Question 1

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?
A) $1.35m
B) $2.40m
C) $3.00m
D) $18.75m

Accepted Answer

Capital intensity ratio = 0.75 = Total assets/$25 => Total assets = 0.75 × $25m = $18.75m.
=> Debt ratio = 0.4 = Total debt/$18.75m => Total debt = 0.4 × $18.75m = $7.5m.
=> Total equity = $18.75m − $7.5m = $11.25m.
=> ROE = 0.12 = Net income/$11.25m => Net income = 0.12 × $11.25m = $1.35m.

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

ROA = Profit Margin × Total asset turnover = 8 percent × 1.5 = 12 percent.
RR = ($400,000 − $200,000) / $400,000 = 0.50.
 11ea8218_2a52_1673_bbd8_effb1d836c04_TB1326_00

Question 3

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

Equity multiplier = Total assets/Total equity => 1/Equity multiplier = Total equity/Total assets.
Debt ratio = Total debt/Total assets = (Total assets − Total equity)/Total assets = 1 − (Total equity/Total assets).
0.2 = 1 − (Total equity/Total assets) => Total equity/Total assets = 1 − 0.2 = 0.8 = 1/Equity multiplier.
=> Equity multiplier = 1/0.8 = 1.25.
ROE = Profit Margin × Total asset turnover × Equity multiplier.
= 0.12 × 1/1.25 × 1.25 = 12 percent.
Retention ratio (RR) = 1 − dividend payout ratio = 1 − 0.1 = 0.9.
 11ea8218_2a53_9d17_bbd8_4780d53986f9_TB1326_00

Question 4

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?
A) 1.67 percent
B) 2.78 percent
C) 4.17 percent
D) 10.42 percent

Accepted Answer

Debt ratio = 0.4 = $12m/Total assets => Total assets = $12m/0.4 = $30m
=> Total equity = $30m − $12m = $18m
=> ROE = $500,000/$18m = 2.78 percent

Question 5

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

Debt ratio = 0.4 = Total debt/$40m => Total debt = 0.4 × $40m = $16m.
=> Total equity = $40m − $16m = $24m.
=> Book value of equity = $24m/2m = $12.00 per share.
=> Market-to-book ratio = $20/$12.00 = 1.67 times.

Question 6

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

Accepted Answer

Debt ratio = 0.35 = $65m/Total assets => Total assets = $65m/0.35 = $185.71m.
=> Total equity = $185.71m − $65m = $120.71m.
=> ROE = $10m/$120.71m = 8.2843 percent.

Question 7

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

Capital intensity ratio = 1.5 = Total assets/$9m => Total assets = 1.5 × $9m = $13.5m.
=> Debt ratio = 0.5 = Total debt/$13.5m => Total debt = 0.5 × $13.5m = $6.75m.
=> Total equity = $13.5m − $6.75m = $6.75m.
=> ROE = 0.27 = Net income/$6.75m => Net income = 0.27 × $6.75m = $1.8225m.

Question 8

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

Debt ratio = 0.6 = Total debt/$75m => Total debt = 0.6 × $75m = $45m.
=> Total equity = $75m − $45m = $30m.
=> Book value of equity = $30m/4m = $7.50 per share.
=> Market to book ratio = $40/$7.50 = 5.3333 times.

Question 9

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

Equity multiplier = Total assets/Total equity => 1/Equity multiplier = Total equity/Total assets.
Debt ratio = Total debt/Total assets = (Total assets − Total equity)/Total assets = 1 − (Total equity/Total assets).
0.6 = 1 − (Total equity/Total assets) => Total equity/Total assets = 1 − 0.6 = 0.4 = 1/Equity multiplier.
=> Equity multiplier = 1/0.4 = 2.5.
ROE = Profit Margin × Total asset turnover × Equity multiplier.
= 0.135 × 1/0.75 × 2.5 = 45 percent.
Retention ratio (RR) = 1 − dividend payout ratio = 1 − 0.8 = 0.2.
 11ea8218_2a53_27e6_bbd8_c975902fa448_TB1326_00

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

Total asset turnover = 2 = Sales/$30m => Sales = $30m × 2 = $60m.
=> Profit margin = 0.1 = Net income/$60m => Net income = 0.1 × $60m = $6m.
=> EPS = $6m/4m = $1.50 per share.
=> PE ratio = $40/$1.50 = 26.67 times.

