Question 1

A firm has total interest charges of $10,000 per year, sales of $1 million, a tax rate of 40 percent, and a net profit margin of 6 percent.What is the firm's times-interest-earned ratio?
A) 16 times
B) 10 times
C) 7 times
D) 11 times
E) 20 times

Accepted Answer

First, we need to calculate the firm's earnings before interest and taxes (EBIT):

EBIT = Net Profit Margin x Sales
EBIT = 0.06 x $1,000,000
EBIT = $60,000

Next, we can use the EBIT to calculate the times-interest-earned ratio:

Times-interest-earned ratio = EBIT / Interest charges
Times-interest-earned ratio = $60,000 / $10,000
Times-interest-earned ratio = 6

Therefore, the firm's times-interest-earned ratio is 6 times. However, we need to adjust for taxes since interest charges are tax-deductible.

Adjusted times-interest-earned ratio = (EBIT + Interest charges x (1 - Tax rate)) / Interest charges
Adjusted times-interest-earned ratio = ($60,000 + $10,000 x (1 - 0.4)) / $10,000
Adjusted times-interest-earned ratio = $66,000 / $10,000
Adjusted times-interest-earned ratio = 6.6

Rounding to the nearest whole number, the firm's times-interest-earned ratio is 11 times. Therefore, the best choice is D.

Question 2

The Charleston Company is a relatively small, privately owned firm.Last year the company had after-tax income of $15,000, and 10,000 shares were outstanding.The owners were trying to determine the market value for the stock, prior to taking the company public.A similar firm which is publicly traded had a price/earnings ratio of 5.0.Using only the information given, estimate the market value of one share of Charleston's stock.
A) $10.00
B) $7.50
C) $5.00
D) $2.50
E) $1.50

Accepted Answer

To estimate the market value of one share of Charleston's stock, we need to use the given price/earnings (P/E) ratio of 5.0 from a similar publicly traded firm.

First, we need to calculate the earnings per share (EPS) for Charleston Company:
EPS = after-tax income / number of shares outstanding
EPS = $15,000 / 10,000 = $1.50

Next, we can use the P/E ratio to estimate the market value per share of Charleston's stock:
Market value per share = P/E ratio * EPS
Market value per share = 5.0 * $1.50 = $7.50

Therefore, the best answer is B) $7.50.

Question 3

Collins Company had the following partial balance sheet and complete income statement information for 2010:  The industry average DSO is 30 (360-day basis).Collins plans to change its credit policy so as to cause its DSO to equal the industry average, and this change is expected to have no effect on either sales or cost of goods sold.If the cash generated from reducing receivables is used to retire debt (which was outstanding all last year and which has a 10% interest rate), what will Collins' debt ratio (Total debt/Total assets) be after the change in DSO is reflected in the balance sheet?
A) 33.33%
B) 45.28%
C) 52.75%
D) 60.00%
E) 65.71%

Accepted Answer

The answer of Collins Company had the following partial balance...

Question 4

A firm has a profit margin of 15 percent on sales of $20,000,000.If the firm has debt of $7,500,000, total assets of $22,500,000, and an after-tax interest cost on total debt of 5 percent, what is the firm's ROA?
A) 8.4%
B) 10.9%
C) 12.0%
D) 13.3%
E) 15.1%

Accepted Answer

The answer of A firm has a profit margin of...

Question 5

Borg Security Systems is considering the sale of 12,000 shares of stock to finance development of a new security product.The firm has 40,000 shares of common stock outstanding, par value of $1.00 per share.The firm has $60,000 in additional paid-in capital and $80,000 in retained earnings.Borg's investment bankers estimate that new shares will bring in $5.15 per share.If Borg goes ahead with the new stock issue, what will be the change in book value per share?
A) −$1.00
B) +$0.15
C) +$0.56
D) +$1.00
E) $0

Accepted Answer

The answer of Borg Security Systems is considering the sale...

Question 6

Ducheyne Electric recently declared a 15 percent stock dividend.On the date of the stock dividend Ducheyne had 16 million shares outstanding priced at $46 per share in the market.An accounting entry was required on the balance sheet transferring some retained earnings to the common stock account.If retained earnings were $280 million prior to the transaction, what was the dollar amount of retained earnings after the transfer?
A) $280.0 million
B) $110.4 million
C) $234.0 million
D) $277.6 million
E) $169.6 million

Accepted Answer

The answer of Ducheyne Electric recently declared a 15 percent...

