Financial Statement Analysis

CPA REVIEW SCHOOL OF THE PHILIPPINES Manila MANAGEMENT ADVISORY SERVICES FINANCIAL STATEMENT ANALYSIS THEORY 1.When a balance sheet amount is related to an income statement amount in computing a ratio, a. The income statement amount should be converted to an average for the year. b. Comparisons with industry ratios are not meaningful. c. The balance sheet amount should be converted to an average for the year. d. The ratio loses its historical perspective because a beginning-of-the-year amount is combined with an end-of-the-year amount. 2. How are financial ratios used in decision making? a. They can help identify the reasons for success and failure in business, but decision making requires information beyond the ratios. b. They remove the uncertainty of the business environment. c. They aren’t useful because decision making is too complex. d. They give clear signals about the appropriate action to take. 3. A useful tool in financial statement analysis is the common-size financial statement. What does this tool enable the financial analyst to do? a. Evaluate financial statements of companies within a given industry of approximately the same value. b. Determine which companies in the same industry are at approximately the same stage of development. c. Compare the mix of assets, liabilities, capital, revenue, and expenses within a company over time or between companies within a given industry without respect to relative size. d. Ascertain the relative potential of companies of similar size in different industries. 4. Which of the following is not revealed on a common size balance sheet? a. The debt structure of a firm. b. The capital structure of a firm. c. The peso amount of assets and liabilities. d. The distribution of assets in which funds are invested. 5. If a transaction causes total liabilities to decrease but does not affect the owners’ equity, what change if any, will occur in total assets? a. Assets will be increased. c. No change in total assets. b. Assets will be decreased. d. None of the above. 6. Last year, a business had no long-term investments; this year long term investments amount to P100,000. In a horizontal analysis the change in long-term investments should be expressed as a. An absolute value of P100,000, and an increase of 100% b. An absolute value of P100,000 and an increase of 1,000% c. An absolute value of P100,000 and no value for a percentage change d. No change in any terms because there was no investment in the previous year. 7. In a set of comparative financial statements, you observed a gradual decline in the net of gross ratio, i.e., between net sales and gross sales. This indicates that: a. There is a stiffening in the grant of discounts to the customers. b. The discount period is being lengthened. c. There is adherence to the collection policies of the company. d. Sales volume is decreasing. MSQ-07 Page 1 ’s financial statements for a possible extension of credit. Which combination of ratios can be used to derive return on equity? A. Total assets minus goodwill to total equity. Sales minus returns to total debt. 1. Price-to-earnings ratio and return-on-assets ratio. Price-to-earnings ratio. Belle may need to sell its available-for-sale investments to meet its current obligations. Issue long-term debt and use the proceeds to purchase fixed assets. c. Which of the following factors should North consider as possible limitation of using this ratio when evaluating Belle’s creditworthiness? a. 3. 7. d. 6. 12. Northpark Co. b. North Bank is analyzing Belle Corp. Earnings per share 5. c. Which of the following actions will increase a company’s quick ratio? a. Belle’s quick ratio is significantly better than the industry average. c. B. Inventory turnover ratio. Reduce inventories and use the proceeds to reduce current liabilities. Reduce inventories and use the proceeds to reduce long-term debt. Which one of the following ratios would provide a best measure of liquidity? A. 3. C. Fluctuating market prices of short-term investments may adversely affect the ratio. d. 1991. Current ratio. Current ratio. 3. D. 11. Net profit minus dividends to interest expense. Dividends per share Denominator Denominator Numerator Earnings per share Numerator Not used Denominator Book value per share Not used Numerator Not used ratio for a company d. and net profit margin. and 5 only 9. 