Question 1

Rappaport Corp.'s sales last year were $320,000,and its net income after taxes was $23,000.What was its profit margin on sales?

Accepted Answer

Profit margin = (Net Income / Sales) x 100%
Profit margin = (23,000 / 320,000) x 100%
Profit margin = 0.071875 x 100%
Profit margin = 7.19%

Question 2

A new firm is developing its business plan.It will require $565,000 of assets,and it projects $452,800 of sales and $354,300 of operating costs for the first year.Management is quite sure of these numbers because of contracts with its customers and suppliers.It can borrow at a rate of 7.5%,but the bank requires it to have a TIE of at least 4.0,and if the TIE falls below this level the bank will call in the loan and the firm will go bankrupt.What is the maximum debt ratio the firm can use? (Hint: Find the maximum dollars of interest,then the debt that produces that interest,and then the related debt ratio.)

Accepted Answer

The answer of A new firm is developing its business...

Question 3

An investor is considering starting a new business.The company would require $475,000 of assets,and it would be financed entirely with common stock.The investor 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

The answer of An investor is considering starting a new...

Question 4

Arshadi Corp.'s sales last year were $52,000,and its total assets were $22,000.What was its total assets turnover ratio (TATO)?

Accepted Answer

The answer of Arshadi Corp.'s sales last year were $52,000,and...

Question 5

Nikko Corp.'s total common equity at the end of last year was $305,000,and its net income after taxes was $60,000.What was its ROE?

Accepted Answer

The answer of Nikko Corp.'s total common equity at the...

Question 6

Chambliss Corp.'s total assets at the end of last year were $305,000 and its EBIT was 62,500.What was its basic earning power (BEP)?

Accepted Answer

Basic Earning Power (BEP) is calculated by dividing EBIT (Earnings Before Interest and Taxes) by total assets. BEP = EBIT / Total Assets = $62,500 / $305,000 = 0.204918... or 20.49%.

Question 7

Beranek Corp.has $410,000 of assets,and it uses no debt-it is financed only with common equity.The new CFO wants to employ enough debt to bring the debt/assets ratio to 40%,using the proceeds from the borrowing to buy back common stock at its book value.How much must the firm borrow to achieve the target debt ratio?

Accepted Answer

To achieve a 40% debt/assets ratio, Beranek Corp. needs to have 40% of its assets financed by debt. Therefore, the firm must borrow 40% of $410,000, which is $164,000.

Question 8

Pace Corp.'s assets are $625,000,and its total debt outstanding is $185,000.The new CFO wants to employ a debt ratio of 55%.How much debt must the company add or subtract to achieve the target debt ratio?

Accepted Answer

The target debt ratio is 55%, which means that the company's debt should be 55% of its assets. The company's assets are $625,000, so its target debt should be $625,000 * 0.55 = $343,750. The company's current debt is $185,000, so it must add $343,750 - $185,000 = $158,750 to achieve the target debt ratio.

Question 9

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.However,company HD has a higher debt ratio.Which of the following statements is correct?

Accepted Answer

Given that HD has a higher debt ratio and all other factors are equal, leveraging (using more debt) increases return on equity (ROE) when the cost of debt is lower than the company's return on its assets (BEP). Thus, if the interest rate on debt is less than BEP, HD's higher leverage results in a higher ROE.

Question 10

Harper Corp.'s sales last year were $395,000,and its year-end receivables were $42,500.Harper sells on terms that call for customers to pay 30 days after the purchase,but many 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.

Accepted Answer

The answer of Harper Corp.'s sales last year were $395,000,and...

Question 11

Bonner Corp.'s sales last year were $415,000,and its year-end total assets were $355,000.The average firm in the industry has a total assets turnover ratio (TATO) of 2.4.Bonner's new CFO believes the firm has excess assets that can be sold so as to bring the TATO down to the industry average without affecting sales.By how much must the assets be reduced to bring the TATO to the industry average,holding sales constant?

