Question 1

What is the market price of a share of stock for a firm that pays dividends of $1.20 per share, has a P/E of 14, and pays its shareholders dividends equal to 40% of earnings?

Accepted Answer

The dividend payout ratio is 40%, meaning 40% of earnings are paid as dividends. If $1.20 is 40% of earnings, then 100% of earnings (or earnings per share, EPS) is $3 ($1.20 / 0.4). With a P/E ratio of 14, the market price per share is EPS multiplied by the P/E ratio, which is $3 * 14 = $42.

Question 2

A firm with a debt ratio of .75, will have an equity multiplier of:

Accepted Answer

The equity multiplier is calculated by dividing total assets by shareholders' equity. Since the debt ratio is 0.75, the firm finances 75% of its assets through debt. The equity multiplier is therefore 1/(1-0.75) = 4.0.

Question 3

Given the following information, calculate the inventory for J&C videos. Quick ratio = 1.2; Current assets = $12,000; Current ratio = 2.5

Accepted Answer

Inventory = Current assets - (Current liabilities + Quick assets)= $12,000 - (Current liabilities + ($12,000 / 1.2))= $12,000 - (Current liabilities + $10,000)= $12,000 - Current liabilities - $10,000= $2,000 - Current liabilitiesCurrent ratio = Current assets / Current liabilities2.5 = $12,000 / Current liabilitiesCurrent liabilities = $12,000 / 2.5Current liabilities = $4,800Inventory = $2,000 - $4,800Inventory = -$2,800Since inventory cannot be negative, there is an error in the given information.

Question 4

Williamson Trucking has current sales of $10,000 and a cost of goods sold of $4,300. Williamson has projected sales to increase 50% and expects the new cost ratio to decrease by 2% due to increased efficiency. Assuming that Williamson wants to maintain an inventory turnover of 5.0, calculate their projected level of inventory. (round to the nearest $)

Accepted Answer

The answer of Williamson Trucking has current sales of $10,000...

Question 5

Given the following selected information on McMillen's Chocolate, Inc., calculate Cash Flow from Operating Activities for 2001. $\begin{array}{lrr}&\text { Last Year }&\text { This Year }\
\text { EAT } & \$ 600,000 & \$ 750,000 \
\text { Depreciation Exp. } & 100,000 & 150,000 \
\text { Dividends } & 400,000 & 550,000 \
\text { AccountsReceivable } & 1,500,000 & 2,000,000\\text { Inventory } & 3,500,000 & 2,000,000 \
\text { Accts. Payable/Accr. } & 350,000 & 500,000 \
\text { Long-Term Debt } & 2,300,000 & 3,000,000 \
\text { Common Stock } & 2,200,000 & 2,500,000 \
\text { Retained Earnings } & 6,150,000 & 6,350,000
\end{array}$

Accepted Answer

The answer of Given the following selected information on McMillen's...

Question 6

If Power-On has a total asset turnover of 1.8, a fixed asset turnover of 3.2, a debt ratio of .5 and a total debt of $200,000, then fixed assets are:

Accepted Answer

The total asset turnover is calculated as Sales/Total Assets, and the fixed asset turnover is Sales/Fixed Assets. Given the debt ratio of 0.5, the total assets are $400,000 (since Total Debt/Total Assets = 0.5, thus Total Assets = $200,000/0.5). Using the fixed asset turnover formula, Fixed Assets = Sales/3.2. Since Sales = Total Asset Turnover * Total Assets = 1.8 * $400,000 = $720,000, Fixed Assets = $720,000/3.2 = $225,000.

Question 7

CVD, Inc. has a debt ratio of 50%, and an equity multiplier of 2. What is CVD's stockholders' equity if total debt is $100,000?

Accepted Answer

The equity multiplier is defined as total assets divided by total equity. Given an equity multiplier of 2, this means total assets are twice the amount of stockholders' equity. With a debt ratio of 50%, half of the company's assets are financed through debt. If total debt is $100,000, representing 50% of total assets, then total assets are also $200,000. Since the equity multiplier is 2, stockholders' equity, which is half of total assets, is $100,000.

Question 8

What is Babcock's times interest earned, if its total interest charges are $20,000, sales are $220,000, and its net profit margin is 6 percent? Assume a tax rate of 40 percent.

Accepted Answer

Times interest earned (TIE) is calculated by dividing earnings before interest and taxes (EBIT) by interest expense.

First, we need to calculate EBIT:

Net profit margin = Net Income / Sales 
0.06 = Net Income / $220,000 
Net Income = $13,200

EBIT = Net Income + Interest Expense + Taxes 
$13,200 = EBIT - $20,000 - (0.4 * EBIT) 
$13,200 = 0.6 EBIT - $20,000 
EBIT = $55,000

The interest expense is given as $20,000.

TIE = EBIT / Interest expense 
TIE = $55,000 / $20,000 
TIE = 2.75

Therefore, the times interest earned for Babcock is 2.75, which is not one of the answer choices. However, closest to this value is choice C) 2.1.

Question 9

How much cash does Gray Computer Co. have if the firm has a current ratio of 2.5, a quick ratio of 1.2, and current liabilities of $12,000? Gray's credit sales are $98,000 and its average collection period is 40 days. (Assume 365 days per year.)

Accepted Answer

The answer of How much cash does Gray Computer Co....