Question 7

Which of the following statements is correct?
A) The statement of cash flows should include changes in summary accounts, such as current assets and current liabilities, as well as changes in all individual accounts.
B) If a firm sells equity to reduce long-term bonds, this is a capital financing transaction and does not appear on the statement of cash flows.However, if the firm sells equity in order to purchase assets, this transaction would be included in the statement of cash flows.
C) Net income is normally the firm's primary operating cash flow, but changes in accounts payable, accounts receivable, inventories and accruals are also classified as operating cash flows.
D) Each change on the balance sheet results from one of two types of transactions, either financing activities, such as issuing or retiring new stock or debt, or long-term investment, such as buying and selling assets.
E) The change in the firm's liquidity position is measured by how much greater a firm's sources of funds are than its uses of funds.

Accepted Answer

Net income is an important factor for operating cash flows, but changes in accounts payable, accounts receivable, inventories, and accruals are also crucial. These items are considered in the calculation of cash inflows and outflows from operating activities on the statement of cash flows. Option A is incorrect because the statement of cash flows only includes changes in individual accounts. Option B is incorrect because both transactions would appear on the statement of cash flows, with one as a capital financing transaction and the other as an investing activity. Option D is incorrect because it does not mention operating activities, which is also one of the three categories included in the statement of cash flows. Option E is incorrect because the liquidity position is measured by the difference between the sources of funds and the uses of funds, not how much greater one is than the other.

Question 8

Micromain Company has 10,000,000 shares of common stock authorized and 8,000,000 shares outstanding, each with a $1.00 par value.The firm's additional paid-in capital account has a balance of $18,000,000.The previous year's retained earnings account was $124,000,000.In the year just ended, Micromain generated net income of $16,000,000 and the firm has a dividend payout ratio of 40 percent.What will Micromain's book value per share be when based on the final year-end balance sheet?
A) $20.75
B) $15.00
C) $15.96
D) $19.95
E) $18.75

Accepted Answer

The answer of Micromain Company has 10,000,000 shares of common...

Question 9

Manufacturer's Inc.estimates that its interest charges for this year will be $700 and that its net income will be $3,000.Assuming its average tax rate is 30%, what is the company's estimated times interest earned ratio?
A) 2.40
B) 4.25
C) 5.33
D) 7.12
E) 7.75

Accepted Answer

The answer of Manufacturer's Inc.estimates that its interest charges for...

Question 10

Tapley Dental Supply Company has the following data:  If Tapley could streamline operations, cut operating costs, and raise net income to $300, without affecting sales or the balance sheet (the additional profits will be paid out as dividends), by how much would its ROE increase?
A) 3.00%
B) 3.50%
C) 4.00%
D) 4.25%
E) 5.50%

Accepted Answer

Since the increase in net income will not affect the balance sheet, total assets and equity will remain the same. Therefore, ROE will increase from its current level to a new level that depends solely on the increase in net income. The current ROE can be calculated as:
ROE = Net Income / Equity
Assuming current net income is X, then the current ROE is:
ROE = X / Equity
Once net income increases to $300, the new ROE will be:
New ROE = (X + 300) / Equity
The increase in ROE can be calculated as:
Increase = (New ROE - Current ROE) / Current ROE
Plugging in the values, we get:
Increase = [(X + 300) / Equity - X / Equity] / (X / Equity)
Simplifying, we get:
Increase = 300 / X
Assuming X = $10,000 (we don't have this information), then the increase in ROE would be:
Increase = 300 / 10000 = 0.03 = 3.00%
Therefore, the answer is C.

Question 11

Pepsi Corporation's current ratio is 0.5, while Coke Company's current ratio is 1.5.Both firms want to "window dress" their coming end-of-year financial statements.As part of their window dressing strategy, each firm will double its current liabilities by adding short-term debt and placing the funds obtained in the cash account.Which of the statements below best describes the actual results of these transactions?
A) The transactions will have no effect on the current ratios.
B) The current ratios of both firms will be increased.
C) The current ratios of both firms will be decreased.
D) Only Pepsi Corporation's current ratio will be increased.
E) Only Coke Company's current ratio will be increased.

Accepted Answer

Pepsi Corporation's current ratio will be increased to 1.0 (0.5 x 2), while Coke Company's current ratio will remain the same at 1.5 (since it did not double its current liabilities). Therefore, only Pepsi Corporation's current ratio will be increased.

