Question 1

Liquidity and Asset Management Ratios Oasis Products, Inc. has current liabilities = $10 million, current ratio = 1.5 times, inventory turnover ratio = 12 times, average collection period = 20 days, and sales = $100 million. What is the value of their cash and marketable securities?

Accepted Answer

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Question 2

Liquidity Ratios Ernie's Mufflers has current liabilities of $45 million. Cash makes up 5 percent of the current assets and accounts receivable makes up another 50 percent of current assets. Ernie's current ratio = 1.5 times. What is the value of inventory listed on the firm's balance sheet?

Accepted Answer

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Question 3

Debt Management Ratios Paige's Purses, Inc. reported a debt to equity ratio of 2.4 times at the end of 2011. If the firm's total assets at year-end are $27 million, how much of their assets is financed with equity?

Accepted Answer

The debt to equity ratio of 2.4 means that for every $1 of equity, there is $2.4 of debt. Let E be the equity. Then, debt = 2.4E. Total assets = debt + equity = 2.4E + E = 3.4E. Given total assets are $27 million, we have 3.4E = $27 million. Solving for E gives E = $27 million / 3.4 = $7.94 million.

Question 4

Debt Management Ratios Nicole's Neon Signs, Inc. reported a debt to equity ratio of 1.9 times at the end of 2011. If the firm's total assets at year-end are $100 million, how much of their assets is financed with equity?

Accepted Answer

The debt to equity ratio of 1.9 means that for every $1 of equity, there is $1.9 of debt. Let E be the equity. Then, 1.9E is the debt. The total assets are financed by both debt and equity, so E + 1.9E = $100 million. Solving for E gives E = $34.48 million.

Question 5

Debt Management Ratios Calculate the times interest earned ratio for Paige's Purses, Inc. using the following information. Sales = $50,000,000, cost of goods sold = $15,000,000, depreciation expense = $2,000,000, addition to retained earnings = $10,000,000, dividends per share = $1.10, tax rate = 30%, and number of shares of common stock outstanding = 10,000,000. Paige's Purses has no preferred stock outstanding.

Accepted Answer

First, we need to calculate earnings before interest and taxes (EBIT) which is calculated as:
Sales - cost of goods sold - depreciation expense = $50,000,000 - $15,000,000 - $2,000,000 = $33,000,000

Next, we need to calculate the interest expense which is not given in the information provided. Therefore, we need to use the times interest earned (TIE) ratio formula to solve for it. TIE is calculated as:
TIE = EBIT / Interest expense

We can rearrange the formula to solve for interest expense:
Interest expense = EBIT / TIE

We are given the following information:
Addition to retained earnings = $10,000,000
Dividends per share = $1.10
Tax rate = 30%
Number of shares of common stock outstanding = 10,000,000

We can calculate the total dividends paid as:
Total dividends = Dividends per share x Number of shares = $1.10 x 10,000,000 = $11,000,000

We can calculate the net income as:
Net income = Addition to retained earnings - Total dividends
Net income = $10,000,000 - $11,000,000 = -$1,000,000 (since the company paid out more in dividends than it added to retained earnings)

Now we can use the TIE ratio formula with the information we have to solve for interest expense:
11 = ($33,000,000 - (-$1,000,000)) / Interest expense
Interest expense = $3,000,000

Finally, we can calculate the TIE ratio using the interest expense we just calculated:
TIE = EBIT / Interest expense
TIE = $33,000,000 / $3,000,000
TIE = 11.00

Therefore, the correct answer is C) 11.00.

Question 6

Liquidity Ratios You have the following information on Marco's Polo Shop: total liabilities and equity = $205 million, current liabilities = $45 million, inventory = $60 million, and quick ratio = 2.4 times. Using this information, what is the balance for fixed assets on Marco Polo's balance sheet?

Accepted Answer

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Question 7

Debt Management Ratios Tierre's Ts, Inc. reported a debt to equity ratio of 3 times at the end of 2011. If the firm's total assets at year-end are $15 million, how much of their assets is financed with equity?

Accepted Answer

The debt to equity ratio of 3 means that for every $1 of equity, there is $3 of debt. Therefore, the equity portion is 1/4 of the total financing. If total assets are $15 million, then $15 million * (1/4) = $3.75 million is financed with equity.

Question 8

Asset Management and Debt Management Ratios Use the following information to calculate current assets: Sales = $12 million, capital intensity ratio = 4 times, debt ratio = 45%, and fixed asset turnover ratio = 2.5 times.

Accepted Answer

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Question 9

Asset Management and Profitability Ratios You have the following information on Universe It Ts, Inc.: sales to working capital = 10 times, profit margin = 25%, net income available to common stockholders = $3 million, and current liabilities = $1 million. What is the firm's balance of current assets?

Accepted Answer

To find the firm's balance of current assets, first calculate sales using the profit margin: Sales = Net Income / Profit Margin = $3 million / 0.25 = $12 million. Then, use the sales to working capital ratio: Working Capital = Sales / Sales to Working Capital Ratio = $12 million / 10 = $1.2 million. Since Working Capital = Current Assets - Current Liabilities, Current Assets = Working Capital + Current Liabilities = $1.2 million + $1 million = $2.2 million.

Question 10

Debt Management Ratios Calculate the times interest earned ratio for Tierre's Ts, Inc. using the following information. Sales = $200,000, cost of goods sold = $50,000, depreciation expense = $13,000, addition to retained earnings = $70,000, dividends per share = $0.50, tax rate = 30%, and number of shares of common stock outstanding = 1,000. Tierre's Ts has no preferred stock outstanding.

