Question 1

Trina'sTrikes, Inc. reported a debt-to-equity ratio of 2 times at the end of 2018. If the firm's total debt at year-end was $10 million, how much equity does Trina's Trikes have?

Accepted Answer

The debt-to-equity ratio is calculated as total debt divided by total equity. Given a debt-to-equity ratio of 2, this means total debt is twice the equity. Therefore, if total debt is $10 million, the equity must be $5 million to maintain a ratio of 2 ($10 million / $5 million = 2).

Question 2

Tops N Bottoms Corp. reported sales for 2018 of $50 million. Tops N Bottoms listed $4 million of inventory on its balance sheet. Using a 365-day year, how many days did Tops N Bottoms' inventory stay on the premises? How many times per year did Tops N Bottoms' inventory turnover?

Accepted Answer

To calculate the days inventory outstanding (DIO), use the formula: $DIO = \frac{Inventory}{Cost\ of\ Goods\ Sold} \times 365$. Assuming Cost of Goods Sold (COGS) is approximated by sales, $DIO = \frac{4\ million}{50\ million} \times 365 = 29.2$ days. Inventory turnover is calculated as $Turnover = \frac{Sales}{Inventory} = \frac{50\ million}{4\ million} = 12.5$ times.

Question 3

Which of these can be used by interested parties to identify changes in corporate performance?

Accepted Answer

Common-size financial statements are used to analyze and compare the financial statements of a company over time or with other companies within the same industry, by converting the financial statements into percentages of a common base figure. This makes it easier to identify changes in corporate performance.

Question 4

You are evaluating the balance sheet for Blue Jays Corporation. From the balance sheet you find the following balances: cash and marketable securities = $200,000, accounts receivable = $800,000, inventory = $1,000,000, accrued wages and taxes = $250,000, accounts payable = $400,000, and notes payable = $300,000. What are Blue Jays' current ratio, quick ratio, and cash ratio, respectively?

Accepted Answer

The current ratio is calculated as Current Assets / Current Liabilities. Here, Current Assets = $200,000 (cash and marketable securities) + $800,000 (accounts receivable) + $1,000,000 (inventory) = $2,000,000. Current Liabilities = $250,000 (accrued wages and taxes) + $400,000 (accounts payable) + $300,000 (notes payable) = $950,000. So, the current ratio = $2,000,000 / $950,000 = 2.10526. The quick ratio is calculated as (Current Assets - Inventory) / Current Liabilities = ($2,000,000 - $1,000,000) / $950,000 = $1,000,000 / $950,000 = 1.05263. The cash ratio is calculated as (Cash and Marketable Securities) / Current Liabilities = $200,000 / $950,000 = 0.21053.

Question 5

Bree's Tennis Supply's market-to-book ratio is currently 9.4 times and PE ratio is 20 times. If Bree's Tennis Supply's common stock is currently selling at $20.50 per share, what is the book value per share and earnings per share?

Accepted Answer

The answer of Bree's Tennis Supply's market-to-book ratio is currently...

Question 6

The top part of Mars, Inc.'s 2018 balance sheet is listed as follows (in millions of dollars).
$$\begin{array} { l r l r } 
\text { Current assets: } & & \text { Curreat liabilities: } & \
\text { Cash ard marketable securities } & \$ 10 & \text { Accrued wages and taxes } & \mathbf { 2 0 } \
\text { Accounts receivable } & 40 & \text { Accounts payable } & 30 \
\text { Irventory } & 160 & \text { Notes payable } & 40 \
\text { Total } & \$ 210 & \text { Total } &\$ 90
\end{array}$$
What are Mars, Inc.'s current ratio, quick ratio, and cash ratio for 2018?

Accepted Answer

The current ratio is calculated as current assets divided by current liabilities (210/90 = 2.3333). The quick ratio is calculated as (current assets - inventory) divided by current liabilities ((210-160)/90 = 0.5556). The cash ratio is calculated as cash and marketable securities divided by current liabilities (10/90 = 0.1111).

Question 7

The top part of Rammy's Inc.'s 2018 balance sheet is listed as follows (in millions of dollars).
$$\begin{array} { l r l l r } 
\text { Current assets: } & & \text { Curreat liabilities: } & \
\text { Cash ard marketable securities } & \$  5 & \text { Accrued wages and taxes } &  \$6\
\text { Accounts receivable } & 15 & \text { Accounts payable } & 10 \
\text { Irventory } & 95 & \text { Notes payable } & 50 \
\text { Total } & \$ 115 & \text { Total } & \$ 66
\end{array}$$
What are Mars, Inc.'s current ratio, quick ratio, and cash ratio for 2018?

Accepted Answer

Current ratio = Total current assets / Total current liabilities = 115 / 66 = 1.74242Quick ratio = (Total current assets - Inventory) / Total current liabilities = (115 - 95) / 66 = 0.30303Cash ratio = (Cash and marketable securities) / Total current liabilities = 5 / 66 = 0.07576

Question 8

Will's Wheels, Inc. reported a debt-to-equity ratio of 0.65 times at the end of 2018. If the firm's total debt at year-end was $5 million, how much equity does Will's Wheels have?

