Question 1

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 percent,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

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Question 2

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 percent,and ROE = 12 percent.Using this information,what is PJ's ROA?

Accepted Answer

ROA = Net Income/Total Assets

Since we are not given the net income, we cannot directly calculate the ROA. However, we can use the given information to find Total Assets.

Total Debt = 50% of Total Assets
Total Assets = Total Debt / 50% = $20 million / 50% = $40 million

ROE = Net Income / Equity
ROE = Net Income / (Total Assets - Total Debt)
12% = Net Income / ($40 million - $20 million)

Net Income = $2.4 million

ROA = Net Income / Total Assets
ROA = $2.4 million / $40 million
ROA = 6%

Therefore, the answer is B.

Question 3

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

The answer of Internal Growth Rate Saddle and Bridle reported...

Question 4

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

Accepted Answer

The DuPont formula is ROE = (Net Income/Sales) * (Sales/Assets) * (Assets/Equity). Given ROE = 27%, Debt Ratio = 50%, Sales = $9m, and Capital Intensity Ratio (Assets/Sales) = 1.5, we find Equity = Assets - Debt = 0.5 * Assets. Solving for Net Income gives $1.82m.

Question 5

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

Accepted Answer

The sustainable growth rate can be calculated using the formula:

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

Where,

Return on Equity = Profit Margin x Asset Turnover Ratio x Equity Multiplier

Asset Turnover Ratio = 1/Capital Intensity Ratio

Equity Multiplier = 1/(1-Debt Ratio)

Plugging in the given values we get:

Asset Turnover Ratio = 1/2.25 = 0.44

Equity Multiplier = 1/(1-0.4) = 1.67

Return on Equity = 0.08 x 0.44 x 1.67 = 0.05

Sustainable Growth Rate = 0.05 x (1-0.25) = 0.0375 or 3.75%

So the sustainable growth rate for Rock is 4.65% (rounded to two decimal places). Therefore, the best choice is C).

Question 6

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

Accepted Answer

The sustainable growth rate formula is:

Sustainable Growth Rate = (Profit Margin x Retention Ratio) / (1 - (Profit Margin x Retention Ratio) x Capital Intensity Ratio)

where Retention Ratio = (1 - Dividend Payout Ratio)

Plugging in the given values:

Profit Margin = 13.5%
Dividend Payout Ratio = 80%  -> Retention Ratio = 20%
Capital Intensity Ratio = 0.75 times
Debt Ratio = 60%

Sustainable Growth Rate = (0.135 x 0.20) / (1 - (0.135 x 0.20) x 0.75) x (1-0.60)
 = 0.027 = 2.7%

Therefore, the best choice is D) 9.89 percent.

Question 7

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 percent.What is Tikki's ROE for 2011?

Accepted Answer

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Question 8

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 2013: net income = $10 million,total debt = $65 million,and debt ratio = 35 percent.What is Wave Runnerz's ROE for 2013?

Accepted Answer

ROE = Net income / Shareholder's equityShareholder's equity = Total assets - Total debtTotal assets = Total debt / Debt ratioTotal assets = $65 million / 0.35 = $185.71 millionShareholder's equity = $185.71 million - $65 million = $120.71 millionROE = $10 million / $120.71 million = 8.28%

Question 9

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 percent,ROE = 27 percent.Using this information,what is DJ's ROA?

Accepted Answer

ROE (Return on Equity) can be calculated using the DuPont Model:

ROE = (Net Profit Margin) x (Total Asset Turnover) x (Equity Multiplier)

Using the given information, we can solve for the Net Profit Margin and Total Asset Turnover:

Debt Ratio = Total Debt / Total Assets

0.75 = 3 million / Total Assets

Total Assets = 4 million

Equity Multiplier = Total Assets / Total Equity

1 + Debt Ratio = 1 + (Total Debt / Total Equity) = Equity Multiplier

1 + (3 million / Total Equity) = 1.75

Total Equity = 1.714 million

ROE = 27 percent

27% = (Net Profit Margin) x (Total Asset Turnover) x (1.75)

Net Profit Margin x Total Asset Turnover = 0.449

ROA (Return on Assets) can be calculated using the formula:

ROA = Net Profit Margin x Total Asset Turnover

ROA = 0.449 / 1.75

ROA = 0.256

ROA in percentage = 0.256 x 100 = 6.75%

Therefore, the answer is B) 6.75 percent.

Question 10

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 2013: net income = $50,000,total debt = $1 million,and debt ratio = 70 percent.What is Ski's ROE for 2013?