1. Debt ratio. All eight ratios. Numerator Not used Denominator 14. MSQ-07 Page 2 . c. On December 31. b. Return on total assets. and 8 only.8. b. Belle may need to liquidate its inventory to meet its long-term obligations. b. Quick (acid test) ratio. and equity multiplier. total assets turnover. C. Quick ratio. Issue short-term debt and use the proceeds to purchase inventory. 13. 1. Market-to-book-value ratio and total-debt-to-total-assets ratio. Debt-equity ratio 8. d. 10. Issue equity and use the proceeds to purchase inventory. Price-earnings ratio a. b. Current assets minus inventories to current liabilities. Increasing market prices for Belle’s inventory may adversely affect the ratio. d. D. Return on assets 2. and 8 only. B. An investor has been given several financial ratios for an enterprise but none of the financial reports. Accounts receivable turnover. Return on sales 7. 16. d. e. Current ratio 6. collected a receivable due from a major customer. Which ratio is most helpful in appraising the liquidity of current assets? a. Which of the following ratios would be increased by this transaction? a. c. c. b. d. earnings per share. Current ratio. Net profit margin. Which of these ratios are measures of a company’s profitability? 1. Receivable turnover ratio. 5. Receivables turnover 4. 5. The ratio of analytical measurements which measures the productivity of assets regardless of capital structure is a. Acid-test ratio. Inventory turnover 3. b. Debt ratio. How are the following used in the calculation of the dividend-pay-out with only common stock outstanding? a. 15. c. Borrow cash on a six-month note. the company has a current ratio of 2. d. A high current ratio may indicate inefficient use of various assets and liabilities. D. 25. At the end of the year. d. d. Sells merchandise for more than cost and records the sale using the perpetual inventory method. d. Return on equity. The current ratio includes assets other than cash. Refinancing a P60. 24. c. The current ratio.000 and current liabilities of P360. a ratio that must also increase is A.000 of merchandise inventory with a short-term accounts payable.000. If the ratio of total liabilities to equity increases. b. Receives a 5% stock dividend on one of its marketable securities.000 of short-term accounts payable. D. The ratio that measures a firm's ability to generate earnings from its resources is A. An increase in the use of payables during the current year. Pays a large account payable which had been a current liability. ABC Corporation has a current ratio of 2 to 1 and a quick ratio (acid test) of 1 to 1. Increase both current ratio and working capital b. Days' sales in receivables. A transaction that would change Bond's quick ratio but not its current ratio is the A. In comparing the current ratios of two companies. MSQ-07 Page 3 . b. B. 18. Inc. Sold merchandise on open account that earned a normal gross margin. b. sale of short-term marketable securities for cash that results in a profit. This ratio would decrease to less than 2 to 1 if the company a. Paid an account payable.0 to 1 at the beginning of the year. 21. 20. C.000 of short-term accounts receivable. Have no effect on current ratio or earnings per share d. payment of accounts payable. Jack & Sons. Increase current ratio but no effect on working capital.17. Purchased inventory on open account. C. A company has a current ratio of 2 to 1. An increase in credit sales in relationship to sales c. b. D. collection of accounts receivable. has current assets of P180.1 Which of the following could help explain the divergence in the ratios from the beginning to the end of the year? a. A high current ratio may indicate inadequate inventory on hand. Collecting P20. Paying P40. Total liabilities to total assets. 23. why is it invalid to assume that the company with the higher current ratio is the better company? a.5 to 1 and a quick ratio of 0. Purchasing P100. Sales to working capital. c. Decreases both current ratio and working capital c. Asset turnover.2 to 1 and the quick ratio is 1. Times interest earned. c. Which of the following transactions would improve Mabuhay’s current ratio? a. The two companies may define working capital in different terms. b. An increase in the use of payables during the current year. C. 19. 