Accepted Answer

The debt-to-equity ratio is calculated as total debt divided by total equity. Given a debt-to-equity ratio of 0.65 and total debt of $5 million, we can set up the equation 0.65 = $5 million / Equity. Solving for equity gives us Equity = $5 million / 0.65 = $7.69 million.

Question 9

For publicly traded firms, which of these ratios measure what investors think of the company's future performance and risk?

Accepted Answer

Market value ratios are used to evaluate the share price of a company's stock and what investors think about the company's future performance and risk. These ratios include price-to-earnings (P/E) ratio, market-to-book ratio, and others that reflect the market's perception of the company's future growth and risk.

Question 10

The key to cross-sectional analysis comparison of firm ratios include:

Accepted Answer

Cross-sectional analysis involves comparing a company's financial ratios or conditions to those of other firms in the same industry at the same point in time. This comparison is most meaningful when it includes firms that compete in the same markets (A), have similar asset sizes (B), and operate in a similar manner (C), ensuring that the analysis is comparing like with like.

Question 11

Return on Equity….

Accepted Answer

Return on Equity (ROE) specifically measures the return (profit) generated on the common stockholder's equity investment in the firm, indicating how effectively the company uses the money invested by its equity shareholders.

Question 12

Which statement(s) is/are true of PE ratios?

Accepted Answer

The PE (Price-to-Earnings) ratio is a valuation metric that measures how much investors are willing to pay for each dollar of earnings per share, indicating expectations of future growth for companies with high PE ratios. Thus, both statements A and C are true.

Question 13

Which statement is true of ratio analysis:

Accepted Answer

Ratio analysis can provide insights into a firm's current financial health and, while not predictive, can suggest trends that might hint at future performance.

Question 14

CornProducts Corp. ended the year 2018 with an average collection period of 40 days. The firm's credit sales for 2018 were $9 million. What is the approximate year-end 2018 balance in accounts receivable for Corn Products?

Accepted Answer

The year-end balance in accounts receivable can be calculated using the formula: (Average Collection Period / 365 days) * Credit Sales. Plugging in the values: (40 / 365) * $9,000,000 = $986,301.37, which is approximately $986,300.

Question 15

Which of these ratios show the combined effects of liquidity, asset management, and debt management on the overall operation results of the firm?

Accepted Answer

Profitability ratios show the combined effects of liquidity, asset management, and debt management on the overall operation results of the firm by measuring the amount of profit the company generates with the resources it has.

Question 16

Which of the following is the maximum growth rate that can be achieved by financing asset growth with new debt and retained earnings?

Accepted Answer

The sustainable growth rate is the maximum growth rate a company can achieve by financing asset growth with new debt and retained earnings, without needing to issue new equity.

Question 17

To interpret financial ratios, managers, analysts, and investors use which of the following type of benchmarks?

Accepted Answer

Time series analysis involves comparing financial ratios over different periods to identify trends and patterns, making it a common benchmark for interpretation.

Question 18

Rachets R Us Corp. reported sales for 2013 of $200,000. Rachets R Us listed $25,000 of inventory on its balance sheet. Using a 365-day year, how many days did Rachets R Us's inventory stay on the premises? How many times per year did Rachets R Us's inventory turnover?

Accepted Answer

The inventory turnover ratio is calculated as sales divided by inventory, which is $200,000 / $25,000 = 8 times. The days in inventory is calculated as 365 days divided by the inventory turnover ratio, which is 365 / 8 = 45.625 days.

Question 19

Which of the following measures the operating return on the firm's assets, irrespective of financial leverage and taxes?

Accepted Answer

The basic earnings power (BEP) ratio measures the operating return on the firm's assets, ignoring the effects of financial leverage and taxes. It is calculated by dividing earnings before interest and taxes (EBIT) by total assets, providing insight into the firm's operational efficiency.

Question 20

You are considering a stock investment in one of two firms (LotsofDebt, Inc. and LotsofEquity, Inc.), both of which operate in the same industry. LotsofDebt, Inc. finances its $100 million in assets with $90 million in debt and $10 million in equity. LotsofEquity, Inc. finances its $100 million in assets with $10 million in debt and $90 million in equity. What are the debt ratio, equity multiplier, and debt-to-equity ratio for the two firms?

Accepted Answer

The debt ratio is calculated as total debt divided by total assets. For LotsofDebt, Inc., it's $90 million / $100 million = 90%. For LotsofEquity, Inc., it's $10 million / $100 million = 10%. The equity multiplier is total assets divided by total equity. For LotsofDebt, Inc., it's $100 million / $10 million = 10 times. For LotsofEquity, Inc., it's $100 million / $90 million = 1.11 times. The debt-to-equity ratio is total debt divided by total equity. For LotsofDebt, Inc., it's $90 million / $10 million = 9 times. For LotsofEquity, Inc., it's $10 million / $90 million = 0.1111 times.

Quiz 3: Analyzing Financial Statements