FINC 303 test 1 ch 3

The ratios that are based on financial statement values and used for comparison purposes are called:

financial ratios

The DuPont identity can be accurately defined as:

Equity multiplier × Return on assets.

Which one of the following is the maximum growth rate that a firm can achieve without any additional external financing?

internal growth rate

The sustainable growth rate is defined as the maximum rate at which a firm can grow given which of the following conditions?

No new external equity and a constant debt-equity ratio

Builder’s Outlet just hired a new chief financial officer. To get a feel for the company, she wants to compare the firm’s sales and costs over the past three years to determine if any trends are present and also determine where the firm might need to make changes. Which one of the following statements will best suit her purposes?

Common-size income statement

Which one of these transactions will increase the liquidity of a firm?

Credit sale of inventory at cost

The equity multiplier is equal to:

one plus the debt-equity ratio.

If a firm has an inventory turnover of 15, the firm:

sells its entire inventory an average of 15 times each year.

The Wood Shop generates $.97 in sales for every $1 invested in total assets. Which one of the following ratios would reflect this relationship?

Total asset turnover

Which one of the following will increase the profit margin of a firm, all else held constant?

Decrease in the tax rate

All else held constant, which one of the following will decrease if a firm increases its net income?

Price-earnings ratio

Which one of these statements is true concerning the price-earnings (PE) ratio?

A high PE ratio may indicate that a firm is expected to grow significantly.

The DuPont identity can be used to help a financial manager determine the:

I. degree of financial leverage used by a firm.
II. operating efficiency of a firm.
III. utilization rate of a firm’s assets.
IV. rate of return on a firm’s assets.

I, II, III, and IV

Donovan’s would like to increase its internal rate of growth. Decreasing which one of the following will help the firm achieve its goal?

Dividend payout ratio

If a firm has a 100 percent dividend payout ratio, then the internal growth rate of the firm is:

zero percent

The sustainable growth rate is based on the premise that:

the debt-equity ratio will be held constant

A firm can increase its sustainable rate of growth by decreasing its:

dividends

Financial statement analysis:

provides useful information that can serve as a basis for forecasting future performance.

Which one of the following statements is correct?

Adjustments have to be made when comparing the income statements of firms that use different methods of accounting for inventory.

City Plumbing has inventory of $287,800, equity of $538,800, total assets of $998,700, and sales of $1,027,400. What is the common-size percentage for the inventory account?

Inventory common-size percentage = $287,800/$998,700 = .2882, or 28.82 percent

A firm has inventory of $46,500, accounts payable of $17,400, cash of $1,250, net fixed assets of $318,650, long-term debt of $109,500, and accounts receivable of $16,600. What is the common-size percentage of the equity?

total assets = Total liabilities and equity = $1,250 + 16,600 + 46,500 + 318,650 = $383,000 Equity common-size percentage = ($383,000 – 17,400 – 109,500) / $383,000 = .6687, or 66.87 percent

Oil Field Services has net income of $120,400, total assets of $1,219,000, total equity of $694,100, and total sales of $1,521,700. What is the common-size percentage for the net income?

Net income common-size percentage = $120,400 / $1,521,700 = .0791, or 7.91 percent

Delmont Movers has a profit margin of 7.1 percent and net income of $63,700. What is the common-size percentage for the cost of goods sold if that expense amounted to $522,600 for the year?

COGS common-size percentage = $522,600 / ($63,700 / .071) = .5825, or 58.25 percent

A firm has sales of $811,000 for the year. The profit margin is 5.1 percent and the retention ratio is 56 percent. What is the common-size percentage for the dividends paid?

Dividends paid common-size percentage = [$811,000 ×.051 × (1 – .56)] / $811,000 = .0224, or 2.24 percent

Motor Works has total assets of $919,200, long-term debt of $264,500, total equity of $466,900, net fixed assets of $682,800, and sales of $1,021,500. The profit margin is 6.2 percent. What is the current ratio?

Current ratio = ($919,200 – 682,800) / ($919,200 – 264,500 – 466,900) = 1.26

Wilberton’s has total assets of $537,800, net fixed assets of $412,400, long-term debt of $323,900, and total debt of $388,700. If inventory is $173,900, what is the current ratio?

Current ratio = ($537,800 – 412,400) / ($388,700 – 323,900) = 1.94

A firm has net working capital of $6,800 and current assets of $21,800. What is the current ratio?

Current ratio = $21,800 / ($21,800 – 6,800) = 1.45

You are analyzing a company that has cash of $8,800, accounts receivable of $15,800, fixed assets of $87,600, accounts payable of $40,300, and inventory of $46,900. What is the quick ratio?

Quick ratio = ($8,800 + 15,800) / $40,300 = .61

Deep Sea Fisheries has current liabilities of $238,620, net working capital of $42,580, inventory of $262,750, and sales of $1,941,840. What is the quick ratio?

