Question 1

Zero Corp's total common equity at the end of last year was $510,000 and its net income was $70,000.What was its ROE?

Accepted Answer

ROE (Return on Equity) is calculated as Net Income divided by Total Common Equity. So, for Zero Corp, it's $70,000 / $510,000 = 0.13725 or 13.73%.

Question 2

Beranek Corp has $625,000 of assets (which equal total invested capital),and it uses no debt-it is financed only with common equity.The new CFO wants to employ enough debt to raise the total debt to total capital ratio to 40%,using the proceeds from borrowing to buy back common stock at its book value.How much must the firm borrow to achieve the target debt ratio?

Accepted Answer

The answer of Beranek Corp has $625,000 of assets (which...

Question 3

Ryngard Corp's sales last year were $24,000,and its total assets were $16,000.What was its total assets turnover ratio (TATO)?

Accepted Answer

The answer of Ryngard Corp's sales last year were $24,000,and...

Question 4

X-1 Corp's total assets at the end of last year were $365,000 and its EBIT was $52,500.What was its basic earning power (BEP)ratio?

Accepted Answer

The answer of X-1 Corp's total assets at the end...

Question 5

Herring Corporation has operating income of $275,000 and a 25% tax rate.The firm has short-term debt of $143,000,long-term debt of $323,000,and common equity of $466,000.What is its return on invested capital?

Accepted Answer

The answer of Herring Corporation has operating income of $275,000...

Question 6

Which of the following statements is CORRECT?

Accepted Answer

Statement B is correct because the TIE ratio is directly related to the amount of sales required to cover a firm's interest expense. The other statements either contain incorrect information or cannot be determined without additional information.

Question 7

River Corp's total assets at the end of last year were $320,000 and its net income was $32,750.What was its return on total assets?

Accepted Answer

Return on total assets = (Net Income / Total Assets) × 100%
Return on total assets = (32,750 / 320,000) × 100%
Return on total assets = 10.23%

Question 8

Royce Corp's sales last year were $280,000,and its net income was $23,000.What was its profit margin?

Accepted Answer

Profit margin is calculated by dividing the net income by the total revenue and expressing the result as a percentage. Therefore, profit margin = (Net Income / Total Revenue) x 100. 
In this case, the profit margin = (23,000 / 280,000) x 100 = 8.21%. Therefore, the best choice is C.

Question 9

Precision Aviation had a profit margin of 7.00%,a total assets turnover of 1.5,and an equity multiplier of 1.8.What was the firm's ROE?

Accepted Answer

The answer of Precision Aviation had a profit margin of...

Question 10

Safeco's current assets total to $20 million versus $10 million of current liabilities,while Risco's current assets are $10 million versus $20 million of current liabilities.Both firms would like to "window dress" their end-of-year financial statements,and to do so they tentatively plan to borrow $10 million on a short-term basis and to then hold the borrowed funds in their cash accounts.Which of the statements below best describes the results of these transactions?

Accepted Answer

Safeco's current ratio before the transaction is 2 (20/10), and after borrowing $10 million, their current assets will increase to $30 million while their current liabilities will stay at $10 million. This would result in a current ratio of 3 (30/10), which seems like an improvement in their financial strength. However, this is just window-dressing as the borrowed funds are being held in cash accounts and do not contribute to their operating activities.

On the other hand, Risco's current ratio before the transaction is 0.5 (10/20), and after borrowing $10 million, their current assets will increase to $20 million while their current liabilities will increase to $30 million. This would result in a current ratio of 0.67 (20/30), which appears to be an improvement in their financial strength. However, this is also just window-dressing as the borrowed funds are being held in cash accounts.

In summary, both firms are not actually improving their financial strength by borrowing and holding funds in cash accounts, but the transaction would have the effect of a lower current ratio for Safeco and a higher current ratio for Risco. Therefore, option B is the correct choice.

Question 11

Companies HD and LD have the same total assets,sales,operating costs,and tax rates,and they pay the same interest rate on their debt.Both firms finance using only debt and common equity,and total assets equal total invested capital.However,company HD has a higher total debt to total capital ratio.Which of the following statements is CORRECT?

Accepted Answer

Given that both companies have the same operating metrics but different capital structures, with HD being more leveraged, HD will benefit more from leverage when the cost of debt is lower than the return on assets (BEP), leading to a higher ROE for HD under those conditions.

