Question 1

a.Using the financial statements for IUP Enterprises for 2010 (given below),calculate the return on equity,the debt ratio,and the times interest earned ratio.
b.Suppose the industry average debt ratio is 50%.Give one reason why the debt ratio for IUP Enterprises may be considered favorable,and give one reason why the debt ratio for IUP Enterprises may be considered unfavorable.
IUP Enterprises
2010 Financial Statements

Accepted Answer

The answer of a.Using the financial statements for IUP Enterprises...

Question 2

Kaylor Corporation increased its financial leverage during 2010 by taking out a loan and using the proceeds to buy back common stock.At the end of 2010,the corporation reported higher earnings per share and higher return on equity.However,its stock price declined.Discuss why this may happen.

Accepted Answer

The answer of Kaylor Corporation increased its financial leverage during...

Question 3

Complete the following balance sheet using the information given.Round account balances to the nearest dollar.

Accepted Answer

The answer of Complete the following balance sheet using the...

Question 4

The balance sheet and income statement for Becker,Becker & Becker is presented below.
  a.Compute the following ratios:
 Current ratio,Acid test ratio,Debt ratio,Total asset turnover,Operating profit margin,Return on total investments,Times interest earned,Inventory turnover.
b.All other things equal,compute the dollar amount of sales needed to achieve an 18% return on total assets for the coming year.
c.Given Becker's inventory turnover ratio,find a way of computing the current level of inventory given this ratio and assuming the current level of inventories is unknown.Set up but do not solve.

Accepted Answer

The answer of The balance sheet and income statement for...

Question 5

Please refer to Table 4-7 for the following question.
Table 4-7
Hokie Corporation Comparative Balance Sheet
For the Years Ending December 31, 2009 and 2010
(Millions of Dollars)
  Hokie had net income of $28 million for 2010 and paid total cash dividends of $20 million to their common stockholders.
-Calculate the following 2010 financial ratios of Hokie Corporation using the information given in Table 4-7:
i.current ratio
ii.acid test ratio
iii.debt ratio
iv.return on total assets
v.return on common equity

Accepted Answer

The answer of Please refer to Table 4-7 for the...

Question 6

Assume that a firm issues a six-month note to purchase inventory.Which of the following is true if the current ratio before the purchase is 1.0?

Accepted Answer

Issuing a note to purchase inventory will increase the firm's liabilities, which will decrease its quick ratio. However, it will not necessarily affect the current ratio as inventory is considered a current asset and will balance out the increase in liabilities. Therefore, the firm's current ratio may remain the same or increase depending on the amount of inventory purchased and its impact on current assets.

Question 7

Roxbury has sales of $2,250,000; a gross profit of $825,000; total operating costs of $620,000; income taxes of $74,800; total assets of $995,000; and interest expense of $18,000.What is Roxbury's times interest earned ratio?

Accepted Answer

Times interest earned ratio = EBIT / Interest expense= (825,000 - 620,000) / 18,000= 11.4

Question 8

Which of the following is true if a firm wishes to collect its accounts faster by imposing stricter credit terms on its customers?

Accepted Answer

Stricter credit terms can lead to a shorter average collection period (A), an increase in accounts receivable turnover (B), and potentially a decrease in sales as some customers may be deterred by the stricter terms (C).

Question 9

CPR Corp.has cash of $100,000; short-term notes payable of $75,000,accounts receivable of $125,000; accounts payable of $140,000; inventories of $200,000; and accruals of $55,000.What is CPR's current ratio?

Accepted Answer

Current ratio = (Current assets) / (Current liabilities)Current assets = Cash + Accounts receivable + Inventories = $100,000 + $125,000 + $200,000 = $425,000Current liabilities = Short-term notes payable + Accounts payable + Accruals = $75,000 + $140,000 + $55,000 = $270,000Current ratio = $425,000 / $270,000 = 1.57

Question 10

Secular Electric has total equity of $560,000; sales of $2,250,000; current assets of $700,000; and total liabilities of $435,000.What is Secular Electric's total asset turnover?

Accepted Answer

Total Asset Turnover = Sales / Total Assets

Total Assets = Total Equity + Total Liabilities 
Total Assets = $560,000 + $435,000 = $995,000

Total Asset Turnover = $2,250,000 / $995,000 = 2.26

Question 11

Please refer to Table 4-6 for the following question.
Table 4-6
Financial Data for Springfield Power Co. as of December 31, 2010:
 
-From the information presented in Table 4-6,calculate the following ratios for the Springfield Power Co.
i.current ratio
ii.acid test ratio
iii.average collection period
iv.inventory turnover
v.gross profit margin
vi.operating profit margin
vii.net profit margin
viii.total asset turnover

Accepted Answer

The answer of Please refer to Table 4-6 for the...

Question 12

Solid State,Inc.has a total equity of $560,000; sales of $2,250,000; total assets of $995,000; and current liabilities of $310,000.What is Solid State's debt ratio?

Accepted Answer

Debt ratio = Total debt / Total assets

Total debt = Total assets - Total equity 
Total equity = $560,000
Total assets = $995,000
Total debt = $995,000 - $560,000 = $435,000

Debt ratio = $435,000 / $995,000 = 43.7%

Question 13

Complete the following balance sheet using the information given.Round account balances to the nearest dollar.