22. sale of inventory on account at cost. Collected an account receivable. The ratio will decrease if the company a. Mabuhay Corp.000 long-term mortgage with a short-term note. A company’s current ratio is 2. c. B. B. d. An increase in inventory levels during the year. Recording cash dividend payment when declaration was recorded earlier would a.8 to 0. Days' sales in inventory. has a 2 to 1 acid test (quick) ratio. c. return on assets exceeds the cost of borrowing. c. The firm is undercapitalized. B. b. Accounts receivable turnover increased. Book value per share of common stock is substantially higher than market value per share. The firm is likely to have liquidity problems. If. The following situations are descriptive of SBD Corporation. Assume that a company's debt ratio is currently 50%. In a comparison of 1992 to 1991. Investors have a lower required return on equity. Neir Co. Statements a and b are correct. and decrease if the assets are leased. c. the price-earnings ratio of common stock is low.26. D. Current ratio Increase Decrease Increase Decrease Inventory turnover Increase Decrease Decrease Increase 30. This could indicate a. You observe that a firm’s profit margin and debt ratio are below the industry average. c. SBD stops paying dividends on its cumulative preferred stock. a. Total asset turnover increased. B. everything else equal. Be higher than the debt-to-assets ratio. b. C. Total assets turnover is below the industry average. MSQ-07 Page 4 . Increase if the assets are purchased. Return on assets is above the industry average. Equity ratio is high. 33. Be lower than the debt-to-assets ratio. Cost of goods sold decreased. Investors have shorter expected holding periods. Gross profit percentage decreased. 27. b. The company's debt ratio as measured by the balance sheet will A. b. if A. D. C.’s inventory turnover ratio increased substantially although sales and inventory amounts were essentially unchanged. b. d. Working capital is not profitably utilized. 32. just prior to the period of rising prices. d. has a high sales-to-working-capital ratio. while its return on equity exceeds the industry average. When compared to a debt-to-assets ratio. Equity ratio is low. d. C. Investors have longer expected holding periods. D. return on assets exceeds the cost of borrowing. Have no relationship at all to the debt-to-assets ratio. d. What can you conclude? a. Which would be considered as the most favorable for the common stockholders. a company changed its inventory measurement from FIFO to LIFO. and remain unchanged if the assets are leased. the effect in the next period would be to a. c. The firm is not profitable. 29. Total assets turnover is above the industry average. return on common stockholders’ equity is less than the rate of interest paid to creditors. Increase if the assets are purchased. Remain unchanged whether the assets are purchased or leased. 31. d. Which of the following statements explains the increased inventory turnover ratio? a. 28. B. Investors expect lower dividend growth. Be about the same as the debt-to-assets ratio. It plans to purchase fixed assets either by using borrowed funds for the purchase or by entering into an operating lease. a debt-to-equity ratio would A. Minix Co. Increase whether the assets are purchased or leased. The market value of a firm's outstanding common shares will be higher. Barr is seeking capital to fund an expansion. A relatively low return on assets (ROA) is always an indicator of managerial incompetence.000 MSQ-07 Page 5 . The beginning inventories of goods in process and finished goods are P82. In 19x5.000 D. The ending inventories are. C. finished goods. Times-interest-earned ratio to decrease. P55. $525. Working capital and current ratio are increased. The net sales of Grand Manufacturing Co. 60% b. then leverage is positive. The bank is requiring a debt-to-equity rate of 0.000. P90. A company issued long-term bonds and used the proceeds to repurchase 40% of the outstanding shares of its stock. Total assets turnover ratio to increase. It reduced equity per share of common stock. d. 37. b. This financial transaction will likely cause the A.000. The results of financial statements analysis are of value only when viewed in comparison with the results of other periods or other firms. The selling expenses is 5%. general and administrative expenses 2. All of the following statements are valid except a. $225.000 and P65.000. What percentage increase in net income must MPX achieve in 19x7 to offset the 19x6 decline in net income? a. and the common stockholders will benefit. 