Question 12

Your sister is thinking about starting a new business.The company would require $355,000 of assets,and it would be financed entirely with common stock.She will go forward only if she thinks the firm can provide a 13.5% return on the invested capital,which means that the firm must have an ROE of 13.5%.How much net income must be expected to warrant starting the business?

Accepted Answer

To find the required net income, multiply the required ROE (13.5%) by the total assets ($355,000): 0.135 * $355,000 = $47,925.

Question 13

Meyer Inc's total invested capital is $670,000,and its total debt outstanding is $185,000.The new CFO wants to establish a total debt to total capital ratio of 55%.The size of the firm will not change.How much debt must the company add or subtract to achieve the target debt to capital ratio?

Accepted Answer

Total capital = Total invested capital + Total debt outstanding
Total capital = $670,000 + $185,000 = $855,000
Target debt to capital ratio = 55%
Hence, Target total debt = 55% of total capital = 0.55 * $855,000 = $470,250
To achieve the target, the company needs to adjust its debt by:
$470,250 - $185,000 = $285,250
To decrease the debt by $285,250, the company would need to repay that amount. To increase the debt, it would need to borrow that amount. 
Therefore, the company must subtract $285,250 from its total debt outstanding, which is $185,000. 
Thus, the company needs to reduce its debt by $100,500 ($285,250 - $185,000), and the new total debt outstanding will be $84,500 ($185,000 - $100,500). 
So, the amount of debt the company must subtract to achieve the target debt to capital ratio is $100,500 or Choice B.

Question 14

Garcia Industries has sales of $207,500 and accounts receivable of $18,500,and it gives its customers 25 days to pay.The industry average DSO is 27 days,based on a 365-day year.If the company changes its credit and collection policy sufficiently to cause its DSO to fall to the industry average,and if it earns 8.0% on any cash freed up by this change,how would that affect its net income,assuming other things are held constant? Assume all sales to be on credit.Do not round your intermediate calculations.

Accepted Answer

The answer of Garcia Industries has sales of $207,500 and...

Question 15

Faldo Corp sells on terms that allow customers 45 days to pay for merchandise.Its sales last year were $300,000,and its year-end receivables were $60,000.If its DSO is less than the 45-day credit period,then customers are paying on time.Otherwise,they are paying late.By how much are customers paying early or late? Base your answer on this equation: DSO - Credit Period = Days early or late,and use a 365-day year when calculating the DSO.A positive answer indicates late payments,while a negative answer indicates early payments.Assume all sales to be on credit.Do not round your intermediate calculations.

Accepted Answer

The answer of Faldo Corp sells on terms that allow...

Question 16

Hoagland Corp's stock price at the end of last year was $24.00,and its book value per share was $25.00.What was its market/book ratio?

Accepted Answer

Market/book ratio is calculated by dividing the market price per share by the book value per share. Therefore, the market/book ratio for Hoagland Corp is:
$24.00/$25.00 = 0.96.

Therefore, the best choice is B.

Question 17

Song Corp's stock price at the end of last year was $28.50 and its earnings per share for the year were $1.30.What was its P/E ratio?

Accepted Answer

The answer of Song Corp's stock price at the end...

Question 18

Han Corp's sales last year were $425,000,and its year-end receivables were $52,500.The firm sells on terms that call for customers to pay 30 days after the purchase,but some delay payment beyond Day 30.On average,how many days late do customers pay? Base your answer on this equation: DSO - Allowed credit period = Average days late,and use a 365-day year when calculating the DSO.Assume all sales to be on credit.Do not round your intermediate calculations.

Accepted Answer

The answer of Han Corp's sales last year were $425,000,and...

Question 19

Helmuth Inc's latest net income was $1,075,000,and it had 225,000 shares outstanding.The company wants to pay out 45% of its income.What dividend per share should it declare? Do not round your intermediate calculations.

Accepted Answer

The answer of Helmuth Inc's latest net income was $1,075,000,and...

Question 20

Ajax Corp's sales last year were $510,000,its operating costs were $362,500,and its interest charges were $12,500.What was the firm's times-interest-earned (TIE)ratio?

Accepted Answer

The TIE ratio is calculated as EBIT (Earnings Before Interest and Taxes) divided by interest charges. EBIT is sales minus operating costs, which is $510,000 - $362,500 = $147,500. The TIE ratio is $147,500 / $12,500 = 11.80.

Quiz 4: Analysis of Financial Statements