Exam 8: Analysis of Financial Statements

You have collected the following information regarding Companies C and D: • The two companies have the same total assets. • The two companies have the same operating income (EBIT)• The two companies have the same tax rate. • Company C has a higher debt ratio and a higher interest expense than Company D. • Company C has a lower profit margin than Company D. Based on this information, which of the following statements is most correct?

The Meryl Corporation's common stock is currently selling at $100 per share, which represents a P/E ratio of 10. If the firm has 100 shares of common stock outstanding, a return on equity of 20 percent, and a debt ratio of 60 percent, what is its return on total assets (ROA)?

A firm is considering actions which will raise its debt ratio. It is anticipated that these actions will have no effect on sales, operating income, or on the firm's total assets. If the firm does increase its debt ratio, which of the following will occur?

Which of the following statements is most correct?

You are given the following information: Stockholders' equity = $1,250; price/earnings ratio = 5; shares outstanding = 25; market/book ratio = 1.5. Calculate the market price of a share of the company's stock.

The financial position of companies whose business is seasonal can be dramatically different depending upon the time of year chosen to construct financial statements. This time sensitivity is especially true with respect to the firm's balance sheet.

Determining whether a firm's financial position is improving or deteriorating requires analysis of more than one set of financial statements. Trend analysis is one method of measuring a firm's performance over time.

Suppose a firm wants to maintain a specific TIE ratio. If the firm knows the level of its debt, the interest rate it will pay on that debt, and the applicable tax rate, the firm can then calculate the earnings level required to maintain its target TIE ratio.

Tapley Dental Supply Company has the following data: Net income: $240 Sales: $10,000 Total assets: $6,000 Debt ratio: 75% TIE ratio: 2.0 Current ratio: 1.2 BEP ratio: 13.33% If Tapley could streamline operations, cut operating costs, and raise net income to $300, without affecting sales or the balance sheet (the additional profits will be paid out as dividends), by how much would its ROE increase?

If sales decrease and financial leverage increases, we can say with certainty that the profit margin on sales will decrease.

One of the problems of ratio analysis is that account relationships can be manipulated. For example, we know that if we use some of our cash to pay off some of our current liabilities, the current ratio will always increase, especially if the current ratio is low initially, for example, below 1.0.

Which of the following statements is most correct?

Last year, Quayle Energy had sales of $200 million, and its inventory turnover ratio was 5.0. The company's current assets totaled $100 million, and its current ratio was 1.2. What was the company's quick ratio?

Which of the following statements is most correct?

Cannon Company has enjoyed a rapid increase in sales in recent years, following a decision to sell on credit. However, the firm has noticed a recent increase in its collection period. Last year, total sales were $1 million, and $250,000 of these sales were on credit. During the year, the accounts receivable account averaged $41,096. It is expected that sales will increase in the forthcoming year by 50 percent, and, while credit sales should continue to be the same proportion of total sales, it is expected that the days sales outstanding will also increase by 50 percent (assume a 365-day year). If the resulting increase in accounts receivable must be financed by external funds, how much external funding will Cannon need?

The basic earning power ratio (BEP) reflects the earning power of the firm's assets inclusive of the effects of leverage and taxes. Therefore, this ratio measures the net earning power of the firm reflecting the magnitude of the leverage employed.

Which of the following statements is most correct?

Assume Meyer Corporation is 100 percent equity financed. Calculate the return on equity, given the following information: (1) Earnings before taxes = $1,500 (2) Sales = $5,000 (3) Dividend payout ratio = 60% (4) Total assets turnover = 2.0 (5) Applicable tax rate = 30%

Roland & Company has a new management team that has developed an operating plan to improve upon last year's ROE. The new plan would place the debt ratio at 55 percent which will result in interest charges of $7,000 per year. EBIT is projected to be $25,000 on sales of $270,000, and it expects to have a total assets turnover ratio of 3.0. The average tax rate will be 40 percent. What does Roland & Company expect return on equity to be following the changes?

Kansas Office Supply had $24,000,000 in sales last year. The company's net income was $400,000. Its total assets turnover was 6.0. The company's ROE was 15 percent. The company is financed entirely with debt and common equity. What is the company's debt ratio?