400% d. d. $750.5% of cost of sales. a. B. P45. The net profit in the year 1990 is a.000 b. c. d. The inventory turnover is computed by dividing sales by average inventory. b. What would be the effect on book value per share and earnings per share if the corporation purchased its own shares in the open market at a price greater than book value per share? A. Fixed charge coverage ratio to increase.000.725 c. Identify the 38.000 B. b. D. A high quick ratio is always a good indication of a well-managed liquidity position. Book value per share No effect Increase Decrease Decrease Earnings per share Increase Increase Decrease Increase 35. in 1990 is total. respectively.850 d.000 in common stock.000. Current ratio to decrease.600. Barr Co. P580. has total debt of $420. P53. P75. and is negotiating with a bank to borrow additional funds.000 C. An increase in a firm’s inventories will call for additional financing unless the increase is offset by an equal or larger decrease in some other asset account. B. Share of each common stockholder is reduced. c. goods in process. MPX Corporation’s net income was P800. 300% 3. Which of the following statements is correct? a. The cost of goods manufactured is P480. c. $330. What is the maximum additional amount Barr will be able to borrow? A. A high degree of operating leverage lowers the risk by stabilizing the firm’s earnings stream. The peso amount of capita stock is increased.000 and shareholders’ equity of $700. respectively. The short term creditor is more interested in cash flows and in working capital management that he is in how much accounting net income is reported.000 and in 19x6 it was P200. 600% c. D. C.000 2. statements that indicate the correct effect(s) of this transaction. PROBLEMS 1.75. 36.000. Barr is planning to issue an additional $300.34. The company issued new common shares in a three-for-one stock split. P83. If the return on total assets is higher than the after-tax cost of long-term debt. 500 C. 5.0 9. What is Alumbat’s current TIE ratio? a.000 Purchased office equipment for cash 2. The working capital of Regalado Co. and its net profit margin on sales is 6 percent.000.800. What is the new asset turnover ratio? A.000 Consumed supplies 4.000 d.500 D.0. Blasso Co. AL officers exercised stock options for 1.5 to 1. 2000 and $600. The following transactions occurred during January: Performed services on account $30. Liabilities P 60.0 c. 2.000 b.5 Current ratio 1. If the company does not maintain a TIE ratio of at least 4 times. What was the inventory turnover for 1989? a. $5.00 10.000 B. What was the effect of exercising the stock option? a.950.000 shares of stock at an option price of P8 per share.000 at December 31.000 b.000. What is OTW’s current ratio immediately after it has paid P2million of its accounts payable? a. and the ending inventory at December 31.4 b.500 What is the amount of working capital at the end of January? A. purchased $960.000 c. Earnings per share increased by P0.59 C.3 d.500.000. A service company's working capital at the beginning of January of the current year was $70.000 Accrued salaries 3. 1989 was $180.000 During 1997.000 Purchased supplies on account 5. its average tax rate is 40 percent.000 b. its bank will refuse to renew its loan. P900.000 of debt outstanding. During 1989. $3. $500. and it pays an interest rate of 10 percent annually on its bank loan. 2.75 to 1 b.000. 19x7. is P600. and bankruptcy will result.000. 3. The following information pertains to AL Corporation as of and for the year-ended December 31. $2. The accounts receivable turnover for 2001 was 5.4.4 b. Asset turnover increased to 50.000 Stockholders’ equity P 500.000 Net income P 30. sales increased by 20% and average total assets increased by 10%. $90. This year.000 at December 31. $430. 3.429 5. 2.000 and its current ratio is 3 to 1. 6. The cost of goods sold for 1989 was $900. Alumbat’s annual sales are $3. P1. Last year's asset turnover ratio for Wuerffel Airlines was 2. $47.4% d. $80.0 12. Alumbat Corporation has $800.75 to 1 MSQ-07 Page 6 .000 Paid short-term bank loan 6. 2001. P1.75 to 1 c.000 7.’s net accounts receivable were $500. What were Blasso’s total net sales for 2001? a.000 c. Rand Co.200. P600.500 6. 3. $ 61.500 Paid salaries 10.000 8. 3.000 c. $3. Perry Technologies Inc. 6.000 Shares of common stock issued and outstanding 10.200. 2. The amount of current assets is a. 4.6 d. No ratios were affected. c. 3.25 to 1 d.50 B. 2.33 11.000 Inventory turnover 8x Quick ratio 1. b.5. $107.000.73 D. Debt to equity ratio decreased to 12%. 