Accepted Answer

The answer of Complete the following balance sheet using the...

Question 14

A company borrows $10,000 and puts the money into its checking account.This transaction will increase the company's current ratio if prior to the transaction the company's current ratio was

Accepted Answer

The current ratio is calculated by dividing the current assets by the current liabilities. If the company borrows $10,000 and puts it into the checking account, the current assets will increase by $10,000 but the current liabilities will remain the same. Therefore, the current ratio will increase only if the ratio was less than one before the transaction. If the ratio was already equal to or greater than one, adding $10,000 to current assets will not change the ratio.

Question 15

Which of the following has the most significant influence on return on equity?

Accepted Answer

Operating income directly affects the numerator of the return on equity formula (net income), and therefore has the most significant influence on return on equity. Common dividends and principal payments affect the amount of equity available, but not the return calculation itself. Accruals may affect net income, but not necessarily in a way that would significantly impact return on equity.

Question 16

Please refer to Table 4-7 for the following question.
Table 4-7
Hokie Corporation Comparative Balance Sheet
For the Years Ending December 31, 2009 and 2010
(Millions of Dollars)
  Hokie had net income of $28 million for 2010 and paid total cash dividends of $20 million to their common stockholders.
-Certainty Corp.had total sales of $1,200,000 in 2010 (80 percent of its sales are credit).The company's gross profit margin is 25 percent,its ending inventory is $150,000,and its accounts receivable balance is $90,000.What additional amount of cash could the firm have generated if it had increased its inventory turnover ratio to 9.0 and reduced its average collection period to 28.21875 days?

Accepted Answer

The answer of Please refer to Table 4-7 for the...

Question 17

Anton's Coffee Shop has a return on assets of 12%.Anton's assets = $100 while Anton's owner's equity = $40 and its debt equals $60.What is Anton's return on equity?

Accepted Answer

The answer of Anton's Coffee Shop has a return on...

Question 18

All of the following will improve a firm's liquidity position except:

Accepted Answer

Increasing the average collection period will decrease a firm's liquidity, as it means it takes longer to receive payment from customers. The other choices will all improve a firm's liquidity position.

Question 19

Which of the following ratios would be the best way to determine how customers are paying for their purchases?

Accepted Answer

The Average Collection Period ratio would be the best way to determine how customers are paying for their purchases, as it measures the average number of days it takes for a business to collect its accounts receivable from customers. This can give insight into the payment habits of customers and the effectiveness of the company's credit and collection policies. Inventory turnover and Total asset turnover ratios are more focused on measuring efficiency and productivity, while the Current ratio is a measure of a company's ability to pay its short-term liabilities.

Question 20

S.Panya has total assets of $1,000,000; common equity of $400,000; a gross profit of $800,000; total operating expenses of $620,000; interest expense of $20,000; income taxes of $74,000; and preferred dividends of $30,000.What is S.Panya's return on equity?

Accepted Answer

Return on equity (ROE) is calculated as Net Income divided by Common Equity. Net Income = Gross Profit - Operating Expenses - Interest Expense - Income Taxes - Preferred Dividends = $800,000 - $620,000 - $20,000 - $74,000 - $30,000 = $56,000. ROE = $56,000 / $400,000 = 14.0%.

Quiz 4: Evaluating a Firms Financial Performance

Kaylor Corporation increased its financial leverage during 2010 by taking out a loan and using the proceeds to buy back common stock.At the end of 2010,the corporation reported higher earnings per share and higher return on equity.However,its stock price declined.Discuss why this may happen.

Complete the following balance sheet using the information given.Round account balances to the nearest dollar.

Assume that a firm issues a six-month note to purchase inventory.Which of the following is true if the current ratio before the purchase is 1.0?

Roxbury has sales of $2,250,000; a gross profit of $825,000; total operating costs of $620,000; income taxes of $74,800; total assets of $995,000; and interest expense of $18,000.What is Roxbury's times interest earned ratio?

Which of the following is true if a firm wishes to collect its accounts faster by imposing stricter credit terms on its customers?

CPR Corp.has cash of $100,000; short-term notes payable of $75,000,accounts receivable of $125,000; accounts payable of $140,000; inventories of $200,000; and accruals of $55,000.What is CPR's current ratio?

Secular Electric has total equity of $560,000; sales of $2,250,000; current assets of $700,000; and total liabilities of $435,000.What is Secular Electric's total asset turnover?

Solid State,Inc.has a total equity of $560,000; sales of $2,250,000; total assets of $995,000; and current liabilities of $310,000.What is Solid State's debt ratio?

Complete the following balance sheet using the information given.Round account balances to the nearest dollar.

A company borrows $10,000 and puts the money into its checking account.This transaction will increase the company's current ratio if prior to the transaction the company's current ratio was

Which of the following has the most significant influence on return on equity?

Anton's Coffee Shop has a return on assets of 12%.Anton's assets = $100 while Anton's owner's equity = $40 and its debt equals $60.What is Anton's return on equity?

All of the following will improve a firm's liquidity position except:

Which of the following ratios would be the best way to determine how customers are paying for their purchases?

S.Panya has total assets of $1,000,000; common equity of $400,000; a gross profit of $800,000; total operating expenses of $620,000; interest expense of $20,000; income taxes of $74,000; and preferred dividends of $30,000.What is S.Panya's return on equity?