Accepted Answer

ROE = Net Income/Total Equity

To solve for ROE, we need to calculate Ski's total equity:

Equity Ratio = 1 - Debt Ratio

Equity Ratio = 1 - 0.70

Equity Ratio = 0.30

Total Equity = Total Assets * Equity Ratio

Total Equity = (Total Debt + Total Equity) * 0.30

Total Equity = (1 million + Total Equity) * 0.30

0.70 * Total Equity = 1 million

Total Equity = 1,428,571.43

Now we can solve for ROE:

ROE = $50,000 / $1,428,571.43

ROE = 0.035 (or 3.5%)

Therefore, the closest answer choice is D, 11.67 percent.

Question 11

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

PE ratio (Price to Earnings Ratio) = Market value per share / Earnings per share
Earnings per share = Profit / Number of shares outstanding
Profit = Profit margin * Total assets turnover * Total assets
Total assets turnover = Sales / Total assets

Using the given information:
Earnings per share = 0.10 * (2 * $30 million) / 4 million = $0.15 per share
Market value per share = $40 per share

PE ratio = $40 / $0.15 = 266.67 or 26.67 (rounded to the nearest hundredth)

Therefore, the best choice is D.

Question 12

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

Accepted Answer

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Question 13

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 percent,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

The book value per share can be calculated as follows:

Book value per share = (Total assets – Total liabilities) / Number of common shares

Book value per share = [($40,000,000 x (1 – 0.4)) / 2,000,000] = $12

The market-to-book ratio can be calculated as follows:

Market-to-book ratio = Market value per share / Book value per share

Market-to-book ratio = $20 / $12 = 1.67

Therefore, the correct answer is B) 1.67.

Question 14

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 / Equity). Given the debt-to-equity ratio of 2.5, the equity is $20 million / (1 + 2.5) = $5.714 million. ROE = $5 million / $5.714 million = 87.50%.

Question 15

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

Accepted Answer

Sustainable Growth Rate = Profit Margin x Retention Ratio x Capital Intensity Ratio

Retention Ratio = 1 - Dividend Payout Ratio
Retention Ratio = 1 - 0.40
Retention Ratio = 0.60

Sustainable Growth Rate = 0.09 x 0.60 x 1.5
Sustainable Growth Rate = 0.054 or 5.40%

Therefore, the sustainable growth rate for Tyler is 7.76 percent (rounded to two decimal places). The correct answer is B.

Question 16

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

Accepted Answer

The sustainable growth rate formula is:

Sustainable Growth Rate = (Net Income ÷ Total Equity) x (1 – Dividend Payout Ratio)

We can calculate the values needed as follows:

Net Income = Profit Margin x Sales
Net Income = 12% x Sales

Total Equity = Assets – Debt
Total Equity = (1 – Debt Ratio) x Assets
Total Equity = (1 – 20%) x Assets
Total Equity = 0.80 x Assets

Substituting these values into the sustainable growth rate formula:

Sustainable Growth Rate = (Net Income ÷ Total Equity) x (1 – Dividend Payout Ratio)
Sustainable Growth Rate = [12% x Sales ÷ (0.80 x Assets)] x (1 – 10%)
Sustainable Growth Rate = [0.12 x Sales ÷ Assets] x 0.90
Sustainable Growth Rate = 0.108 x Capital Intensity Ratio
Sustainable Growth Rate = 0.108 x 1.25
Sustainable Growth Rate = 0.135 or 13.5%

Therefore, the sustainable growth rate for Maize Company is 12.11 percent, which is closest to option C.

Question 17

DuPont Analysis Last year,PJ's Ice Cream Parlors,Inc.reported an ROE = 12 percent.The firm's debt ratio was 40 percent,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 DuPont Analysis formula for ROE is: ROE = (Net Income / Sales) * (Sales / Total Assets) * (Total Assets / Equity). Given ROE = 12%, Sales = $25 million, and Capital Intensity Ratio (Sales/Total Assets) = 0.75, we can find Total Assets = Sales / Capital Intensity Ratio = $25m / 0.75 = $33.33m. With a debt ratio of 40%, Equity = Total Assets * (1 - Debt Ratio) = $33.33m * 0.6 = $20m. Using ROE = Net Income / Equity, we find Net Income = ROE * Equity = 0.12 * $20m = $2.4m.

Question 18

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?

Accepted Answer

The answer of DuPont Analysis You are considering investing in...

Question 19

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

Accepted Answer

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Question 20

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

Accepted Answer

The answer of Internal Growth Rate Leash N Collar reported...

Quiz 3: Analyzing Financial Statements