5.500 d. 5. $50.200.4 c. had the following financial information for the past year: Sales $860.75 What were Perry’s current liabilities? a.000 of inventory. Net cash sales for 2001 were $200. OTW Corporation has current assets totaling P15 million and a current ratio of 2.000 d. Earnings per share amount to P10 and the price earnings ratio is 5. P241. $ 4. Planners have determined that sales will increase by 25% next year. P225.6 million of accounts receivable on its balance sheet. $ 8. and that the profit margin will remain at 15% of sales.000 b. Taft Technologies has the following relationships: Annual sales $1.8 Current liabilities $ 375. 47. 1. (Assume a 25% income tax rate on first P100.97 c.000. and accounts receivable. Given the following information. The company’s DSO is 40 (based on a 360-day year).000 and its net income after income tax is P99.000 15. The amount of dividend cannot be determined.000 Market/Book ratio = 0. What were the dividends on common stock? a. B. The dividend payout ratio on common stock was 40%. Associated Co.000 of income and 35% income tax rate on income in excess of P100. what will Victoria’s new current ratio be? a.000. The average stockholders equity for ABC Company for 2000 was P2. its current assets are $2. Associated’s dividend payout ratio for 1995 was a. Ten percent of the increase in sales will become net income. If the company succeeds in its plan.000 c. and its current ratio is 1. $2.000 of bond interest expense related to its longterm debt.333 b. paid out one-half of its 1994 earnings by dividends.3 million and earnings per share of common stock of $2.) a. If the dividend yield is 8%. The profit margin will grow by 15%. Dividends on preferred stock were $300.120.000 c. 10 times b. Market price of the stock must be P40.66 20. had net income of $5. $ 2. Included in this figure is P200. d. Included in the net income was $500.5% during the 2000. D. The dividend is P4 per share.000 21. C.000 Earnings per share = $2.5 million.3% c.000 d. 0. $1.13.000 Inventory turnover ratio 4. Ehrenburg Co. which remained unchanged during the year.00 c. 1. -$ 8.900. $125.00 d. Market value of the stock cannot be determined. Profit will grow proportionately faster than sales. $200. $1. Which of the following statements is correct? A.00 b.000 Current ratio 1. inventories. $20.50 b. calculate the market price per share of WAM Inc.000.000 d. The resulting decrease in accounts receivable will free up cash that will be used to reduce current liabilities.50. $ 66.000. $2. 52.000. 16. The company plans to reduce its DSO from 40 to the industry average of 30 without causing a decline in sales.72 d.800. The income tax rate was 50%. c. Net income = $200. How much cash does Taft have on its balance sheet? a.5% b. P234.000 d.000. 16. 19.5. Victoria Enterprises has $1.00 17.000 MSQ-07 Page 7 .0% d.9% 18.000. Profit will grow by 25%.667 c.2 Days sales outstanding (DSO) 40 (360-day year) The company’s current assets consist of cash. What would be a company’s “times interest earned ratio” if interest paid on loans amount to P9. 13 times d.00 Stockholders’ equity = $2. 12 times c. P250.21 times 14. Its earnings increased by 20% and the amounts of its dividends increased by 15% in 1995.20 a. 1. 51. a. The return on common shareholders’ equity was 12. How much was the net income of the company in 2000? a. 75.200.000 par value of 8% preferred stock.000 b. b. 50% 23. is required to double the return on equity? a.000 25. 0. Last year. Inc.000.8? a. 5. 8.30 and a profit margin of 10%.2 c.6.1% b.0 MSQ-07 Page 8 . 0. $278. 8.2. and he thinks it could be doubled. What is the company’s inventory turnover ratio? a.22. 6.000 b.50. days sales outstanding equal to 60 days.000 Preferred dividends 200. and he thinks it could be doubled.60% d. $625. You are assigned to put together a financial report. sells all its merchandise on credit. 5.75 b.40% c.400. This could be accomplished (1) by increasing the profit margin to 14% and (2) increasing debt utilization.39 c.000 d. 5. $2.440. 40% d. Quayle Energy had sales of $200 million and its inventory turnover ratio was 5.000 Payout ratio 40% Shares outstanding throughout 2003 Preferred 20. Son & Co.40. Rainier Inc. By how much can Rainier’s short-term debt (notes payable) increase without pushing its quick ratio below 0. $333. its current ratio is 1.000. $556. along with the 15% profit margin.50 B.20 b. 0.000 Interest expense 250.000 24.70 c.08 27. and its quick ratio is 1. What are the company’s sales? (Assume that the company has no preferred stock. The president is unhappy with the current return on assets. What is the firm’s return on equity (ROE)? Assume a 360-day year. Deb & Co.000. Shepherd Enterprises has an ROE of 15 percent.2.35% b. 0. What new debt ratio.000. $ 360. 1. total assets of $3 million.000 Common 35. and a profit margin of 5 percent.65 d. $1. 