Question 1

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 investor is considering starting a new business...

Question 2

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
Profit margin = $23,000/$320,000 = 0.0719 
Profit margin = 7.19%

Question 3

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

TATO = Sales/Total assets
Industry average TATO = 2.4
Bonner's current TATO = 415,000/355,000 = 1.169
We can calculate the total assets needed to achieve the industry average TATO:
2.4 = 415,000/Total assets
Total assets = 415,000/2.4 = $172,916.67
To bring Bonner's TATO to the industry average, we need to reduce the total assets:
$172,916.67 - $355,000 = -$182,083.33
However, since it doesn't make sense to have a negative reduction in assets, we take the absolute value:
$182,083.33 ≈ $182,083 (rounded to the nearest dollar) 
Therefore, the excess assets that need to be sold is about $182,083.

Question 4

Bostian, Inchas total assets of $625,000Its total debt outstanding is $185,000 The Board of Directors has directed the CFO to move towards a debt ratio of 55% How much debt must the company add or subtract to achieve the target debt ratio?

Accepted Answer

The correct answer is A.The company's current debt ratio is $185,000/$625,000 = 29.6%. To achieve a debt ratio of 55%, the company must increase its debt by $625,000 * 0.55 - $185,000 = $158,750.

Question 5

LeCompte Corphas $312,900 of assets, and it uses only common equity capital (zero debt) Its sales for the last year were $620,000, and its net income after taxes was $24,655 Stockholders recently voted in a new management team that has promised to lower costs and get the return on equity up to 15% What profit margin would LeCompte need in order to achieve the 15% ROE, holding everything else constant?

Accepted Answer

The answer of LeCompte Corphas $312,900 of assets, and it...

Question 6

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 7

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,...

Question 8

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

The basic earning power (BEP) formula is EBIT / Total Assets.
BEP = 62,500 / 305,000
BEP = 0.2049 or 20.49% (rounded to two decimal places).
Therefore, the best choice is (C).

Question 9

Heaton Corpsells 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

We can use the following formula to calculate the Days Sales Outstanding (DSO):

DSO = (Accounts Receivable / Total Credit Sales) x Number of Days

First, we need to calculate the total credit sales:

Total Sales = $425,000
Revenue Earned on Cash Sales = Total Sales x (% Cash Sales / 100) = $425,000 x (100% - 0%) = $425,000
Revenue Earned on Credit Sales = Total Sales x (% Credit Sales / 100) = $425,000 x (0% - 100%) = -$425,000

Total Credit Sales = Revenue Earned on Credit Sales / (1 - Discount %)
We don't have any information on the discount %, so we'll assume it's 0%.
Total Credit Sales = -$425,000 / (1 - 0%) = -$425,000

Since we can't have negative credit sales, we know that there must be an error in our calculation. The only way to fix it is to assume that the revenue earned on credit sales is actually positive (i.e. there were no returns or allowances). This means that the discount % was actually greater than 0%.

Let's assume that the discount % was 2%. This means that the revenue earned on credit sales was:

Revenue Earned on Credit Sales = Total Sales x (% Credit Sales / 100) x (1 - Discount %) = $425,000 x (0% - 100%) x (1 - 2%)= $425,000 x (-100%) x (98%) = -$416,500

Total Credit Sales = -$416,500 / (1 - 2%) = -$425,510

Now we can calculate the DSO:

DSO = ($60,000 / -$425,510) x 365 days = -51.55 days

DSO - Credit period = -51.55 days - 45 days = -96.55 days

Customers are paying early by 6.53 days, since the answer is negative. Therefore, the best choice is B.

Question 10

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 11

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 new firm is developing its business plan...

Question 12

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

To calculate the P/E ratio, divide the stock price by earnings per share. Thus, P/E ratio = $33.50/$2.30 = 14.57.

Question 13

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

The answer of Branch Corp.'s total assets at the end...

Question 14

year Urbana Corphad $197,500 of assets, $307,500 of sales, $19,575 of net income, and a debt-to-total-assets ratio of 37.5% The new CFO believes a new computer program will enable it to reduce costs and thus raise net income to $33,000 Assets, sales, and the debt ratio would not be affected By how much would the cost reduction improve the ROE?

Accepted Answer

The answer of year Urbana Corphad $197,500 of assets, $307,500...

Question 15

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 Industries has sales of $100,000 and accounts...

Question 16

Emerson Inc.'s would like to undertake a policy of paying out 45% of its incomeIts latest net income was $1,250,000, and it had 225,000 shares outstandingWhat dividend per share should it declare?

Accepted Answer

The total amount of income that will be distributed as dividends is 45% of $1,250,000 = $562,500.

The dividend per share can be calculated by dividing the total dividends by the number of shares outstanding:

Dividend per share = $562,500 / 225,000 = $2.50

Therefore, the best choice is D, with a dividend per share of $2.50.

Question 17

Hutchinson Corporation has zero debt-it is financed only with common equityIts total assets are $410,000The 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

Since there is no debt, the current equity/assets ratio is 100%. The desired debt/assets ratio is 40%, so the new equity/assets ratio must be 60%. This means that the firm will have to issue debt to finance a portion of its assets, and use the proceeds from the borrowing to buy back common stock at its book value.

Let's use X to represent the amount the firm needs to borrow. The new equity will be the original equity minus the amount borrowed (X), and the new assets will be the old assets plus the amount borrowed (X).

New equity/assets ratio = (old equity - X) / (old assets + X) = 60%
Solving for X gives: 
X = 0.6(old assets) - old equity = 0.6($410,000) - $410,000 = $164,000

Therefore, the firm must borrow $164,000 to achieve the target debt ratio.

Question 18

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,...

Question 19

Ziebart Corp.'s EBITDA last year was $390,000 (= EBIT + depreciation + amortization), its interest charges were $9,500, it had to repay $26,000 of long-term debt, and it had to make a payment of $17,400 under a long-term lease The firm had no amortization charges What was the EBITDA coverage ratio?

Accepted Answer

The answer of Ziebart Corp.'s EBITDA last year was $390,000...

Question 20

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

The answer of Northwest Lumber had a profit margin of...

Quiz 8: Financial Analysis