Question 1

You are considering investing in Lenny's Lube, Inc. You have been able to locate the following information on the firm: total assets = $20 million, accounts receivable = $6 million, ACP = 20 days, net income = $5 million, and debt-to-equity ratio = 2.5 times. What is the ROE for the firm?

Accepted Answer

ROE (Return on Equity) is calculated as Net Income / Shareholder's Equity. Given the debt-to-equity ratio is 2.5, we can find the equity as a fraction of total assets. The debt-to-equity ratio formula is Total Debt / Total Equity. Rearranging this to solve for equity gives us Total Equity = Total Debt / 2.5. Since the firm's total assets are $20 million and assuming the firm is financed only through debt and equity, Total Assets = Total Debt + Total Equity. We can express Total Debt as Total Assets - Total Equity. Substituting this into the rearranged debt-to-equity formula and solving for Total Equity gives us Total Equity = $20 million / 3.5 (since Total Debt / Total Equity = 2.5 implies Total Debt is 2.5 parts and Total Equity is 1 part, for a total of 3.5 parts). This results in Total Equity of $5.714 million approximately. Therefore, ROE = $5 million / $5.714 million = 87.5%.

Question 2

Calculate the times interest earned ratio for Tierre's Ts, Inc. using the following information. Sales = $200,000, cost of goods sold = $50,000, depreciation expense = $13,000, addition to retained earnings = $70,000, dividends per share = $0.50, tax rate = 30 percent, and number of shares of common stock outstanding = 1,000. Tierre's Ts has no preferred stock outstanding.

Accepted Answer

The times interest earned ratio is calculated as EBIT (Earnings Before Interest and Taxes) divided by interest expense. However, the interest expense is not directly provided, so we focus on calculating EBIT first. EBIT can be calculated as Sales - Cost of Goods Sold - Operating Expenses (excluding interest and taxes). Given data does not explicitly mention operating expenses but includes depreciation, which is an operating expense. However, without explicit interest expense or more detailed operating expenses, we can't directly calculate the times interest earned ratio as intended in traditional financial analysis. The provided information is insufficient to calculate the times interest earned ratio accurately because critical components such as operating expenses (beyond depreciation) and interest expenses are missing. Therefore, the correct answer choice cannot be determined from the given data, indicating a potential misunderstanding in the question's setup or a lack of necessary information.

Question 3

PJ's Ice Cream Parlour has asked you to help piece together financial information on the firm for the most current year. Managers give you the following information: sales = $50 million, total debt = $20 million, debt ratio = 50 percent, and ROE = 12 percent. Using this information, what is PJ's ROA?

Accepted Answer

ROA (Return on Assets) can be calculated using the formula ROA = Net Income / Total Assets. Given the debt ratio (Total Debt / Total Assets) is 50%, this means Total Assets = $40 million ($20 million / 0.5). With an ROE (Return on Equity) of 12% and knowing that Equity = Total Assets - Total Debt = $40 million - $20 million = $20 million, we can calculate Net Income = ROE * Equity = 0.12 * $20 million = $2.4 million. Therefore, ROA = $2.4 million / $40 million = 6%.

Question 4

Last year, DJ's Soda Fountains, Inc. reported an ROE = 27 percent. The firm's debt ratio was 50 percent, sales were $9 million, and the capital intensity ratio was 1.5 times. What is the net income for DJ's last year?

Accepted Answer

The net income can be calculated using the Return on Equity (ROE) formula: ROE = Net Income / Equity. Given an ROE of 27% and a debt ratio of 50%, the equity ratio is 50% (since Debt Ratio + Equity Ratio = 100%). With a capital intensity ratio of 1.5 times, the total assets are 1.5 * $9m in sales = $13.5m. Therefore, Equity = 50% of total assets = 0.5 * $13.5m = $6.75m. Thus, Net Income = ROE * Equity = 0.27 * $6.75m = $1.8225m, which rounds to $1.82m.

Question 5

Lab R Doors' year-end price on its common stock is $40. The firm has total assets of $75 million, the debt ratio is 60 percent, there is no preferred stock, and there are 4 million shares of common stock outstanding. Calculate the market-to-book ratio for Lab R Doors.

Accepted Answer

The answer of Lab R Doors' year-end price on its...

Question 6

Last year, PJ's Ice Cream Parlours, Inc. reported an ROE = 12 percent. The firm's debt ratio was 40 percent, sales were $25 million, and the capital intensity ratio was 0.75 times. What is the net income for PJ's last year?

