Question 1

Rachets R Us Corp. reported sales for 2013 of $200,000. Rachets R Us listed $25,000 of inventory on its balance sheet. Using a 365-day year, how many days did Rachets R Us's inventory stay on the premises? How many times per year did Rachets R Us's inventory turnover?

Accepted Answer

The inventory turnover ratio is calculated as sales divided by inventory, which is $200,000 / $25,000 = 8 times. The days in inventory is calculated as 365 days divided by the inventory turnover ratio, which is 365 / 8 = 45.625 days.

Question 2

You are considering a stock investment in one of two firms (LotsofDebt, Inc. and LotsofEquity, Inc.), both of which operate in the same industry. LotsofDebt, Inc. finances its $100 million in assets with $90 million in debt and $10 million in equity. LotsofEquity, Inc. finances its $100 million in assets with $10 million in debt and $90 million in equity. What are the debt ratio, equity multiplier, and debt-to-equity ratio for the two firms?

Accepted Answer

- LotsofDebt: Debt ratio = Debt / Total Assets = 90 / 100 = 0.9 or 90%, Equity multiplier = Total Assets / Equity = 100 / 10 = 10 times, Debt-to-equity ratio = Debt / Equity = 90 / 10 = 9 times
- LotsofEquity: Debt ratio = Debt / Total Assets = 10/ 100 = 0.1 or 10%, Equity multiplier = Total Assets / Equity = 100 / 90 = 1.11 times, Debt-to-equity ratio = Debt / Equity = 10 / 90 = 0.1111 times
LotsofDebt has a higher debt ratio and debt-to-equity ratio, indicating higher reliance on debt financing. LotsofEquity has a higher equity multiplier, indicating higher reliance on equity financing.

Question 3

Which of the following is the maximum growth rate that can be achieved by financing asset growth with new debt and retained earnings?

Accepted Answer

The maximum growth rate that can be achieved by financing asset growth with new debt and retained earnings is called the sustainable growth rate. This rate takes into account both internal sources of financing, such as retained earnings, and external sources, such as new debt. The sustainable growth rate is calculated as (ROE x (1 - Dividend payout ratio)).

Question 4

If Epic, Inc. has an ROE = 25 percent, equity multiplier = 4, a profit margin of 12 percent, what is the total asset turnover ratio?

Accepted Answer

ROE = Net Income / Total Equity
25% = Net Income / (Total Assets / Total Equity)
25% = Net Income / (Total Assets / (Total Assets / Equity Multiplier))
25% = Net Income / (Total Assets / 4)
Total Asset Turnover Ratio = Total Revenue / Total Assets
Total Revenue / Total Assets = (Net Income / Profit Margin) / Total Assets
Total Revenue / Total Assets = (Net Income / 0.12) / Total Assets
Total Revenue / Total Assets = (Total Equity x ROE / 0.12) / Total Assets
Total Revenue / Total Assets = Total Equity x (ROE / 0.12) / Total Assets
Total Revenue / Total Assets = Total Equity x (25 / 0.12) / Total Assets
Total Revenue / Total Assets = Total Equity x 208.33 / Total Assets

Equity Multiplier = Total Assets / Total Equity
4 = Total Assets / Total Equity
Total Equity = Total Assets / 4

Total Revenue / Total Assets = (Total Assets / 4) x 208.33 / Total Assets
Total Revenue / Total Assets = 52.08 / 100
Total Asset Turnover Ratio = 0.5208

Question 5

If Apex, Inc. has an ROE = 10 percent, equity multiplier = 3, and profit margin of 5 percent, what is the total asset turnover ratio?

Accepted Answer

The answer of If Apex, Inc. has an ROE =...

Question 6

Trina'sTrikes, Inc. reported a debt-to-equity ratio of 2 times at the end of 2013. If the firm's total debt at year-end was $10 million, how much equity does Trina's Trikes have?

Accepted Answer

The debt-to-equity ratio is calculated as total debt divided by total equity. Rearranging the formula, we get equity = total debt / debt-to-equity ratio. Substituting the given values, we get equity = $10 million / 2 = $5 million. Therefore, the answer is B.

Question 7

CornProducts Corp. ended the year 2013 with an average collection period of 40 days. The firm's credit sales for 2011 were $9 million. What is the approximate year-end 2013 balance in accounts receivable for Corn Products?

