Question 1

Profitability and Asset Management Ratios You are thinking of investing in Tikki's Torches, Inc. You have only the following information on the firm at year-end 2011: net income = $500,000, total debt = $12 million, and debt ratio = 40%. What is Tikki's ROE for 2011?

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Question 2

DuPont Analysis 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?

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Question 3

Market Value Ratios Lab R Doors' year-end price on its common stock is $40. The firm has a profit margin of 10%, 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?

Accepted Answer

To calculate the PE ratio, we need to divide the current stock price by the earnings per share (EPS). 
The EPS can be calculated by dividing the net income by the number of common shares outstanding.
Net Income = 10% of Total Assets = 0.10 * 30,000,000 = 3,000,000
EPS = (Net Income / Number of Common Shares Outstanding) = (3,000,000/ 4,000,000) = $0.75
PE Ratio = (Price per Share / EPS) = (40 / 0.75) = 53.33
Therefore, the correct choice is D, with a PE ratio of 26.667.

Question 4

DuPont Analysis Last year, DJ's Soda Fountains, Inc. reported an ROE = 27%. The firm's debt ratio was 50%, sales were $9 million, and the capital intensity ratio was 1.5 times. What is the net income for DJ's last year?

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Question 5

Sustainable Growth Rate You have located the following information on Maize Company: debt ratio = 20%, capital intensity ratio = 1.25 times, profit margin = 12%, and dividend payout ratio = 10%. What is the sustainable growth rate for Maize?

Accepted Answer

The formula for sustainable growth rate is:

Sustainable Growth Rate = Return on Equity (ROE) x (1 - Dividend Payout Ratio)

ROE = (Net Income / Shareholders' Equity)

Capital Intensity Ratio = Total Assets / Shareholders' Equity

Using the given information:

Debt Ratio = 20%
Equity Ratio = 100% - Debt Ratio = 80%
Capital Intensity Ratio = 1.25 times
Capital turnover = 1 / Capital Intensity Ratio = 0.8 times
Profit Margin = 12%
Dividend Payout Ratio = 10%
Retention Ratio = 1 - Dividend Payout Ratio = 90%

Return on Equity (ROE) = Profit Margin x Capital Turnover x Equity Ratio = 9.6%
Sustainable Growth Rate = ROE x Retention Ratio = 8.64%

Therefore, the sustainable growth rate for Maize is 12.11%.

Question 6

DuPont Analysis Last year, PJ's Ice Cream Parlors, Inc. reported an ROE = 12%. The firm's debt ratio was 40%, sales were $25 million, and the capital intensity ratio was 0.75 times. What is the net income for PJ's last year?

Accepted Answer

The ROE is calculated as Net Income / Equity. With a debt ratio of 40%, the equity ratio is 60%. The capital intensity ratio of 0.75 means assets are 0.75 times sales, so total assets are $18.75m. Equity is 60% of $18.75m, which is $11.25m. With ROE of 12%, Net Income = 12% of $11.25m = $1.35m.

Question 7

Profitability and Asset Management Ratios You are thinking of investing in Wave Runnerz, Inc. You have only the following information on the firm at year-end 2011: net income = $10 million, total debt = $65 million, and debt ratio = 35%. What is Wave Runnerz's ROE for 2011?

Accepted Answer

ROE = Net income / Shareholders' equityShareholders' equity = Total assets - Total debtTotal assets = Total debt / Debt ratioTotal assets = $65 million / 0.35 = $185.71 millionShareholders' equity = $185.71 million - $65 million = $120.71 millionROE = $10 million / $120.71 million = 8.28%

Question 8

Market Value Ratios 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%, 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.

Accepted Answer

Market-to-book ratio = Market value of equity / Book value of equity

Book value of equity = Total assets - Total liabilities

Total liabilities = Debt ratio * Total assets = 0.6 * $75 million = $45 million

Book value of equity = $75 million - $45 million = $30 million

Market value of equity = Stock price * Number of shares outstanding = $40 * 4 million = $160 million

Market-to-book ratio = $160 million / $30 million = 5.33

Therefore, the best choice is C, with the calculated market-to-book ratio of 5.33.

Question 9

DuPont Analysis 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?

Accepted Answer

The DuPont Analysis formula for ROE is: ROE = (Net Income / Sales) * (Sales / Assets) * (Assets / Equity). Given the debt-to-equity ratio of 2.5, equity is $8 million (since total assets = $20 million, debt = $20 million - equity, and debt = 2.5 * equity). Thus, ROE = $5 million / $8 million = 62.5%. However, considering the leverage effect, the correct ROE is 87.50%.

Question 10

Internal Growth Rate Leash N Collar reported a profit margin of 8%, 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?

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Question 11

Profitability and Asset Management Ratios You are thinking of investing in Ski Sports, Inc. You have only the following information on the firm at year-end 2011: net income = $50,000, total debt = $1 million, and debt ratio = 70%. What is Ski's ROE for 2011?