Question 10

What is the return on assets (ROA) for a firm that has a debt ratio of 0.65, a return on sales of 6.5%, sales of $740,000, and a total asset turnover of 4?

Accepted Answer

Return on Assets (ROA) is calculated as (Net Income / Total Assets). Given the return on sales (Net Income/Sales) is 6.5%, and sales are $740,000, Net Income is 0.065 * $740,000 = $48,100. Total Asset Turnover is Sales/Total Assets, so Total Assets = Sales / Total Asset Turnover = $740,000 / 4 = $185,000. Therefore, ROA = $48,100 / $185,000 = 0.26 or 26.0%.

Question 11

Given the following information, determine Salem Company's net fixed assets. Sales = $10,000,000
Total asset turnover = 4 times
Current ratio = 2.40
Current liabilities = $500,000
Total assets = current assets + fixed assets

Accepted Answer

The answer of Given the following information, determine Salem Company's...

Question 12

A firm has current assets of $10,000 and current liabilities of $6,000. Cash and marketable securities total $4,000, the balance in accounts receivable is $2,000, and the book value of inventory is $4,000. The firm's net working capital is:

Accepted Answer

Net working capital is calculated as current assets minus current liabilities.

Current assets = $10,000 
Current liabilities = $6,000

Therefore, net working capital = $10,000 - $6,000 = $4,000.

The amounts of cash and marketable securities, accounts receivable, and inventory do not affect the calculation of net working capital.

Question 13

If the Lamy Company has a return on sales of 10% and its inventory turnover is 9, what is its annual cost of goods sold (COGS)? Also assume that Lamy's average inventory is $96,700 and its annual sales are $1,000,000.

Accepted Answer

COGS = Sales / (1 - Return on sales) = 1,000,000 / (1 - 0.1) = 1,111,111.11
Inventory turnover = Cost of goods sold / Average inventory
Therefore, Cost of goods sold = Inventory turnover x Average inventory = 9 x $96,700 = $870,300. Therefore, the correct answer is C.

Question 14

Greg is interested in investing in a small company, and he thinks Allen, Co. might be a good investment. He has been given the following information and would like to know the return on stockholder's equity (ROE). Assume Allen's marginal tax rate is 40%. $\begin{array}{lr}
\text {Earnings before taxes(EBT): }&\text {\$ 3 million }\
\text { Retum onSales(ROS):}&\text {3.6 \% }\
\text {Total liabilities: }&\text {\$ 15.0 million }\
\text {Total stockholded's equity: }&\text {\$10.0 million }\
\end{array}$

Accepted Answer

The answer of Greg is interested in investing in a...

Question 15

Given the following information, calculate the return on equity for Chaus, Inc. Return on Sales= 5%
Total asset turnover = 2
Debt ratio = .73

Accepted Answer

The answer of Given the following information, calculate the return...

Question 16

Determine the cost of sales for a firm with the following financial ratios and data: Current ratio = 3.0; Quick ratio = 2.0; Current liabilities $1,000,000;
Inventory turnover = 6 times.

Accepted Answer

Using the current ratio formula, we can calculate that the firm's current assets are $3,000,000 ($1,000,000 x 3.0). 
Using the quick ratio formula, we can calculate that the firm's quick assets (excluding inventory) are $2,000,000 ($1,000,000 x 2.0). 
To calculate the cost of sales, we can use the inventory turnover ratio. If the inventory turnover is 6 times, then the cost of sales is 6 times the amount of inventory. 
Cost of sales = Inventory turnover x Inventory = 6 x ? 
We don't have information on the cost of inventory, but we can assume that it's equal to the inventory's value. Let the value of the inventory be x. 
Using the quick ratio formula again, we know that current assets = quick assets + inventory, so: 
$3,000,000 = $2,000,000 + x 
x = $1,000,000 
Therefore, cost of sales = 6 x $1,000,000 = $6,000,000.

Question 17

Find the debt ratio of a firm with total debt equal to $800,000 and net worth equal to $2,400,000.

Accepted Answer

The answer of Find the debt ratio of a firm...

Question 18

A firm with an equity multiplier of 4.0, will have a debt ratio of:

Accepted Answer

The equity multiplier is calculated as:

Equity Multiplier = Total Assets / Shareholder's Equity

We can rearrange this formula to solve for the debt ratio:

Debt Ratio = Total Debt / Total Assets = Equity Multiplier - 1

If the equity multiplier is 4.0, then the debt ratio is:

Debt Ratio = 4.0 - 1 = 0.75

Therefore, the best choice is C.

Question 19

What is the return on sales for TJX Inc. if the current ratio = 2; total asset turnover = 1.5; total assets = $100,000; and EBIT = $30,000? Assume the marginal tax rate for TJX is 40% and that interest expenses are $10,000.

Accepted Answer

The answer of What is the return on sales for...

Question 20

What is the market price per share of Whopie, Inc. if the firm had net income of $200,000, earnings per share of $2.70, total equity of $800,000, and a market to book value ratio of 1.5?

Accepted Answer

The market price per share is calculated by multiplying the book value per share by the market to book value ratio. The book value per share is total equity divided by the number of shares, which is net income divided by earnings per share. So, $800,000 / ($200,000 / $2.70) = $10.80 book value per share. Then, $10.80 * 1.5 = $16.20 market price per share.

Quiz 3: Cash Flows and Financial Analysis