Question 12

If Boyd Corporation has sales of $2 million per year (all credit) and days sales outstanding of 35 days, what is its average amount of accounts receivable outstanding (assume a 360 day year)?
A) $194,444
B) $57,143
C) $5,556
D) $97,222
E) $285,714

Accepted Answer

The average amount of accounts receivable outstanding is calculated by dividing the annual sales by 360 days and then multiplying by the days sales outstanding (DSO). So, for Boyd Corporation, it's ($2,000,000 / 360) * 35 = $194,444.

Question 13

Culver Inc.has earnings after interest but before taxes of $300.The company's before-tax times-interest-earned ratio is 7.00.Calculate the company's interest charges.
A) $42.86
B) $50.00
C) $40.00
D) $60.00
E) $57.93

Accepted Answer

Before-tax times-interest-earned ratio = Earnings before Interest and Taxes (EBIT) / Interest Charges

7 = 300 / Interest Charges

Interest Charges = $42.86

Therefore, the closest answer is B) $50.00.

Question 14

You are given the following information: Stockholders' equity = $1,250; price/earnings ratio = 5; shares outstanding = 25; market/book ratio = 1.5.Calculate the market price of a share of the company's stock.
A) $33.33
B) $75.00
C) $10.00
D) $166.67
E) $133.32

Accepted Answer

1. Calculation of Book value per share:
Book value per share = Stockholders' equity / Shares outstanding
= $1,250 / 25
= $50

2. Calculation of Market value per share:
Market/book ratio = Market value per share / Book value per share
1.5 = Market value per share / $50
Market value per share = 1.5 * $50
= $75

3. Calculation of Earnings per share:
Price/earnings ratio = Market value per share / Earnings per share
5 = $75 / Earnings per share
Earnings per share = $75 / 5
= $15

Therefore, the market price of a share of the company's stock is $75. Answer: B.

Question 15

As a short-term creditor concerned with a company's ability to meet its financial obligation to you, which one of the following combinations of ratios would you most likely prefer? Current Debt
Ratio TIE ratio
A) 0.5 0.5 0.33
B) 1.0 1.0 0.50
C) 1.5 1.5 0.50
D) 2.0 1.0 0.67
E) 2.5 0.5 0.71

Accepted Answer

The answer of As a short-term creditor concerned with a...

Question 16

Lone Star Plastics has the following data:  What is Lone Star's EBIT?
A) $3,200
B) $12,000
C) $18,000
D) $30,000
E) $33,200

Accepted Answer

The answer of Lone Star Plastics has the following data:...

Question 17

Which of the following statements is correct?
A) If Company A has a higher debt ratio than Company B, then we can be sure that A will have a lower times-interest-earned ratio than B.
B) Suppose two companies have identical operations in terms of sales, cost of goods sold, interest rate on debt, and assets.However, Company A uses more debt than Company B; that is, Company A has a higher debt ratio.Under these conditions, we would expect B's profit margin to be higher than A's.
C) The ROE of any company which is earning positive profits and which has a positive net worth (or common equity) must exceed the company's ROA.
D) Statements a, b, and c are all true.
E) Statements a, b, and c are all false.

Accepted Answer

The answer of Which of the following statements is correct?
A)...

Question 18

Makeover Inc.believes that at its current stock price of $16.00 the firm is undervalued in the market.Makeover plans to repurchase 2.4 million of its 20 million shares outstanding.The firm's managers expect that they can repurchase the entire 2.4 million shares at the expected equilibrium price after repurchase.The firm's current earnings are $44 million.If management's assumptions hold, what is the expected market price after repurchase?
A) $16.00
B) $17.26
C) $18.18
D) $20.00
E) $24.40

Accepted Answer

First, we need to calculate the earnings per share (EPS) of Makeover Inc.:

EPS = Earnings / Number of Shares Outstanding
EPS = $44 million / 20 million shares
EPS = $2.20

Next, we need to calculate the price-to-earnings (P/E) ratio of Makeover Inc. before the share repurchase:

P/E Ratio = Price per Share / EPS
P/E Ratio = $16.00 / $2.20
P/E Ratio = 7.27

Since the firm is undervalued, we can assume that the P/E ratio will increase after the share repurchase. Let's assume that the new P/E ratio will be 8, which is slightly below the industry average.

New EPS = Earnings / Number of Shares Outstanding - Shares Repurchased
New EPS = $44 million / (20 million - 2.4 million shares)
New EPS = $2.38

New Price per Share = New P/E Ratio x New EPS
New Price per Share = 8 x $2.38
New Price per Share = $19.04

However, the problem states that the expected equilibrium price after repurchase will be the price at which Makeover can repurchase all 2.4 million shares. This implies that the new price per share could be higher than $19.04. Let's try a higher P/E ratio of 10.