Accepted Answer

The ROE (Return on Equity) is calculated as Net Income / Equity. Given ROE = 12% and the debt ratio = 40%, the equity ratio is 60%. The capital intensity ratio is 0.75, meaning Total Assets = 0.75 * Sales = 0.75 * $25m = $18.75m. Equity = 60% of Total Assets = 0.6 * $18.75m = $11.25m. Therefore, Net Income = ROE * Equity = 0.12 * $11.25m = $1.35m.

Question 7

Calculate the times interest earned ratio for Paige's Purses, Inc. using the following information: sales = $50,000,000, cost of goods sold = $15,000,000, depreciation expense = $2,000,000, addition to retained earnings = $10,000,000, dividends per share = $1.10, tax rate = 30 percent, and number of shares of common stock outstanding = 10,000,000. Paige's Purses has no preferred stock outstanding.

Accepted Answer

The times interest earned ratio is calculated as EBIT divided by interest expense. First, calculate EBIT: Sales - COGS - Depreciation = $50,000,000 - $15,000,000 - $2,000,000 = $33,000,000. Next, calculate net income: Addition to retained earnings + Dividends = $10,000,000 + ($1.10 * 10,000,000) = $21,000,000. Since net income is after tax, calculate EBIT: Net income / (1 - tax rate) = $21,000,000 / 0.7 = $30,000,000. Interest expense is EBIT - Net income = $33,000,000 - $30,000,000 = $3,000,000. Times interest earned = EBIT / Interest expense = $33,000,000 / $3,000,000 = 11.00.

Question 8

Paige's Purses, Inc. reported a debt to equity ratio of 2.4 times at the end of 2018. If the firm's total assets at year-end are $27 million, how much of their assets is financed with equity?

Accepted Answer

The debt to equity ratio is given as 2.4, which means for every $1 of equity, there is $2.4 of debt. If we let E represent equity, then debt is 2.4E. The total assets are the sum of debt and equity, which is $27 million. Therefore, 2.4E + E = $27 million, simplifying to 3.4E = $27 million. Solving for E, we find E = $27 million / 3.4 = $7.94 million.

Question 9

Fancy Paws' year-end price on its common stock is $20. The firm has a profit margin of 12 percent, total assets of $20 million, a total asset turnover ratio of 0.5, no preferred stock, and there are 2 million shares of common stock outstanding. What is the PE ratio for Fancy Paws?

Accepted Answer

The answer of Fancy Paws' year-end price on its common...

Question 10

You are thinking of investing in Ski Sports, Inc. You have only the following information on the firm at year-end 2018: net income = $50,000, total debt = $1 million, and debt ratio = 70 percent. What is Ski's ROE for 2018?

Accepted Answer

ROE = Net income / Shareholder's equityShareholder's equity = Total assets - Total debtTotal assets = Total debt / Debt ratioTotal assets = $1 million / 0.70 = $1.43 millionShareholder's equity = $1.43 million - $1 million = $0.43 millionROE = $50,000 / $0.43 million = 11.67%

Question 11

Lab R Doors' year-end price on its common stock is $40. The firm has a profit margin of 10 percent, total assets of $30 million, a total asset turnover ratio of 2, no preferred stock, and there are 4 million shares of common stock outstanding. What is the PE ratio for Lab R Doors?

Accepted Answer

First, calculate the earnings per share (EPS). The total assets are $30 million, and the total asset turnover ratio is 2, meaning the sales are $60 million ($30 million * 2). With a profit margin of 10%, the net income is $6 million (10% of $60 million). With 4 million shares outstanding, the EPS is $1.50 ($6 million / 4 million shares). The price-earnings (PE) ratio is the share price divided by EPS, which is $40 / $1.50 = 26.667.

Question 12

Zoe's Dog Toys, Inc. reported a debt to equity ratio of 0.5 times at the end of 2018. If the firm's total assets at year-end are $50 million, how much of their assets is financed with equity?

Accepted Answer

The debt to equity ratio is defined as total debt divided by total equity. Given a ratio of 0.5, this means that for every $1 of equity, there is $0.5 of debt. If the total assets are $50 million and we assume that the company only uses debt and equity to finance these assets (Assets = Debt + Equity), we can set up the equation: Debt/Equity = 0.5. Rearranging this equation to solve for Equity in terms of Debt gives Equity = 2 * Debt. Since Assets = Debt + Equity, and Equity is 2 times Debt, it implies that Equity is 2/3 of the total assets. Therefore, 2/3 of $50 million is $33.33 million, which means $33.33 million of the assets are financed with equity.

Question 13

Leash N Collar reported a profit margin of 8 percent, total asset turnover ratio of 1.5 times, debt-to-equity ratio of 0.75 times, net income of $400,000, and dividends paid to common stockholders of $200,000. The firm has no preferred stock outstanding. What is Leash N Collar's internal growth rate?

Accepted Answer

The answer of Leash N Collar reported a profit margin...

