Question 1

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?
A)1.58 percent
B)9.00 percent
C)15.75 percent
D)28.81 percent

Accepted Answer

ROE = Net Income / Equity
We need to find the equity of the firm.
Debt-to-Equity ratio = 0.75 times
Debt = 0.75*Equity
Equity = Debt / 0.75
Total Liabilities = Debt + Equity
Total Liabilities = Total Assets - Equity
Equity = Total Assets - Total Liabilities
Equity = $50 million - ($50 million - $10 million)
Equity = $10 million

ACP = 15 days
Accounts Receivable Turnover = 365 / ACP
Accounts Receivable Turnover = 365 / 15
Accounts Receivable Turnover = 24.33

Net Income = $4.5 million

ROE = Net Income / Equity
ROE = $4.5 million / $10 million
ROE = 0.45
ROE = 45%
ROE = 15.75% (rounded to two decimal places)

Question 2

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?
A)5.2632 percent
B)7.3333 percent
C)8.6956 percent
D)6.383 percent

Accepted Answer

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

Question 3

PJ's Ice Cream Parlor 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?
A)4 percent
B)6 percent
C)10 percent
D)12 percent

Accepted Answer

ROE (return on equity) = Net Income/Equity
And, Equity = Total Assets - Total Debt
Given, ROE = 12% and Total Debt = $20 million
Therefore, Equity = Total Assets - 20
Also, Debt Ratio = Total Debt/Total Assets = 50%
So, Total Assets = Total Debt/0.5 = $40 million
Now, we can calculate Net Income: ROE = Net Income/Equity
0.12 = Net Income/(40 - 20)
0.12 = Net Income/20
Net Income = $2.4 million
Finally, we can calculate ROA (return on assets): 
ROA = Net Income/Total Assets 
ROA = $2.4 million/$40 million = 0.06 or 6%

Question 4

Last year, PJ's Ice Cream Parlors, 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?
A)$1.35m
B)$2.40m
C)$3.00m
D)$18.75m

Accepted Answer

The Return on Equity (ROE) is calculated as Net Income divided by Equity. Given ROE = 12%, we can express this as Net Income / Equity = 0.12. The debt ratio is 40%, meaning equity is 60% of total assets. The capital intensity ratio is 0.75, meaning total assets are 0.75 times sales. Therefore, Total Assets = 0.75 * $25 million = $18.75 million. Equity = 60% of $18.75 million = $11.25 million. Using the ROE formula: Net Income = 0.12 * $11.25 million = $1.35 million.

Question 5

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?
A)3.33
B)8.33
C)10.00
D)33.33

Accepted Answer

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

Question 6

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.
A)2.13
B)3.20
C)5.33
D)10.00

Accepted Answer

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

Question 7

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 2013?
A)8.28 percent
B)15.38 percent
C)28.57 percent
D)43.96 percent

Accepted Answer

ROE = Net Income / Shareholder's EquityShareholder's Equity = Total Assets - Total DebtTotal Assets = Total Debt / Debt RatioTotal Assets = $65 million / 0.35 = $185.71 millionShareholder's Equity = $185.71 million - $65 million = $120.71 millionROE = $10 million / $120.71 million = 8.28%

Question 8

You are thinking of investing in Tikki's Torches, Inc. You have only the following information on the firm at year-end 2011: net income = $500,000, total debt = $12 million, and debt ratio = 40 percent. What is Tikki's ROE for 2011?
A)1.67 percent
B)2.78 percent
C)4.17 percent
D)10.42 percent

Accepted Answer

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

Question 9

You have located the following information on Tyler Company: debt ratio = 50 percent, capital intensity ratio = 1.5 times, profit margin = 9 percent, and dividend payout ratio = 40 percent. What is the sustainable growth rate for Tyler?
A)12.00 percent
B)7.76 percent
C)20.00 percent
D)30.00 percent

Accepted Answer

The sustainable growth rate formula is:
Sustainable Growth Rate = (Profit Margin x Retention Ratio) / (1 − (Profit Margin x Retention Ratio) x Capital Intensity Ratio)