Accepted Answer

The times interest earned ratio is calculated as EBIT divided by interest expense. First, calculate EBIT: Sales - COGS - Depreciation = $200,000 - $50,000 - $13,000 = $137,000. Then, calculate net income: Addition to retained earnings + Dividends = $70,000 + ($0.50 * 1,000) = $70,500. Since net income = (EBIT - Interest) * (1 - Tax rate), solve for interest: $70,500 = ($137,000 - Interest) * 0.7. Interest = $37,000. Finally, times interest earned = $137,000 / $37,000 = 3.7756.

Question 11

Asset Management and Profitability Ratios You have the following information on Zip's Diner, Inc.: sales to working capital = 8 times, profit margin = 5%, net income available to common stockholders = $20 million, and current liabilities = $4 million. What is the firm's balance of current assets?

Accepted Answer

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Question 12

Asset Management and Debt Management Ratios Use the following information to calculate current assets: Sales = $100 million, capital intensity ratio = .5 times, debt ratio = 30%, and fixed asset turnover ratio = 5 times.

Accepted Answer

The capital intensity ratio is the inverse of the fixed asset turnover ratio. Given the fixed asset turnover ratio is 5 times, the capital intensity ratio is 0.2 (1/5). Therefore, fixed assets = Sales / Fixed Asset Turnover = $100m / 5 = $20m. The capital intensity ratio is 0.5, so Total Assets = Sales * Capital Intensity Ratio = $100m * 0.5 = $50m. With a debt ratio of 30%, equity is 70%, so Total Assets = Debt + Equity. Therefore, Current Assets = Total Assets - Fixed Assets = $50m - $20m = $30m.

Question 13

Internal Growth Rate Last year Poncho Villa Corporation had an ROA of 16% and a dividend payout ratio of 25%. What is the internal growth rate?

Accepted Answer

To calculate the internal growth rate, we can use the formula: Internal Growth Rate = (ROA x Retention Ratio) / (1 - ROA x Retention Ratio), where Retention Ratio = 1 - Dividend Payout Ratio. Substituting the values, we get Internal Growth Rate = (0.16 x 0.75) / (1 - 0.16 x 0.75) = 0.12 or 12%. However, this assumes that the company is not leveraging any debt to finance its growth. Since there is no information given about the company's debt level, we will assume that the internal growth rate equals the sustainable growth rate which is lower since it assumes that the company must also finance its growth through debt. Therefore, we can conclude that the closest answer to the internal growth rate is B) 13.64%.

Question 14

Internal Growth Rate Last year Rain Repel Corporation had an ROA of 5% and a dividend payout ratio of 90%. What is the internal growth rate?

Accepted Answer

The internal growth rate is calculated using the formula: ROA * (1 - Dividend Payout Ratio). Here, it is 5% * (1 - 0.90) = 0.5%.

Question 15

Liquidity Ratios You have the following information on Olivia's Bridle Shop: total liabilities and equity = $65 million, current liabilities = $10 million, inventory = $15 million, and quick ratio = 3 times. Using this information, what is the balance for fixed assets on Olivia's balance sheet?

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Question 16

Liquidity Ratios Burt's TVs has current liabilities of $25 million. Cash makes up 40 percent of the current assets and accounts receivable makes up another 20 percent of current assets. Burt's current ratio = .85 times. What is the value of inventory listed on the firm's balance sheet?

Accepted Answer

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Question 17

Liquidity and Asset Management Ratios Green Products, Inc. has current liabilities = $40 million, current ratio = 2.4 times, inventory turnover ratio = 8 times, average collection period = 40 days, and sales = $320 million. What is the value of their cash and marketable securities?

Accepted Answer

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Question 18

Debt Management Ratios Zoe's Dog Toys, Inc. reported a debt to equity ratio of .5 times at the end of 2011. If the firm's total assets at year-end are $50 million, how much of their assets is financed with equity?

Accepted Answer

Debt to equity ratio = Total debt / Total equity
0.5 = Total debt / Total equity
Total equity = Total assets - Total debt
Total equity = $50 million - (0.5 x Total equity)
0.5 x Total equity = $25 million
Total equity = $25 million / 0.5
Total equity = $50 million
Therefore, $33.33 million of the assets are financed with equity. Option C is correct.

Question 19

Sustainable Growth Rate Last year Rain Repel Corporation had an ROE of 10% and a dividend payout ratio of 80%. What is the sustainable growth rate?

Accepted Answer

Sustainable Growth Rate = (ROE x Retention Ratio) / (1 - ROE x Retention Ratio)
Retention Ratio = 1 - Dividend Payout Ratio = 1 - 0.80 = 0.20
Sustainable Growth Rate = (0.10 x 0.20) / (1 - 0.10 x 0.20) = 0.02 or 2.04%

Question 20

Sustainable Growth Rate Last year Umbrellas Unlimited Corporation had an ROE of 16.5% and a dividend payout ratio of 40%. What is the sustainable growth rate?

Accepted Answer

Sustainable Growth Rate = ROE x (1 - dividend payout ratio)
= 16.5% x (1- 0.4)
= 9.9%
Therefore, the sustainable growth rate is 9.9% or 10.99% rounded to the nearest hundredth. Choice B is the correct answer.

Quiz 3: Analyzing Financial Statements