Quick ratio = ($42,580 + 238,620 – 262,750) / $238,620 = .08

The Dry Dock has inventory of $431,700, accounts payable of $94,200, cash of $51,950, and accounts receivable of $103,680. What is the cash ratio?

Cash ratio = $51,950 / $94,200 = .55

Towne Realty has total assets of $346,200, net fixed assets of $277,400, current liabilities of $16,100, and long-term liabilities of $124,600. What is the total debt ratio?

Total debt ratio = ($16,100 + 124,600) / $346,200 = .41

Wiley’s has total equity of $679,400, long-term debt of $316,900, net working capital of $31,600, and total assets of $1,123,900. What is the total debt ratio?

Total debt ratio = ($1,123,900 – 679,400) / $1,123,900 = .40

A firm has total assets of $638,727, current assets of $203,015, current liabilities of $122,008, and total debt of $348,092. What is the debt-equity ratio?

Debt-equity ratio = $348,092 / ($638,727 – 348,092) = 1.20

The Gift Shoppe has total assets of $487,920 and an equity multiplier of 1.47. What is the debt-equity ratio?

Debt-equity ratio = 1.47 – 1 = .47

Fresh Foods has sales of $213,600, total assets of $198,700, a debt-equity ratio of 1.43, and a profit margin of 4.8 percent. What is the equity multiplier?

Equity multiplier = 1 + 1.43 = 2.43

Briar Patch Fruits has sales of $529,600, cost of goods sold of $408,350, depreciation of $25,400, and interest expense of $9,100. The tax rate is 35 percent. What is the times interest earned ratio?

Times interest earned ratio = ($529,600 – 408,350 – 25,400) / $9,100 = 10.53

A firm has net income of $28,740, depreciation of 6,170, taxes of $13,420, and interest paid of $2,605. What is the cash coverage ratio?

Cash coverage ratio = ($28,740 + 13,420 + 2,605 + 6,170) / $2,605 = 19.55

UXZ has sales of $683,200, cost of goods sold of $512,900, and inventory of $74,315. What is the inventory turnover rate?

Inventory turnover = $512,900 / $74,315 = 6.90 times

SRC, Inc., sells its inventory in an average of 43 days and collects its receivables in 3.6 days, on average. What is the inventory turnover rate? Assume a 365-day year.

Inventory turnover = 365 / 43 = 8.49 times

Galaxy Sales has sales of $938,300, cost of goods sold of $764,500, and inventory of $123,600. How long on average does it take the firm to sell its inventory?

Days’ sales in inventory = 365 / ($764,500 / $123,600) = 59.01 days

Phil’s Carvings sells its inventory in 93 days, on average. Costs of goods sold for the year are $187,200. What is the average value of the firm’s inventory? Assume a 365-day year.

Inventory = $187,200 × 93 / 365 = $47,698

It takes K’s Boutique an average of 53 days to sell its inventory and an average of 16.8 days to collect its accounts receivable. The firm has sales of $942,300 and costs of goods sold of $692,800. What is the accounts receivable turnover rate? Assume a 365-day year.

Accounts receivable turnover = 365 / 16.8 = 21.73

Leisure Products has sales of $738,800, cost of goods sold of $598,200, and accounts receivable of $86,700. How long on average does it take the firm’s customers to pay for their purchases? Assume a 365-day year.

Days’ sales in receivables = 365 / ($738,800 / $86,700) = 42.83 days

Jessica’s Sports Wear has $38,100 in receivables and $523,700 in total assets. The total asset turnover rate is 1.17 and the profit margin is 7.3 percent. How long on average does it take to collect the receivables? Assume a 365-day year.

Days’ sales in receivables = 365 / [(1.17 × $523,700) / $38,100] = 22.70 days

Bed Bug Inn has annual sales of $137,000. Earnings before interest and taxes is equal to 5.8 percent of sales. For the period, the firm paid $4,700 in interest. What is the profit margin if the tax rate is 34 percent?

Profit margin = {[(.058 × $137,000) – $4,700] × (1 – .34)} / $137,000 = .0156, or 1.56 percent

Fast Kars has a return on equity of 22.3 percent, a profit margin of 14.2 percent, and total equity of $467,000. What is the net income?

Net income = .223 × $467,000 = $104,141

Goshen Industrial Sales has sales of $487,600, total equity of $367,700, a profit margin of 5.1 percent, and a debt-equity ratio of .34. What is the return on assets?

Return on assets = (.051 ×$487,600)/[(1 + .34) ×$367,700)] = .0505, or 5.05 percent

Health Centers, Inc., has total equity of $948,300, sales of $1.523 million, and a profit margin of 4.4 percent. What is the return on equity?

Return on equity = (.044 ×$1,523,000)/$948,300 = .0707, or 7.07 percent

BR Trucking has total sales of $911,300, a total asset turnover of 1.1, and a profit margin of 5.87 percent. Currently, the firm has 18,500 shares outstanding. What are the earnings per share?