0.5 d.000. 0. $ 960.0 b. a. 33. has $2 million in current assets.55 30.2. 35% b. You have found the return on equity to be 12% and the debt ratio was 0. The following were reflected from the records of War Freak Company: Earnings before interest and taxes P1. The company plans to raise funds as additional notes payable and to use these funds to increase inventory. It has a profit margin of 4 percent.64.0.000 c. a total assets turnover of 0. Total assets turnover will not change.3% 28. What was the return on assets? a.250. 7. a debt ratio of 40 percent.72 d. 0. 0.000 c. and a profit margin of 10%. 1.20% 26. 6. 5. Selzer Inc. 0. is required to double the return on assets? a. JC Goods.1% d.000 d. This could be accomplished (1) by increasing the profit margin to 15% and (2) by increasing total assets turnover. and a debt ratio of 0. receivables of $150. 3. The company’s total assets equal $800 million. The company has $2 million in sales and its current liabilities are $1 million.40 C. What new asset turnover ratio. 0. What was the company’s quick ratio? a.000 b. 45% c.25.55 29. The president is unhappy with the current return on equity.6 and a quick ratio equal to 1. Oliver Incorporated has a current ratio equal to 1.000 Income tax ratio 40% Price earnings ratio 5 times The dividend yield ratio is: A. has a total assets turnover of 0. 7.) a. along with the 14% profit margin.3% c. A fire has destroyed many of the financial records of R. The company’s current assets totaled $100 million and its current ratio was 1.12 D. has a debt ratio of 0. 000 Inventories at December 31. $70 d. What will be the company’s current ratio.7% 36. If the firm has 100 shares of common stock outstanding. 11.00 B.000.000.200. P300. $300. 22. P360. is as follows: Net A/R at December 31. Any reductions in inventory will be used to reduce the company’s current liabilities. it has a sales level of A. An enterprise has total asset turnover of 3. the balance sheet at the end of 1997 total assets of a. If the enterprise has total debt of $1. what will be the company’s stock price one year from now? a. and EBIT of $50. Management projects an EBIT of $26. $408.3% 37.000 33. P400. 1.25% c.50% d.100.0% c.00 34.000. its quick ratio is 0. $150. 2001 $1.7% b. which will result in interest charges of $8.50% MSQ-07 Page 9 .26 D.000 and a debt ratio of 30 percent.5 Working capital P20. but its management has developed a new operating plan designed to improve things. assuming that it is successful in improving its inventory turnover ratio to 5? a. The company would like to increase its inventory turnover ratio to the industry average. Southeast Packaging’s ROE last year was only 5 percent.000. 1.000 shares of stock. The company has 300. 10.000 shares of common stock. A firm has total assets of $1.00 C.000. and it currently trades at $60 a share. it has sales of $2.75 32.2.000 Net A/R at December 31.000. what is its return on total assets (ROA)? a.000. 8.000. 9.000.000. $200. Currently. 2000 $1.2 million. so that one year from now the company will have 400.000 Debt/equity ratio . what is the firm’s ROE? a. Under these conditions.5 times and a total debt to total assets ratio of 70%.500. Vance Motors has current assets of $1. without reducing its sales. which is 5.000 35. 2000 $ 900. The new plan calls for a total debt ratio of 60 percent.000 shares of common stock.000.7.000 per year. 17. 12. 2. The company’s current ratio is 1.22 d. $75 38.0.0% d. which represents a P/E ratio of 10. P340.000 Accounts receivable turnover 5 to 1 Inventories at December 31. $60 c. 6.31.500. $2. If the firm’s before-tax cost of debt is 10 percent and the firm’s tax rate is 40 percent.000 on sales of $240.33 b.8 Return on equity . 16.000 c.000 b. $200. The Meryl Corporation’s common stock is currently selling at $100 per share.000.000 d. The company continues to expand and anticipates that one year from now its net income will be $2.000. $5.000. 1. Selected information from the accounting records of the Blackwood Co. total fixed costs of $1.000 d. what return on equity will Southeast earn? a.000 c. Assuming the company’s price/earnings ratio remains at its current level.450.000 b. and it expects to have a total assets turnover ratio of 2.0% b. 1.00% b.67 c. The following ratios and data were computed from the 1997 financial statements of Star Co. 0. 2001 $1. recently reported net income of $1.000. and its inventory turnover ratio is 4. a return on equity of 20 percent. 