Accepted Answer

The average collection period is 40 days, which means that on average, it takes 40 days for Corn Products to collect its receivables. The credit sales for 2011 were $9 million, so the approximate year-end 2013 balance in accounts receivable is $9 million * 40 days / 365 days = $986,300.

Question 8

Last year Café Creations, Inc. had an ROA of 25 percent, a profit margin of 12 percent, and sales of $4 million. What is Café Creations' total assets?

Accepted Answer

ROA = Net Income/Total Assets
25% = Net Income/Total Assets
Net Income = 0.25 * Total Assets

Profit Margin = Net Income/Sales
12% = Net Income/$4 million
Net Income = 0.12 * $4 million

Since both of the above calculations are equal to Net Income, we can set them equal to each other:

0.25 * Total Assets = 0.12 * $4 million
Total Assets = $1.92 million (D)

Question 9

The top part of Mars, Inc.'s 2013 balance sheet is listed as follows (in millions of dollars). $$\begin{array} { l r c r } 
\text { Current assets: } & & \text { Current liabilities: } & \
\text { Cash and marketable } & & \text { Accrued wages and } & \
\text { securities } & \$ 10 & \text { taxes } & \$ 20 \
\text { Accounts receivable } & 40 & \text { Accounts payable } & 30 \
\text { Inventory } & 160 & \text { Notes payable } & 40 \
\text { Total } & \$ 210 & \text { Total } & \$ 90
\end{array}$$ What are Mars, Inc.'s current ratio, quick ratio, and cash ratio for 2013?

Accepted Answer

Current ratio = Current assets / Current liabilities = 210/90 = 2.3333
Quick ratio = (Cash and marketable securities + Accounts receivable + Inventory) / Current liabilities 
= (10 + 40 + 160) / 90 = 0.5556
Cash ratio = (Cash and marketable securities) / Current liabilities = 10/90 = 0.1111

Therefore, Option B (2.3333, 0.5556, 0.1111) is the correct choice for the current ratio, quick ratio, and cash ratio, respectively.

Question 10

Tops N Bottoms Corp. reported sales for 2013 of $50 million. Tops N Bottoms listed $4 million of inventory on its balance sheet. Using a 365-day year, how many days did Tops N Bottoms' inventory stay on the premises? How many times per year did Tops N Bottoms' inventory turn over?

Accepted Answer

Inventory turnover = Sales / Average Inventory

Average Inventory = (Beginning Inventory + Ending Inventory) / 2

Beginning Inventory = $4 million

Ending Inventory = ?

Inventory Turnover = 12.5 times per year

Therefore, Sales = Inventory Turnover x Average Inventory

$50 million = 12.5 x ((Beginning Inventory + Ending Inventory) / 2)

$4 million + Ending Inventory = $50 million / 6.25

Ending Inventory = $8 million

Days' Inventory on Hand (DIH) = (Ending Inventory / Cost of Sales) x 365

Cost of Sales = Sales - Gross Profit = $50 million - $x (let x be the Gross Profit)

Gross Profit = Sales - Cost of Goods Sold = Sales - (Beginning Inventory - Ending Inventory)

Gross Profit = $50 million - ($4 million - $8 million) = $54 million

Cost of Sales = $50 million - $54 million = -$4 million (which doesn't make sense)

Therefore, there must be an error in the information provided. None of the answer choices accurately reflect the calculations.

Question 11

Bree's Tennis Supply's market-to-book ratio is currently 9.4 times and PE ratio is 20 times. If Bree's Tennis Supply's common stock is currently selling at $20.50 per share, what is the book value per share and earnings per share?

Accepted Answer

To find the book value per share, we use the market-to-book ratio:
book value per share = market price per share / market-to-book ratio
= $20.50 / 9.4
= $2.1809

To find the earnings per share, we use the PE ratio:
earnings per share = market price per share / PE ratio
= $20.50 / 20
= $1.025

Therefore, the best choice is B, where the book value per share is $2.1809 and the earnings per share is $1.025.

Question 12

Last year Mocha Java, Inc. had an ROA of 10 percent, a profit margin of 5 percent, and sales of $25 million. What is Mocha Java's total assets?

Accepted Answer

ROA (Return on Assets) is calculated as Net Income / Total Assets. Given an ROA of 10% and a profit margin of 5% on sales of $25 million, we first calculate Net Income = 5% of $25m = $1.25m. Using the ROA formula, 10% = $1.25m / Total Assets, solving for Total Assets gives us $12.5m.