Earnings per share = (.0587 ×$911,300)/18,500 = $2.89

KBJ has total assets of $613,000. There are 21,000 shares of stock outstanding with a market value of $13 a share. The firm has a profit margin of 6.2 percent and a total asset turnover of 1.08. What is the price-earnings ratio?

Price-earnings ratio = $13 /{[.062 ×($613,000 ×1.08)]/21,000} = 6.65

Dellf’s has a profit margin of 3.8 percent on sales of $287,200. The firm currently has 5,000 shares of stock outstanding at a market price of $7.11 per share. What is the price-earnings ratio?

Price-earnings ratio = $7.11/[(.038 ×$287,200)/5,000] = 3.26

The Inside Door has total debt of $208,600, total equity of $343,560, and a return on equity of 13.27 percent. What is the return on assets?

Return on assets = (.1327× $343,560)/($208,600 + 343,560)= .0826, or 8.26 percent

Mike’s Place has total assets of $152,080, a debt-equity ratio of .62, and net income of $14,342 What is the return on equity?

Return on equity = ($14,342/$152,080) ×(1 + .62) = .1528, or 15.28 percent

A firm has net income of $197,400, a return on assets of 8.4 percent, and a debt-equity ratio of .72. What is the return on equity?

Return on equity = .084 ×(1 + .72) = .1445, or 14.45 percent

The Saw Mill has a return on assets of 7.92 percent, a total asset turnover rate of 1.18, and a debt-equity ratio of 1.46. What is the return on equity?

Return on equity = .0792 ×(1 + 1.46) = .1948, or 19.48 percent

Al’s Markets earns $.12 in profit for every $1 of equity and borrows $.65 for every $1 of equity. What is the firm’s return on assets?

ROE= ($.12/$1) = ROA×[($1 + .65)/$1] ROA = .0727, or 7.27 percent

Good Foods has net income of $82,490, total equity of $518,700, and total assets of $1,089,500. The dividend payout ratio is .30. What is the internal growth rate?

Internal growth rate = [($82,490/$1,089,500) ×(1 -.30)]/{1 – [($82,490/$1,089,500) ×(1 -.30)]} = .0560, or 5.60 percent

A firm has adopted a policy whereby it will not seek any additional external financing. Given this, what is the maximum growth rate for the firm if it has net income of $32,600, total equity of $294,000, total assets of $503,000, and a 25 percent dividend payout ratio?

Internal growth rate = [($32,600/$503,000) ×(1 -.25)]/{1 – [($32,600/$503,000) ×(1 -.25)]} = .0511, or 5.11 percent

A firm has a return on equity of 17.8 percent, a return on assets of 11.3 percent, and a 65 percent dividend payout ratio. What is the sustainable growth rate?

Sustainable growth rate = [.178 ×(1 -.65)]/{1 – [.178 ×(1 -.65)]} = .0664 or 6.64 percent

Pizza Pie maintains a constant debt-equity ratio of .55. The firm had net income of $14,800 for the year and paid $12,000 in dividends. The firm has total assets of $248,000. What is the sustainable growth rate?

Sustainable growth rate = {[($14,800/$248,000)×(1 + .55)] ×[($14,800 -12,000)/$14,800]}/(1 – {[($14,800/$248,000)×(1 + .55)] ×[($14,800 -12,000)/$14,800]}) = .0178, or 1.78 percent

Last year, a firm earned $67,800 in net income on sales of $934,600. Total assets increased by $62,000 and total equity increased by $43,500 for the year. No new equity was issued and no shares were repurchased. What is the retention ratio?

Plowback ratio = $43,500/$67,800 = .6416, or 64.16 percent

Last year, Teresa’s Fashions earned $2.03 per share and had 15,000 shares of stock outstanding. The firm paid a total of $16,672 in dividends. What is the retention ratio?

Plowback ratio = 1 – [($16,672 / 15,000)/$2.03] = .4525, or 45.25 percent

Lawler’s BBQ has sales of $311,800, a profit margin of 3.9 percent, and dividends of $4,500. What is the plowback ratio?

Plowback ratio = 1 – [$4,500/(.039 ×$311,800)] = .6299, or 62.99 percent References

Peterboro Supply has a current accounts receivable balance of $391,648. Credit sales for the year just ended were $5,338,411. How long did it take on average for credit customers to pay off their accounts during the past year? Assume a 365-day year.

Days’ sales in receivables = 365/($5,338,411 / $391,648) = 26.78 days

A fire has destroyed a large percentage of the financial records of the Strongwell Co. You have the task of piecing together information in order to release a financial report. You have found the return on equity to be 13.8 percent. Sales were $979,000, the total debt ratio was .42, and total debt was $548,000. What is the return on assets?

Debt-equity ratio = .42/(1 -.42) = .72414 Return on assets = .138/(1 + .72414) = .0800, or 8.00 percent