Question 1

Dreisen Traders has total debt of $1,233,837 and total assets of $2,178,990. What are the firm's equity multiplier and debt-to-equity ratio? Round your final answers to two decimal places.

Accepted Answer

The equity multiplier is calculated as total assets divided by total equity. The debt-to-equity ratio is calculated as total debt divided by total equity. In this case, the equity multiplier is 2.178,990 / (2,178,990 - 1,233,837) = 2.31 and the debt-to-equity ratio is 1,233,837 / (2,178,990 - 1,233,837) = 1.31.

Question 2

Fahr Company has depreciation expenses of $630,715, interest expenses of $112,078, and an EBIT of $1,542,833 for the year ended June 30, 2006. What are the times interest earned and cash coverage ratios for this company? Round your final answers to one decimal place.

Accepted Answer

The answer of Fahr Company has depreciation expenses of $630,715,...

Question 3

Tigger Corp. has reported the financial results for the year-ended 2006. Based on the information given, calculate the firm's gross profit margin and operating profit margin. Round your final answers to one decimal place. Net sales = $4,156,700
Net income = $778,321
Cost of goods sold = $2,715,334
EBIT = $1,356,098

Accepted Answer

Gross profit margin = (Net sales - Cost of goods sold) / Net sales= ($4,156,700 - $2,715,334) / $4,156,700= 34.7%Operating profit margin = EBIT / Net sales= $1,356,098 / $4,156,700= 32.6%

Question 4

Why is the quick ratio considered by some to be a better measure of liquidity than the current ratio?

Accepted Answer

The quick ratio, also known as the acid-test ratio, is considered a better measure of liquidity by some because it excludes the least liquid current asset, which is typically inventory, from the numerator of the ratio. This is important because inventory may take longer to sell and convert to cash than other current assets. By focusing on only the most liquid assets, the quick ratio provides a more conservative measure of a company's ability to meet its short-term obligations.

Question 5

Last year Viera Corp, an all-equity financed company, had $155,000 of assets (which equals total common equity), $305,000 of sales, $20,000 of net income, and a debt-to-total-capital 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, total invested capital, sales, and the debt to capital ratio would not be effected. By how much would the cost reduction improve the ROE?

Accepted Answer

The answer of Last year Viera Corp, an all-equity financed...

Question 6

RTR Corp. has reported a net income of $812,425 for the year. The company's share price is $13.45, and the company has 312,490 shares outstanding. Compute the firm's price-earnings ratio. Round your final answer to two decimal places.

Accepted Answer

First, we need to calculate the earnings per share (EPS) by dividing the net income by the number of shares outstanding:

EPS = net income / number of shares outstanding
EPS = $812,425 / 312,490
EPS = $2.60

Then, we can calculate the price-earnings (P/E) ratio by dividing the share price by the EPS:

P/E ratio = share price / EPS
P/E ratio = $13.45 / $2.60
P/E ratio = 5.17

Therefore, the correct answer is C) 5.17 times.

Question 7

Which one of the following is NOT an advantage of using return on equity (ROE) as a goal?

Accepted Answer

ROE as a goal does not consider risk, which can be a significant disadvantage. While ROE is highly correlated with shareholder wealth maximization and allows management to break down performance, it is important for management to consider risk as they set goals and make decisions.

Question 8

What will be a firm's equity multiplier given a debt ratio of 0.45? Round your final answer to two decimal places.

Accepted Answer

The equity multiplier is calculated as 1 / (1 - debt ratio). Given a debt ratio of 0.45, the equity multiplier is 1 / (1 - 0.45) = 1.82.

Question 9

Which of the following is true of a firm that has no debt in its capital structure?

Accepted Answer

A firm with no debt in its capital structure will only have equity as a source of funding. Therefore, both its ROE and ROA will be the same, as there is no effect of financial leverage (the use of debt) on the returns generated by the assets of the firm.

Question 10

In the latest year, Photon, Inc. reported $276,000 in net income. The firm maintains a debt ratio of 30% and has total assets of $3,000,000. What is Photon's return on equity? (Round your percentage answer to one decimal place.)