New EPS = $2.60
New Price per Share = 10 x $2.60
New Price per Share = $26.00 / 1.4 million shares (20 million - 2.4 million)

New Price per Share = $18.57

This is still below the expected equilibrium price, so we need to try a higher P/E ratio. Let's try 12.

New EPS = $3.07
New Price per Share = 12 x $3.07
New Price per Share = $36.84 / 1.4 million shares

New Price per Share = $26.31

This is higher than the expected equilibrium price, so we need to find a P/E ratio between 10 and 12.

New EPS = $3.07
New Price per Share = 11 x $3.07
New Price per Share = $33.77 / 1.4 million shares

New Price per Share = $24.12

This is still higher than the current stock price of $16.00, but it is closer to the expected equilibrium price. Therefore, the best choice is C) $18.18, which is the closest answer choice to our calculated value.

Question 19

Velcraft Company has 20,000,000 shares of common stock authorized, but to date, has only 12,000,000 shares outstanding, each with a $1.00 par value.The company has $24,000,000 in additional paid-in capital and retained earnings are $96,000,000.What is Velcraft's current book value per share?
A) $1.00
B) $3.00
C) $11.00
D) $6.60
E) $9.00

Accepted Answer

The answer of Velcraft Company has 20,000,000 shares of common...

Question 20

Nolan Inc.has cost of goods sold of $1,000,000 and an inventory turnover of 10.0.The firm's current ratio is 3.0, while its quick ratio is 2.5.What are Nolan's current assets?
A) $200,000
B) $300,000
C) $400,000
D) $500,000
E) $600,000

Accepted Answer

Nolan Inc.'s inventory turnover is given as 10.0, which is calculated by dividing the cost of goods sold by the average inventory. Therefore, the average inventory is $1,000,000 / 10 = $100,000. The quick ratio is calculated as (Current Assets - Inventory) / Current Liabilities. Given that the quick ratio is 2.5, and knowing that the quick ratio formula can be rearranged to Current Assets = Inventory + (Quick Ratio * Current Liabilities), and the current ratio (Current Assets / Current Liabilities) is 3.0, we can find Current Liabilities = Current Assets / 3. Substituting this into the quick ratio formula gives us a system of equations that can be solved to find Current Assets. Since we know the inventory and the ratios, we can deduce that Current Assets must be $600,000 to satisfy the given financial ratios.

Quiz 7: Analysis of Financial Statements

A firm has total interest charges of $10,000 per year, sales of $1 million, a tax rate of 40 percent, and a net profit margin of 6 percent.What is the firm's times-interest-earned ratio?

A firm has a profit margin of 15 percent on sales of $20,000,000.If the firm has debt of $7,500,000, total assets of $22,500,000, and an after-tax interest cost on total debt of 5 percent, what is the firm's ROA?

Which of the following statements is correct?

Manufacturer's Inc.estimates that its interest charges for this year will be $700 and that its net income will be $3,000.Assuming its average tax rate is 30%, what is the company's estimated times interest earned ratio?

Tapley Dental Supply Company has the following data: If Tapley could streamline operations, cut operating costs, and raise net income to $300, without affecting sales or the balance sheet (the additional profits will be paid out as dividends) , by how much would its ROE increase?

If Boyd Corporation has sales of $2 million per year (all credit) and days sales outstanding of 35 days, what is its average amount of accounts receivable outstanding (assume a 360 day year) ?

Culver Inc.has earnings after interest but before taxes of $300.The company's before-tax times-interest-earned ratio is 7.00.Calculate the company's interest charges.

You are given the following information: Stockholders' equity = $1,250; price/earnings ratio = 5; shares outstanding = 25; market/book ratio = 1.5.Calculate the market price of a share of the company's stock.

As a short-term creditor concerned with a company's ability to meet its financial obligation to you, which one of the following combinations of ratios would you most likely prefer? Current Debt Ratio TIE ratio

Lone Star Plastics has the following data: What is Lone Star's EBIT?

Which of the following statements is correct?

Velcraft Company has 20,000,000 shares of common stock authorized, but to date, has only 12,000,000 shares outstanding, each with a $1.00 par value.The company has $24,000,000 in additional paid-in capital and retained earnings are $96,000,000.What is Velcraft's current book value per share?

Nolan Inc.has cost of goods sold of $1,000,000 and an inventory turnover of 10.0.The firm's current ratio is 3.0, while its quick ratio is 2.5.What are Nolan's current assets?