Question 11

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

Equity multiplier = Total assets/Total equity => 1/Equity multiplier = Total equity/Total assets.
Debt ratio = Total debt/Total assets = (Total assets − Total equity)/Total assets = 1 − (Total equity/Total assets).
0.4 = 1 − (Total equity/Total assets) => Total equity/Total assets = 1 − 0.4 = 0.6 = 1/Equity multiplier => Equity multiplier = 1/0.6 = 1.6667.
ROE = Profit Margin × Total asset turnover × Equity multiplier = 0.08 × 1/2.25 × 1.6667 = 5.926 percent.
Retention ratio (RR) = 1 − dividend payout ratio = 1 − 0.25 = 0.75.
 11ea8218_2a52_d9c5_bbd8_77d1b4f8532a_TB1326_00

Question 12

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 current ratio is calculated as current assets divided by current liabilities. None of the options provided (A, B, C) increase a firm's current ratio because they either decrease current assets (A), increase current liabilities (B), or both (C).

Question 13

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) 0.0675 percent
B) 6.75 percent
C) 25.00 percent
D) 27.00 percent

Accepted Answer

Debt ratio = 0.75 = $3m/Total assets => Total assets = $3m/0.75 = $4m
=> Total equity = $4m − $3m = $1m
=> ROE = 0.27 = Net income/$1m => Net income = 0.27 × $1m = $270,000
=> ROA = $270,000/$4m = 6.75 percent

Question 14

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

Total asset turnover = 0.5 = Sales/$20m => Sales = $20m × 0.5 = $10m.
=> Profit margin = 0.12 = Net income/$10m => Net income = 0.12 × $10m = $1.2m.
=> EPS = $1.2m/2m = $0.60 per share.
=> PE ratio = $20/$0.60 = 33.33 times.

Question 15

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

Debt-to-equity = 2.5 = Total debt/Total equity = Total debt/(Total assets − Total debt).
2.5 = Total debt/(20m − Total debt) => (2.5 × 20m) − 2.5 × Total debt = Total debt.
=> 50m = 3.5 × Total debt => Total debt = 50m/3.5 = $14.2857m.
=> Total equity = $20m − $14.2857m = $5.7143m.
=> ROE = $5m/$5.7143m = 87.50 percent.

Question 16

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?
A) 4 percent
B) 6 percent
C) 10 percent
D) 12 percent

Accepted Answer

Debt ratio = 0.50 = $20m/Total assets => Total assets = $20m/0.5 = $40m.
=> Total equity = $40m − $20m = $20m.
=> ROE = 0.12 = Net income/$20m => Net income = 0.12 × $20m = $2.4.
=> ROA = $2.4m/$40m = 6 percent.

Question 17

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

Equity multiplier = Total assets/Total equity => 1/Equity multiplier = Total equity/Total assets.
Debt ratio = Total debt/Total assets = (Total assets − Total equity)/Total assets = 1 − (Total equity/Total assets).
0.5 = 1 − (Total equity/Total assets) => Total equity/Total assets = 1 − 0.5 = 0.5 = 1/Equity multiplier.
=> Equity multiplier = 1/0.5 = 2.
ROE = Profit Margin × Total asset turnover × Equity multiplier.
= 0.09 × 1/1.5 × 2 = 12 percent.
Retention ratio (RR) = 1 − dividend payout ratio = 1 − 0.4 = 0.6.
 11ea8218_2a54_3958_bbd8_89a4fd8e53ee_TB1326_00

Question 18

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?
A) 2.94 percent
B) 3.49 percent
C) 7.14 percent
D) 11.67 percent

Accepted Answer

Debt ratio = 0.7 = $1m/Total assets => Total assets = $1m/0.7 = $1.4286m
=> Total equity = $1.4286m − $1m = $0.4286m
=> ROE = $50,000/$428,600 = 11.67 percent

Question 19

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

ROA = Profit Margin × Total asset turnover = 12 percent × 2 = 24 percent.
RR = ($1,000,000 − $250,000)/$1,000,000 = 0.75.
 11ea8218_2a52_8ba4_bbd8_7192b12ed047_TB1326_00

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

Accepted Answer

Debt-to-equity = 0.75 = Total debt/Total equity = Total debt/(Total assets − Total debt).
0.75 = Total debt/(50m − Total debt) => (0.75 × 50m) − 0.75 × Total debt = Total debt.
=> 37.5m = 1.75 × Total debt => Total debt = 37.5m/1.75m = $21.4286m.
=> Total equity = $50m − $21.4286 = $28.5714m.
=> ROE = $4.5m/$28.5714m = 15.75 percent.

Quiz 3: Analyzing Financial Statements

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?

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?

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?

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?

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.

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?

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?

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 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?

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?

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?

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

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?

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?

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?

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?

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?

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?

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?