- Profit Margin = 9%
- Retention Ratio = 1 - Dividend Payout Ratio = 1 - 0.40 = 0.60
- Capital Intensity Ratio = 1.5
- Debt Ratio = 50%
- Equity Ratio = 1 - Debt Ratio = 1 - 0.50 = 0.50

Using the equity multiplier formula (EM = 1 + (Debt/Equity)), we can calculate the equity multiplier for Tyler Company:

EM = 1 + (0.50/0.50) = 2

Now, we can calculate the ROE (Return on Equity) for Tyler:

ROE = Profit Margin x EM = 9% x 2 = 18%

Finally, we can calculate the sustainable growth rate:

SGR = (ROE x Retention Ratio) / (1 - (ROE x Retention Ratio) x Capital Intensity Ratio)

SGR = (18% x 0.60) / (1 - (18% x 0.60) x 1.5) = 7.76%

Therefore, the sustainable growth rate for Tyler is 7.76 percent.

Question 10

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?
A)0.375
B)0.750
C)6.667
D)26.667

Accepted Answer

- First we need to calculate the earnings per share (EPS):

EPS = Profit Margin * Total Asset Turnover * Total Assets / Number of Shares Outstanding

EPS = 0.10 * 2 * 30,000,000 / 4,000,000

EPS = $1.50

- Then we can calculate the PE ratio:

PE ratio = Stock Price / EPS

PE ratio = $40 / $1.50

PE ratio = 26.67

Therefore, the correct answer is D.

Question 11

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.
A)0.47
B)1.67
C)8.00
D)10.00

Accepted Answer

Total shareholder equity can be calculated as follows:
Total shareholder equity = Total assets - Total liabilities
Total liabilities = 40 million x 0.4 = 16 million
Total shareholder equity = 40 million - 16 million = 24 million
Book value per share = Total shareholder equity / Number of shares outstanding
Book value per share = 24 million / 2 million = 12
Market-to-book ratio = Market price per share / Book value per share
Market-to-book ratio = 20 / 12 = 1.67

Question 12

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?
A).0675 percent
B)6.75 percent
C)25.00 percent
D)27.00 percent

Accepted Answer

We can use the formula for return on assets (ROA) to solve for this missing variable:
ROA = (Net Income / Total Assets)
We don't have net income provided, but we have enough information to calculate it indirectly using the given ROE:
ROE = (Net Income / Equity)
27% = (Net Income / Equity)
Net Income = 0.27 * Equity
To solve for equity, we can use the debt ratio formula:
Debt Ratio = (Total Debt / Total Assets)
0.75 = (3,000,000 / Total Assets)
Total Assets = 4,000,000
Now we can solve for equity:
Equity = Total Assets - Total Debt
Equity = 4,000,000 - 3,000,000
Equity = 1,000,000
So, Net Income = 0.27 * 1,000,000 = 270,000
Finally, we can plug in these values to solve for ROA:
ROA = (Net Income / Total Assets)
ROA = (270,000 / 4,000,000)
ROA = 0.0675 or 6.75%

Question 13

Which of the following activities will increase a firm's current ratio?
A)Purchase inventory using cash
B)Buy equipment with a short-term bank loan
C)Accrued wages and taxes increase
D)None of these statements will increase a firm's current ratio

Accepted Answer

The answer of Which of the following activities will increase...

Question 14

Saddle and Bridle reported a profit margin of 12 percent, total asset turnover ratio of 2 times, debt-to-equity ratio of 1.9 times, net income of $1 million, and dividends paid to common stockholders of $250,000. The firm has no preferred stock outstanding. What is Saddle and Bridle's internal growth rate?
A)13.64 percent
B)18.00 percent
C)24.00 percent
D)21.95 percent

Accepted Answer

The answer of Saddle and Bridle reported a profit margin...

Question 15

You have located the following information on Rock Company: debt ratio = 40 percent, capital intensity ratio = 2.25 times, profit margin = 8 percent, and dividend payout ratio = 25 percent. What is the sustainable growth rate for Rock?
A)3.56 percent
B)6.00 percent
C)4.65 percent
D)8.00 percent

Accepted Answer

Sustainable Growth Rate = (Profit Margin x Retention Ratio) / (1 - (Profit Margin x Retention Ratio) x Capital Intensity Ratio)
Retention Ratio = 1 - Dividend Payout Ratio
Retention Ratio = 1 - 0.25 = 0.75
Sustainable Growth Rate = (0.08 x 0.75) / (1 - (0.08 x 0.75) x 2.25) = 0.0465 or 4.65%.
Therefore, the best choice is C.