Accepted Answer

The correct answer is A.Photon's return on equity is calculated as follows:ROE = Net income / Shareholders' equityShareholders' equity = Total assets - Total debtTotal debt = Debt ratio * Total assetsTotal debt = 0.30 * $3,000,000 = $900,000Shareholders' equity = $3,000,000 - $900,000 = $2,100,000ROE = $276,000 / $2,100,000 = 13.1%

Question 11

Sectors, Inc., has EBIT of $7,221,643 and interest expense of $611,800. Its depreciation for the year is $1,434,500. What is its cash coverage ratio? Round your final answer to two decimal places.

Accepted Answer

Cash Coverage Ratio = (EBIT + Depreciation) / Interest Expense
= ($7,221,643 + $1,434,500) / $611,800
= 14.15 times (rounded to two decimal places)

Question 12

GenTech Pharma has reported the following information: Sales/Total assets = 2.89; ROA = 10.74%; ROE = 20.36%
What are the firm's profit margin and equity multiplier? Round your profit margin answer to one decimal place, and equity multiplier answer to two decimal places.

Accepted Answer

The answer of GenTech Pharma has reported the following information:...

Question 13

Your firm has an equity multiplier of 2.47. What is its debt-to-equity ratio? Round your final answer to two decimal places.

Accepted Answer

The equity multiplier is calculated as total assets divided by total equity, which is equal to 1 plus the debt-to-equity ratio. Therefore, if the equity multiplier is 2.47, the debt-to-equity ratio is 2.47 - 1 = 1.47.

Question 14

Perez Electronics Corp. has reported that its net income for 2006 is $1,276,351. The firm has 420,000 shares outstanding and a PE ratio of 11.2 times. What is the firm's share price? Round your intermediate and final answer to two decimal places.

Accepted Answer

The firm's share price is calculated as follows:Share price = Net income / (Number of shares outstanding * PE ratio)= $1,276,351 / (420,000 * 11.2)= $34.05

Question 15

Which of the following is a criticism of a policy of maximizing the firm's return on equity (ROE)?

Accepted Answer

All of the above options are valid criticisms of a policy of maximizing the firm's ROE.

A) ROE is based only on after-tax earnings, which may not fully reflect the firm's cash flows, especially in cases where the firm has large non-cash expenses such as depreciation.

B) ROE does not consider the risk involved in the firm's operations. A higher ROE may imply higher profitability, but it may also indicate that the firm is taking on more risk, which could lead to financial distress or bankruptcy in the future.

C) ROE ignores the size of the initial investment as well as future cash flows, which are important drivers of value creation. Maximizing ROE may lead the firm to overlook investments in projects with positive net present value or long-term growth potential.

Question 16

Juventus Corp has total assets of $4,744,288, total debt of $2,912,000, and net sales of $7,212,465. Their net profit margin for the year is 18 percent. What is Juventus's return on assets (ROA)? Round intermediate calculations to nearest dollar and percentage answer to one decimal place.

Accepted Answer

The answer of Juventus Corp has total assets of $4,744,288,...

Question 17

The DuPont equation shows that a firm's (return on equity) ROE is determined by three factors:

Accepted Answer

The DuPont equation is a tool used to analyze the return on equity (ROE) by breaking it down into three components: net profit margin, total asset turnover, and the equity multiplier. Therefore, the correct choice is A, which lists the three factors that make up the DuPont equation. B and C are incorrect because they do not include the equity multiplier, while D is incorrect because it does not include the net profit margin.

Question 18

Which one of the following statements is NOT correct?

Accepted Answer

All of the statements are correct.

Question 19

Andrade Corp has debt of $2,834,950, total assets of $5,178,235, sales of $8,234,121, and net income of $812,355. What is the firm's return on equity? Round your final answer to one decimal place.

Accepted Answer

The answer of Andrade Corp has debt of $2,834,950, total...

Question 20

Which of the following is true of a firm that has both debt and equity?

Accepted Answer

A firm that has both debt and equity will have a higher return on equity (ROE) than its return on asset (ROA) because part of the profits will have already paid the interest on the debt, leaving a larger percentage of profits for equity holders.

Quiz 4: Analyzing Financial Statements