Question 13

Which is true? Ratio analysis:

Accepted Answer

Ratio analysis can provide useful information on a firm's current position by assessing financial health, efficiency, and profitability. It can also give hints about future performance by identifying trends and potential areas of concern. However, it should be noted that ratio analysis is just one tool and future performance cannot be predicted with complete accuracy.

Question 14

Which of these can be used by interested parties to identify changes in corporate performance?

Accepted Answer

Common-size financial statements can be used by interested parties to identify changes in corporate performance. These statements present financial information in percentage terms, making it easier to compare changes in performance over time. Industrialized financial statements and sanitized financial statements are not commonly used terms in the financial industry.

Question 15

Tina's Track Supply's market-to-book ratio is currently 4.5 times and PE ratio is 10.5 times. If Tina's Track Supply's common stock is currently selling at $100 per share, what is the book value per share and earnings per share?

Accepted Answer

The answer of Tina's Track Supply's market-to-book ratio is currently...

Question 16

The top part of Rammy's Inc.'s 2013 balance sheet is listed as follows (in millions of dollars). $\begin{array}{lrcr}
\text { Current assets: } & & \text { Current liabilities: } \
\text { Cash and marketable } & &{\text { Accrued wages and }} & \
\text { securities } & \$ & \text { taxes } & \$ 6 \
\text { Accounts receivable } & 15 & \text { Accounts payable } & 10 \
\text { Inventory } & 95 & \text { Notes payable } & 50 \
\text { Total } & \$ 115 & \text { Total } & \$ 66
\end{array}$ What are Rammy's Inc.'s current ratio, quick ratio, and cash ratio for 2013?

Accepted Answer

The current ratio is calculated by dividing current assets by current liabilities. Rammy's Inc.'s current ratio is $115/$66 = 1.74242.The quick ratio is calculated by dividing liquid assets (cash and marketable securities) by current liabilities. Rammy's Inc.'s quick ratio is $15/$66 = 0.30303.The cash ratio is calculated by dividing cash by current liabilities. Rammy's Inc.'s cash ratio is $15/$66 = 0.07576.

Question 17

Will's Wheels, Inc. reported a debt-to-equity ratio of 0.65 times at the end of 2013. If the firm's total debt at year-end was $5 million, how much equity does Will's Wheels have?

Accepted Answer

The debt-to-equity ratio is calculated as Total Debt / Total Equity. Given the ratio is 0.65 and Total Debt is $5 million, we can set up the equation: 0.65 = $5 million / Total Equity. Solving for Total Equity gives Total Equity = $5 million / 0.65 = $7.69 million.

Question 18

You are evaluating the balance sheet for Blue Jays Corporation. From the balance sheet you find the following balances: cash and marketable securities = $200,000, accounts receivable = $800,000, inventory = $1,000,000, accrued wages and taxes = $250,000, accounts payable = $400,000, and notes payable = $300,000. What are Blue Jays' current ratio, quick ratio, and cash ratio, respectively?

Accepted Answer

The current ratio is calculated as Current Assets / Current Liabilities. Here, Current Assets = $200,000 (cash and marketable securities) + $800,000 (accounts receivable) + $1,000,000 (inventory) = $2,000,000. Current Liabilities = $250,000 (accrued wages and taxes) + $400,000 (accounts payable) + $300,000 (notes payable) = $950,000. So, the current ratio = $2,000,000 / $950,000 = 2.10526. The quick ratio is calculated as (Current Assets - Inventory) / Current Liabilities = ($2,000,000 - $1,000,000) / $950,000 = $1,000,000 / $950,000 = 1.05263. The cash ratio is calculated as (Cash and Marketable Securities) / Current Liabilities = $200,000 / $950,000 = 0.21053.

Question 19

To interpret financial ratios, managers, analysts, and investors use which of the following type of benchmarks?

Accepted Answer

Time series analysis involves comparing financial ratios over different periods to identify trends and assess performance over time.

Question 20

Last year Umbrellas Unlimited Corporation had an ROA of 10 percent and a dividend payout ratio of 50 percent. What is the internal growth rate?

Accepted Answer

Internal growth rate (IGR) = (ROA x Retention ratio) / (1 - ROA x Retention ratio)

Retention ratio = 1 - payout ratio
Retention ratio = 1 - 0.5 = 0.5

IGR = (0.10 x 0.5) / (1 - 0.10 x 0.5)
IGR = 0.05 / 0.95
IGR = 0.0526 or 5.26%

Therefore, the internal growth rate is 5.26 percent.

Quiz 3: Analyzing Financial Statements