8. $55 b. Dean Brothers Inc.2 If net income for 1997 is P40.000. and a debt ratio of 60 percent.0% d. If the changes are made.: Current ratio 1. Over the next year the company also anticipates issuing an additional 100. the average tax rate will be 40 percent.000 Inventory turnover 4 to 1 What was the gross margin for 2001? a. $400.163.500.5% c. $450. $500. $1. 7. by how many percentage points is the firm’s ROE greater than its ROA? a. Lombardi Trucking Company has the following data: Assets: $10. 8. Gleim 46.000 B. 7.00 and its average market price was $28. and has annual earnings per share of $2.75 c. 1.000 C. $30.39.0% Debt ratio: 60. it has interest expense of $500.000 d.0% Total assets turnover: 2.56 million.0% c.67 43.0% Debt ratio: 40. 30% c. C. what are the firm's current assets? A.95 b. if its recent market price is $30.86% and 22.000 D.000 capital budget.200 40.62 per quarter. Its tax rate is 40 percent.6 Asset turnover . $20.000 MSQ-07 Page 10 .0% Tax rate: 40% What is Lombardi’s TIE ratio? a. Beatnik Company has a current ratio of 2. The company is at the limit of that ratio and it wishes to issue still another $25 million in senior debt. 0.9 The dividend yield on Watson's common stock is A. 2.1%.000.0 Profit margin: 6.000 Interest rate: 10. 0. B.000 B. $11. How much additional equity capital must it raise to comply with this restrictive provision? A. given the following information: (1) Earnings before taxes = $1. Assume Meyer Corporation is 100 percent equity financed.000 of total debt outstanding. D.45 million. $30.000 (3) Dividend payout ratio = 60% (4) Total assets turnover = 2. 25% b.000. 8.0% B.0.0% Total assets turnover: 3. A firm has a debt/equity ratio of 50 percent. B. D.000 d. 8. $55. $275. 5.0 Profit margin: 3. 8.500 (2) Sales = $5. $1.000 D. 5.56 million.4% 41.80. Currently.86% and 88. 3.000 c. 42% 47. 2.000 on $5. 10. and a $500. $33.0 (5) Tax rate = 30% a.6%. If the firm experienced $2 million in sales and sustains an inventory turnover of 8.27% and 88. $225.000 Interest rate: 8. Watson Corporation computed the following items from its financial records for the year just ended: Price-earnings ratio 12 Payout ratio .2% C.5 and a quick ratio of 2.0. Miller and Rogers Partnership has $3 million in total assets.500. $1. Lone Star Plastics has the following data: Assets: $100. 35% d. $1.6%. If the firm’s ROA is 6 percent. 7. Calculate the return on equity.27% and 22.000 44. how much debt should be incurred? A. Standard Company's bonds have a provision which stipulates that the ratio of senior debt to total assets will never rise above 45%.10 d. $12.25 million. C. $18. 45.000 C. To maintain the same debt-equity ratio. $50. respectively.0% b.1%.00? A.8% 42.5% D.250. What is India Oats's dividend yield and dividend payout ratio for 2000.65 million in equity.0% Tax rate: 40% What is Lone Star’s EBIT? b.2% d. India Oats pays dividends of $0. 71% C. 0. $150 million in current liabilities.76 to 9. The company’s goal is to reduce its DSO to the industry average without reducing sales.31% B. are presented below.30 b. Hanson Corporation's present year ROE remained at last year's 14% level.00% D. 10. 12.000 in sales last year. The difference between average and ending inventories is immaterial. Decease from 14. 0. What does Roland & Company expect its return on equity to be following the changes? a. and the company’s ROE was 15 percent. which is well above the industry average of 35. its total assets turnover was 6. The company’s days sales outstanding (calculated on a 365-day basis) is 50. what debt ratio will the company need in order to double its ROE? a. 21.73 50.0.44% 55. C. Thomas Lumber Co.'s profit margin? A. P1. while the profit margin and debt ratio will increase enough to double ROE. The company’s net income was $400. 44.0. the company’s CFO wants to double ROE.40 d. If the debt ratio is 36% and the market price of the stock is $38 per share. 0. and $75 million in inventories.33.33 c. Current ratio 2. what is Comp Inc. D. 0.2 to 1. 0. 17. (The company finances its assets with debt and common equity.0 Quick ratio 1. Selected data from the year-end financial statements of World Cup Corp.67% d. total assets turnover of 0. The Intelinet Corporation and Comp Inc. 9. EBIT is projected to be $25. 1. P6.5. it expects to have a total assets turnover ratio of 3. have assets of $100. P4.50% 53.000. and the average tax rate will be 40 percent. Assume that the profit margin is increased to 15 percent. P2. and a debt ratio of 20 percent. Remain constant. The effects on asset turnover were to A. What will be the current ratio if the company accomplishes its goal? a.45 52.33.20 b. Landry Retailers has annual sales of $365 million.33 c. 7. 