Question 14

You are thinking of investing in Wave Runnerz, Inc. You have only the following information on the firm at year-end 2013: net income = $10 million, total debt = $65 million, and debt ratio = 35 percent. What is Wave Runnerz's ROE for 2018?

Accepted Answer

ROE = Net income / Shareholder's equityShareholder's equity = Total assets - Total debtTotal assets = Net income / Profit marginProfit margin = Net income / SalesSales = Net income / Net profit marginNet profit margin = Net income / Total revenueTotal revenue = Net income / Gross profit marginGross profit margin = Net income / Cost of goods soldCost of goods sold = Net income / Operating profit marginOperating profit margin = Net income / Earnings before interest and taxes (EBIT)EBIT = Net income / Interest expenseInterest expense = Net income / Debt ratioDebt ratio = Total debt / Total assetsTherefore, ROE = Net income / (Total assets - Total debt)= $10 million / ($10 million / 35% - $65 million)= $10 million / $185.71 million= 8.28%

Question 15

DJ's Soda Fountain has asked you to help piece together financial information on the firm for the most current year. Managers give you the following information: sales = $20 million, total debt = $3 million, debt ratio = 75 percent, ROE = 27 percent. Using this information, what is DJ's ROA?

Accepted Answer

The debt ratio is given as 75%, which means that debt represents 75% of the total assets. Therefore, if total debt is $3 million, the total assets would be $3 million / 0.75 = $4 million. Return on Equity (ROE) is given as 27%, and ROE = Net Income / Equity. Since the debt ratio is 75%, the equity ratio is 25% (100% - 75%), making equity $1 million ($4 million total assets * 25%). With an ROE of 27%, the net income is $270,000 ($1 million * 27%). Return on Assets (ROA) is calculated as Net Income / Total Assets, which would be $270,000 / $4 million = 6.75%.

Question 16

Tierre's Ts, Inc. reported a debt to equity ratio of 3 times at the end of 2018. If the firm's total assets at year-end are $15 million, how much of their assets is financed with equity?

Accepted Answer

The debt to equity ratio is 3, meaning for every $1 of equity, there is $3 of debt. Therefore, the firm's assets are financed with 1 part equity for every 3 parts debt, making a total of 4 parts. Since the total assets are $15 million, each part is $15 million / 4 = $3.75 million, which represents the equity financing.

Question 17

Fancy Paws' year-end price on its common stock is $20. The firm has total assets of $40 million, the debt ratio is 40 percent, there is no preferred stock, and there are 2 million shares of common stock outstanding. Calculate the market-to-book ratio for Fancy Paws.

Accepted Answer

First, calculate the book value of equity. With a debt ratio of 40%, equity is 60% of total assets. So, equity = 0.60 * $40 million = $24 million. The market value of equity is the stock price times the number of shares, which is $20 * 2 million = $40 million. The market-to-book ratio is the market value of equity divided by the book value of equity, which is $40 million / $24 million = 1.67.

Question 18

Nicole's Neon Signs, Inc. reported a debt to equity ratio of 1.9 times at the end of 2018. If the firm's total assets at year-end are $100 million, how much of their assets is financed with equity?

Accepted Answer

The debt to equity ratio is calculated as total debt divided by total equity. Given a ratio of 1.9, this means for every $1 of equity, there is $1.9 of debt. If we let E represent equity, then the debt is 1.9E, and the total assets (which is the sum of debt and equity) is E + 1.9E = 2.9E. Given that total assets are $100 million, we have 2.9E = $100 million, solving for E gives E = $100 million / 2.9 = approximately $34.48 million, indicating that $34.48 million of the assets are financed with equity.

Question 19

You are thinking of investing in Tikki's Torches, Inc. You have only the following information on the firm at year-end 2018: net income = $500,000, total debt = $12 million, and debt ratio = 40 percent. What is Tikki's ROE for 2018?

Accepted Answer

The answer of You are thinking of investing in Tikki's...

Question 20

You are considering investing in Totally Tire Services. You have been able to locate the following information on the firm: total assets = $50 million, accounts receivable = $10 million, ACP = 15 days, net income = $4.5 million, and debt-to-equity ratio = 0.75 times. What is the ROE for the firm?

Accepted Answer

ROE = Net Income / Shareholders' EquityShareholders' Equity = Total Assets - Total LiabilitiesTotal Liabilities = Debt-to-Equity Ratio * Shareholders' EquityShareholders' Equity = Total Assets / (1 + Debt-to-Equity Ratio)Shareholders' Equity = $50 million / (1 + 0.75) = $28.57 millionROE = $4.5 million / $28.57 million = 15.75%

Quiz 3: Analyzing Financial Statements