Accepted Answer

Total assets turnover ratio (TATO) = Sales / Total Assets

Industry Average TATO = 2.4
Bonner Corp.'s TATO = Sales / $355,000 = $415,000 / $355,000 = 1.169

We need to find out the amount of reduction in total assets that would bring TATO to the industry average while keeping sales constant.

Industry Average TATO = 2.4 = Sales / New Total Assets
New Total Assets = Sales / 2.4 = $415,000 / 2.4 = $172,916.67

Excess Assets to be Sold = Existing Total Assets - New Total Assets
Excess Assets to be Sold = $355,000 - $172,916.67 = $182,083.33

Therefore, the excess assets that need to be sold to bring the TATO to the industry average while holding sales constant is $182,083.
The answer is C) $182,083.

Question 12

Helmuth Inc.'s latest net income was $1,250,000,and it had 225,000 shares outstanding.The company wants to pay out 45% of its income.What dividend per share should it declare?

Accepted Answer

The dividend per share can be calculated by first determining the total dividend payout, which is 45% of the net income, and then dividing that amount by the number of shares outstanding. The total dividend payout is $1,250,000 * 45% = $562,500. Dividing this by the number of shares outstanding (225,000) gives a dividend per share of $2.50.

Question 13

Heaton Corp.sells on terms that allow customers 45 days to pay for merchandise.Its sales last year were $425,000,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.

Accepted Answer

DSO (Days Sales Outstanding) is calculated as (Year-end receivables / Sales) * 365. Here, it's ($60,000 / $425,000) * 365 = 51.47 days. Subtracting the credit period of 45 days from the DSO gives 51.47 - 45 = 6.47 days. Since 6.53 is the closest option, it indicates customers are paying slightly late.

Question 14

ABC Inc.has a 59-day average payables period.The account payables are $2,737.50 at the beginning and $3,589.50 at the end of the covering year.What is the annual cost of goods sold? Use a 365-day year when calculating the APP.

Accepted Answer

First, we need to calculate the cost of goods purchased during the year by using the change in accounts payable:

Cost of Goods Purchased = Ending Accounts Payable - Beginning Accounts Payable

Cost of Goods Purchased = $3,589.50 - $2,737.50 = $852

Next, we need to calculate the cost of goods sold (COGS) by using the average payables period:

Average Payables Period = 59 days 
Annual Payables Turnover = 365 / 59 = 6.186

COGS = Cost of Goods Purchased / Annual Payables Turnover

COGS = $852 / 6.186 = $137.89

Finally, we can calculate the annual cost of goods sold by multiplying COGS by the number of times it is sold during the year:

Annual COGS = COGS * Number of Sales 
Assuming only one sale per year, the annual COGS is equal to $137.89.

Question 15

Lindley Corp.'s stock price at the end of last year was $33.50,and its book value per share was $25.00.What was its market/book ratio?

Accepted Answer

The market/book ratio is calculated by dividing the stock price by the book value per share. So, $33.50 / $25.00 = 1.34.

Question 16

Branch Corp.'s total assets at the end of last year were $315,000 and its net income after taxes was $22,750.What was its return on total assets?

Accepted Answer

Return on total assets = Net income after taxes / Total assets * 100= 22,750 / 315,000 * 100= 7.22%

Question 17

Northwest Lumber had a profit margin of 5.25%,a total assets turnover of 1.5,and an equity multiplier of 1.8.What was the firm's ROE?

Accepted Answer

ROE = Profit Margin x Total Asset Turnover x Equity Multiplier
ROE = 5.25% x 1.5 x 1.8
ROE = 14.18%
Therefore, the answer is (C) 14.18%.

Question 18

Vang Corp.'s stock price at the end of last year was $33.50 and its earnings per share for the year were $2.30.What was its P/E ratio?

Accepted Answer

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

Question 19

Aziz Industries has sales of $100,000 and accounts receivable of $11,500,and it gives its customers 30 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?

Accepted Answer

The answer of Aziz Industries has sales of $100,000 and...

Question 20

Orono Corp.'s sales last year were $435,000,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 answer of Orono Corp.'s sales last year were $435,000,its...

Quiz 3: Analysis of Financial Statements