0. Last year. 13. what is the return on equity? A. If Intelinet has net income of $10. 26. Increase from 1.46 to 2.5.000 each and a return on common equity of 17%. White Knight Enterprises is experiencing a growth rate of 9% with a return on assets of 12%. She expects the total assets turnover will remain at 0.5.4 million b.23 b.5. Roland & Company has a new management team that has developed an operating plan to improve upon last year’s ROE.2 million d. Kansas Office Supply had $24.000.48. What is the company’s debt ratio? a.000 and a total assets turnover ratio of 3. 3. 0.0 million 54. while Comp has half the sales of Intelinet. while the profit margin was reduced from 8% to 4% and the leverage ratio increased from 1.0% D. 1. had a profit margin of 10 percent. The new plan would place the debt ratio at 55 percent.5 Current liabilities P600.000 per year..000 Inventory turnover (based on cost of sales) 8 times Gross profit margin 40% World’s net sales for the year were a.33 d.68% B.0% C.60 51.65% b. 18.000. which will result in interest charges of $7.43 d. 0. Increase from 4.0 million c. Cash freed up would be used to repurchase common stock. The company has $200 million in current assets. 7.58 to 2.75% MSQ-07 Page 11 .000 on sales of $270. 0. 49. it does not use preferred stock.82% c.60.30 c. Intelinet has twice the debt of Comp Inc. 1.) This year. B. The company is financed entirely with debt and common equity. Total current liabilities would amount to a.000 Accounts payable P ? Trade receivable-net ? Current notes payable 40.000 d. Manufacturer’s Inc.9 to 1 Ratio of total liabilities to total stockholders’ equity 1.000 c. P472. what is the company’s estimated times interest earned ratio? a. P400. 1982 is a.500 d.40 b. The following data were made available to you: Gross margin for 19x8 P472. P168.000 58.000 Inventory ? Long-term payable ? Fixed assets-net 252. 1982 is a. 5.750 62.000 b.000 c. The balance of accounts payable of San Matias as of December 31.750 c. 4.25 c. 2. & STOCKHOLDERS’ EQUITY Cash P 60. estimates that its interest charges for this year will be $700 and its net income will be $3.33 d. 19x8 P750. P780. P205. P930.00 d.500 Ending balance of merchandise inventory P300. P580. Assuming its average tax rate is 30 percent. 31. P114.000 Questions 60 thru 63 are based on the following information. How much was the bonds payable? a. P100.000 d.000 c. P228.000 57. P714. P60.000 Total stockholders’ equity as of December 31. P370. Figures shown by a question mark (?) may be computed from the additional information given: ASSETS LIAB.000 59.000 Additional information: Current ratio (as of Dec. P600.000.500 61. P229. P243. P200. P68.000 d.825 MSQ-07 Page 12 .000 Retained earnings ? Total Assets P 480.000 b. 1982) 1.000 b.000 b.000 Total L & SHE P 480. The balance of inventory of San Matias as of December 31.000 b.500 b. 1982 is a.550 c.000 c.4 Inventory turnover based on sales and ending inventory 15 times Inventory turnover based on cost of goods sold and ending inventory 10 times Gross margin for 1982 P500. P95. P140.250 c. 7. P200.000 Gross margin ratio 35% Debt to equity ratio 0. P630. 1982 of San Matias Company is given below.56. P360. P550.000 Common stock 140. P280.8:1 Times interest earned 10 Quick ratio 1. P80. The balance of retained earnings of San Matias as of December 31. What was the operating income for 19x8? a.825 b. 60.750 63.000 d. P485.500 d. You are requested to reconstruct the accounts of Angela Trading for analysis.3:1 Ratio of operating expenses to sales 18% Long-term liabilities consisted of bonds payable with interest rate of 20% Based on the above information. Total current assets would amount to a.12 Questions 57 through 59 are based on the following information. The condensed balance sheet as of December 31. P40. C 13. 25. 32. 34. D 14. 37. 29. C 63. 44. 35. 48. D 12. 55. B 9. C 7. 30. A 5. B 4. D 36. 15. D 3. 34. 18. C 37. D 10. C D D D C B C A A D D D C C A A D C D B 16. D D B A C C B B C D D B A B D A D A D B 31. 42. 56. B Problem 1. 24. 27. 57. 17. 28. 43.Answer Key Theory 1. 40. 26. C 16. 22. 36. 33. 14. 39. 52. C 10. C 4. B B B D A 61. 58. C 11. B 15. 12. 21. 33. B 6. 50. C 62. A 38. 47. 27. A 7. A 8. 18. 49. 25. 13. C 2. 32. MSQ-07 Page 13 . 23. B 9. 53. 19. 28. 54. A 6. 24. 30. D D B A B 26. 35. 20. C 5. 38. D 31. 11. 20. 17. 41. B A D C C C B A A A A D D D B A D B C A 21. 60. 46. 23. 29. 59. 45. B 8. A 3. C 2. 19. 51. 22.