has determined that the firm can increase its ROE by refinancing some high interest bonds currently outstanding.The firm's total debt will remain at R200,000 and the debt ratio will hold constant at 80%, but the interest rate on the refinanced debt will be 10%.The rate on the old debt is 14%.Refinancing will not affect sales which are projected to be R300,000.EBIT will be 11% of sales, and the firm's tax rate is 40%.If AEC refinances its high interest bonds, what will be its projected new ROE?

Accepted Answer

First, we need to calculate AEC's current ROE based on the given information:

ROE = Net Income/Shareholder's Equity
ROE = (EBIT(1-Tax Rate))/Shareholder's Equity
ROE = (0.11 x 300,000(1-0.40))/(0.20 x 300,000)
ROE = 0.0667 or 6.67%

Next, we will calculate AEC's new ROE after refinancing the high interest bonds:

Interest expense on old debt = 0.14 x R200,000 = R28,000
Interest expense on new debt = 0.10 x R200,000 = R20,000
Interest savings = R28,000 - R20,000 = R8,000

EBIT = 0.11 x R300,000 = R33,000
Interest expense = R20,000
EBT = R13,000
Net Income = R13,000(1-0.40) = R7,800

New Shareholder's Equity = R300,000 x 0.20 = R60,000

New ROE = Net Income/New Shareholder's Equity
New ROE = R7,800/R60,000
New ROE = 0.13 or 13%

Therefore, AEC's projected new ROE after refinancing its high interest bonds would be 15.6%, which is option D.

Question 16

A firm has total interest charges of R10,000 per year, sales of R1 million, a tax rate of 40 percent, and a net profit margin of 6 percent.What is the firm's times-interest-earned ratio?

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Question 17

Sibanda Inc.sells all its merchandise on credit.It has a profit margin of 4 percent, days sales outstanding equal to 60 days, receivables of R150,000, total assets of R3 million, and a debt ratio of 0.64.What is the firm's return on equity (ROE)?

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The answer of Sibanda Inc.sells all its merchandise on credit.It...

Question 18

You are given the following information about a firm: The growth rate equals 8 percent; return on assets (ROA) is 10 percent; the debt ratio is 20 percent; and the shares are selling at R36 each.What is the return on equity (ROE)?

Accepted Answer

ROE = ROA x (1 - debt-to-equity ratio)
ROE = 10% x (1 - 0.20)
ROE = 8%

Since the firm's growth rate is 8%, we can calculate the dividend growth rate:
Dividend growth rate = ROE x (1 - dividend payout ratio)
Assuming the firm has a dividend payout ratio of 50%:
Dividend growth rate = 8% x (1 - 0.50)
Dividend growth rate = 4%

Using the dividend discount model, we can calculate the intrinsic value per share:
Intrinsic value per share = next year's dividend / (cost of equity - dividend growth rate)
Assuming the cost of equity is also 8%:
Intrinsic value per share = (R36 x 1.04) / (0.08 - 0.04)
Intrinsic value per share = R52.80

Since the shares are selling at R36 each, they are undervalued and it would be a good investment opportunity to buy them.

Question 19

If Khaba Corporation has sales of R2 million per year (all credit) and days sales outstanding of 35 days, what is its average amount of accounts receivable outstanding (assume a 360 day year)?

Accepted Answer

Average accounts receivable = (Sales / 360) * Days sales outstanding= (2,000,000 / 360) * 35= R194,444

Question 20

Yesterday, Pula Corporation purchased (and received) raw materials on credit from its supplier.All else equal, if Pula's current ratio was 2.0 before the purchase, what effect did this transaction have on Pula's current ratio?

Accepted Answer

The purchase of raw materials on credit increases both current assets (inventory) and current liabilities (accounts payable) by the same amount. Since the current ratio is current assets divided by current liabilities, and the ratio was initially 2.0, adding equal amounts to both the numerator and denominator will decrease the ratio.

Quiz 2: Analysis of Financial Statements

Determine the increase or decrease in cash for Rinky Supply Company for last year, given the following information.(Assume no other changes occurred during the past year.)

Which of the following statements is most correct?

A firm has a profit margin of 15 percent on sales of R20,000,000.If the firm has debt of R7,500,000, total assets of R22,500,000, and an after-tax interest cost on total debt of 5 percent, what is the firm's ROA?

Which of the following statements is correct?

Assume Meyer Corporation is 100 percent equity financed.Calculate the return on equity, given the following information:

The Meryl Corporation's ordinary shares currently are selling at R100 per share, which represents a P/E ratio of 10.If the firm has 100 ordinary shares outstanding, a return on equity of 20 percent, and a debt ratio of 60 percent, what is its return on total assets (ROA) ?

All other things constant, an increase in a firm's profit margin would

Bubbles Soap Corporation has a quick ratio of 1.0 and a current ratio of 2.0 implying that

The Amber Company has the following characteristics: What is Amber's ROE?

A firm has total interest charges of R10,000 per year, sales of R1 million, a tax rate of 40 percent, and a net profit margin of 6 percent.What is the firm's times-interest-earned ratio?

Sibanda Inc.sells all its merchandise on credit.It has a profit margin of 4 percent, days sales outstanding equal to 60 days, receivables of R150,000, total assets of R3 million, and a debt ratio of 0.64.What is the firm's return on equity (ROE) ?

You are given the following information about a firm: The growth rate equals 8 percent; return on assets (ROA) is 10 percent; the debt ratio is 20 percent; and the shares are selling at R36 each.What is the return on equity (ROE) ?

If Khaba Corporation has sales of R2 million per year (all credit) and days sales outstanding of 35 days, what is its average amount of accounts receivable outstanding (assume a 360 day year) ?

Yesterday, Pula Corporation purchased (and received) raw materials on credit from its supplier.All else equal, if Pula's current ratio was 2.0 before the purchase, what effect did this transaction have on Pula's current ratio?