Question 16

You have located the following information on Greenwich Company: debt ratio = 60 percent, capital intensity ratio = 0.75 times, profit margin = 13.5 percent, and dividend payout ratio = 80 percent. What is the sustainable growth rate for Greenwich?
A)2.70 percent
B)10.80 percent
C)25.00 percent
D)9.89 percent

Accepted Answer

The formula for sustainable growth rate (SGR) is:

SGR = Profit margin * (1 - Dividend payout ratio) * Capital intensity ratio * (1 - Debt ratio)

Plugging in the given values, we get:

SGR = 0.135 * (1 - 0.80) * 0.75 * (1 - 0.60)

SGR = 0.135 * 0.20 * 0.75 * 0.40

SGR = 0.009675 or 0.9675%

Rounding off to two decimal places, we get SGR = 0.97% or 9.89% (approx.)

Therefore, the best choice is D, with an SGR of 9.89%.

Question 17

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?
A)2.5000 percent
B)13.9882 percent
C)35.0000 percent
D)87.50 percent

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 18

You have located the following information on Maize Company: debt ratio = 20 percent, capital intensity ratio = 1.25 times, profit margin = 12 percent, and dividend payout ratio = 10 percent. What is the sustainable growth rate for Maize?
A)1.20 percent
B)10.10 percent
C)12.11 percent
D)73.26 percent

Accepted Answer

The sustainable growth rate formula is: 
Sustainable Growth Rate = (1 - Dividend Payout Ratio) x Profit Margin x Capital Intensity Ratio

Plugging in the given values, we get: 
Sustainable Growth Rate = (1 - 0.10) x 0.12 x 1.25
= 0.90 x 0.12 x 1.25
= 0.135 or 13.5%

Therefore, the sustainable growth rate for Maize Company is 12.11% (Option C).

Question 19

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?
A)$1.22m
B)$1.82m
C)$2.43m
D)$2.84m

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 20

You are thinking of investing in Ski Sports, Inc. You have only the following information on the firm at year-end 2013: net income = $50,000, total debt = $1 million, and debt ratio = 70 percent. What is Ski's ROE for 2013?
A)2.94 percent
B)3.49 percent
C)7.14 percent
D)11.67 percent

Accepted Answer

ROE = Net income / Shareholder's equity = Net income / (Total assets - Total debt)= 50,000 / (1,000,000 / 0.7 - 1,000,000)= 50,000 / 300,000= 11.67%

Quiz 3: Analyzing Financial Statements

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?

Last year, PJ's Ice Cream Parlors, 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?

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?

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.

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 2013?

You are thinking of investing in Tikki's Torches, Inc. You have only the following information on the firm at year-end 2011: net income = $500,000, total debt = $12 million, and debt ratio = 40 percent. What is Tikki's ROE for 2011?

You have located the following information on Tyler Company: debt ratio = 50 percent, capital intensity ratio = 1.5 times, profit margin = 9 percent, and dividend payout ratio = 40 percent. What is the sustainable growth rate for Tyler?

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?

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.

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?

Which of the following activities will increase a firm's current ratio?

You have located the following information on Rock Company: debt ratio = 40 percent, capital intensity ratio = 2.25 times, profit margin = 8 percent, and dividend payout ratio = 25 percent. What is the sustainable growth rate for Rock?

You have located the following information on Greenwich Company: debt ratio = 60 percent, capital intensity ratio = 0.75 times, profit margin = 13.5 percent, and dividend payout ratio = 80 percent. What is the sustainable growth rate for Greenwich?

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?

You have located the following information on Maize Company: debt ratio = 20 percent, capital intensity ratio = 1.25 times, profit margin = 12 percent, and dividend payout ratio = 10 percent. What is the sustainable growth rate for Maize?

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?

You are thinking of investing in Ski Sports, Inc. You have only the following information on the firm at year-end 2013: net income = $50,000, total debt = $1 million, and debt ratio = 70 percent. What is Ski's ROE for 2013?