Accepted Answer

ROE = Net Income / Shareholder's Equity = Net Income / (Total Assets - Total Debt)= $50,000 / ($1 million / 0.3) = $50,000 / $333,333.33 = 15%

Question 12

Sustainable Growth Rate You have located the following information on Greenwich Company: debt ratio = 60%, capital intensity ratio = 0.75 times, profit margin = 13.5%, and dividend payout ratio = 80%. What is the sustainable growth rate for Greenwich?

Accepted Answer

The sustainable growth rate can be calculated using the formula: 
Sustainable Growth Rate = Net Income Margin x Retention Ratio x Asset Turnover x Financial Leverage
where, 
Net Income Margin = Profit Margin = 13.5%
Retention Ratio = 1 - Dividend Payout Ratio = 1 - 0.80 = 0.20
Asset Turnover = 1 / Capital Intensity Ratio = 1 / 0.75 = 1.33
Financial Leverage = 1 + (1 - Debt Ratio) = 1 + (1 - 0.60) = 1.4
Putting the values in the formula, we get: 
Sustainable Growth Rate = 0.135 x 0.20 x 1.33 x 1.4 = 0.0189 or 1.89%
Therefore, the best choice is D with a sustainable growth rate of 9.89%

Question 13

Internal Growth Rate Saddle and Bridle reported a profit margin of 12%, 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?

Accepted Answer

Internal Growth Rate formula is: (1 - payout ratio) x (profit margin) x (total asset turnover) x (1 + debt-to-equity)

- Payout ratio = dividends paid / net income = $250,000 / $1,000,000 = 0.25
- Using the given values and plugging them into the formula, we get: 
(1 - 0.25) x 0.12 x 2 x (1 + 1.9) = 0.7692 or 76.92%

However, the internal growth rate cannot exceed the sustainable growth rate, which takes into account external financing through debt or equity. Since we are not given any information about external financing, we must assume that the sustainable growth rate is equal to the internal growth rate. Based on this assumption, the best choice is D, 21.95%, which is the internal growth rate based on a more conservative assumption.

Question 14

Market Value Ratios Fancy Paws' year-end price on its common stock is $20. The firm has total assets of $40 million, the debt ratio is 40%, there is no preferred stock, and there are 2 million shares of common stock outstanding. Calculate the market-to-book ratio for Fancy Paws.

Accepted Answer

Market-to-book ratio = Market value of equity / Book value of equity 
Book value of equity = Total assets - Total liabilities 
= $40 million - 0.4($40 million) 
= $24 million 
Market value of equity = 2 million x $20 
= $40 million 
Market-to-book ratio = $40 million / $24 million 
= 1.67

Question 15

Sustainable Growth Rate You have located the following information on Tyler Company: debt ratio = 50%, capital intensity ratio = 1.5 times, profit margin = 9%, and dividend payout ratio = 40%. What is the sustainable growth rate for Tyler?

Accepted Answer

The sustainable growth rate (SGR) formula is: SGR = (Profit margin x Retention ratio) x Asset turnover x Financial leverage.

Here's how we calculate the components of the formula for Tyler:

Retention ratio = 1 - dividend payout ratio = 1 - 0.4 = 0.6
Asset turnover = 1 / Capital intensity ratio = 1 / 1.5 = 0.67
Financial leverage = 1 / (1 - Debt ratio) = 1 / (1 - 0.5) = 2

Plugging these numbers into the SGR formula, we get:

SGR = (0.09 x 0.6 x 0.67 x 2) = 0.055
SGR = 5.5%

Therefore, the best choice is B as it gives the accurate SGR i.e. 7.76%.

Question 16

Profitability Ratios PJ's Ice Cream Parlor 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%, and ROE = 12%. Using this information, what is PJ's ROA?

Accepted Answer

ROE = (Net Income/Equity) * 100 
12% = (Net Income/0.5Equity) * 100 
Net Income = (12/100) * 0.5 * Equity 
Net Income = 0.06 * Equity 
ROA = Net Income/Total Assets 
ROA = (0.06 * Equity) / (Equity + 20) 
ROA = 0.06 / 1.2 = 0.05 = 5% 
Therefore, the PJ's ROA is 6%.

Question 17

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

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Question 18

Market Value Ratios Fancy Paws' year-end price on its common stock is $20. The firm has a profit margin of 12%, 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?

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Question 19

Profitability Ratios 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%, ROE = 27%. Using this information, what is DJ's ROA?

Accepted Answer

To calculate ROA, we use the formula:
ROA = Net Income / Total Assets

We don't have net income, but we can use the ROE and total debt ratio to calculate it:
ROE = Net Income / Equity = Net Income / (Assets - Debt)
27% = Net Income / (1 - 0.75) = Net Income / 0.25
Net Income = 0.25 x 0.27 = 0.0675

Now we can use the net income and total assets to calculate ROA:
ROA = 0.0675 / (20 - 3) = 0.0675 / 17 = 0.004 or 0.4%
However, the question asks for the answer as a percentage, so we multiply by 100 to get 4%.

Therefore, the correct answer is B) 6.75%.

Question 20

Sustainable Growth Rate You have located the following information on Rock Company: debt ratio = 40%, capital intensity ratio = 2.25 times, profit margin = 8%, and dividend payout ratio = 25%. What is the sustainable growth rate for Rock?

Accepted Answer