Exam 4: Analysis of Financial Statements

Last year Harrington Inc.had sales of $325,000 and a net income of $19,000,and its year-end assets were $250,000.The firm's total-debt-to-total-capital ratio was 17.5%.The firm finances using only debt and common equity,and its total assets equal total invested capital.Based on the DuPont equation,what was the ROE? Do not round your intermediate calculations.

Exhibit 4.1 The balance sheet and income statement shown below are for Koski Inc.Note that the firm has no amortization charges,it does not lease any assets,none of its debt must be retired during the next 5 years,and the notes payable will be rolled over. Assets 2018 Cash and securities \ 3,000 Accounts receivable 15,000 Inventories 18,000 Total current assets \ 36,000 Net plant and equipment \ 24,000 Total assets \ 60,000 Liabilities and Equity Accounts payable \ 18,630 Accruals 8,370 Notes payable 6,000 Total current liabilities \ 33,000 Long-term bonds \ 9,000 Total liabilities \ 42,000 Common stock \ 5,040 Retained earnings 12,960 Total common equity \ 18,000 Total liabilities and equity \6 0,000 Income Statement (Millions of \ ) 2018 Net sales \ 84,000 Operating costs except depreciation 78,120 Depreciation 1,680 Earnings before interest and taxes (EBIT) \ 4,200 Less interest 900 Earnings before taxes (EBT) \ 3,300 Taxes 1,320 Net income \ 1,980 Other data: Shares outstanding (millions) 500.00 Common dividends (millions of \ ) \ 693.00 Int rate on notes payable \& L-T bonds 6\% Federal plus state income tax rate 40\% Year-end stock price \ 47.52 -Refer to Exhibit 4.1.What is the firm's days sales outstanding? Assume a 365-day year for this calculation.Do not round your intermediate calculations.

Garcia Industries has sales of $187,500 and accounts receivable of $18,500,and it gives its customers 25 days to pay.The industry average DSO is 27 days,based on a 365-day year.If the company changes its credit and collection policy sufficiently to cause its DSO to fall to the industry average,and if it earns 8.0% on any cash freed up by this change,how would that affect its net income,assuming other things are held constant? Assume all sales to be on credit.Do not round your intermediate calculations.

A firm's ROE is equal to 9% and its ROA is equal to 6%.The firm finances only with short-term debt,long-term debt,and common equity,so assets equal total invested capital.The firm's total debt to total capital ratio must be 50%.

Exhibit 4.1 The balance sheet and income statement shown below are for Koski Inc.Note that the firm has no amortization charges,it does not lease any assets,none of its debt must be retired during the next 5 years,and the notes payable will be rolled over. Assets 2018 Cash and securities \ 3,000 Accounts receivable 15,000 Inventories 18,000 Total current assets \ 36,000 Net plant and equipment \ 24,000 Total assets \ 60,000 Liabilities and Equity Accounts payable \ 18,630 Accruals 8,370 Notes payable 6,000 Total current liabilities \ 33,000 Long-term bonds \ 9,000 Total liabilities \ 42,000 Common stock \ 5,040 Retained earnings 12,960 Total common equity \ 18,000 Total liabilities and equity \6 0,000 Income Statement (Millions of \ ) 2018 Net sales \ 84,000 Operating costs except depreciation 78,120 Depreciation 1,680 Earnings before interest and taxes (EBIT) \ 4,200 Less interest 900 Earnings before taxes (EBT) \ 3,300 Taxes 1,320 Net income \ 1,980 Other data: Shares outstanding (millions) 500.00 Common dividends (millions of \ ) \ 693.00 Int rate on notes payable \& L-T bonds 6\% Federal plus state income tax rate 40\% Year-end stock price \ 47.52 -Refer to Exhibit 4.1.What is the firm's total debt to total capital ratio? Do not round your intermediate calculations.

Last year Hamdi Corp.had sales of $500,000,operating costs of $450,000,and year-end assets (which is equal to its total invested capital)of $385,000.The debt-to-total-capital ratio was 17%,the interest rate on the debt was 7.5%,and the firm's tax rate was 35%.The new CFO wants to see how the ROE would have been affected if the firm had used a 50% debt-to-total-capital ratio.Assume that sales,operating costs,total assets,total invested capital,and the tax rate would not be affected,but the interest rate would rise to 8.0%.By how much would the ROE change in response to the change in the capital structure? Do not round your intermediate calculations.

Last year Kruse Corp had $380,000 of assets (which is equal to its total invested capital),$403,000 of sales,$28,250 of net income,and a debt-to-total-capital ratio of 39%.The new CFO believes the firm has excessive fixed assets and inventory that could be sold,enabling it to reduce its total assets and total invested capital to $252,500.The firm finances using only debt and common equity.Sales,costs,and net income would not be affected,and the firm would maintain the same capital structure (but with less total debt).By how much would the reduction in assets improve the ROE? Do not round your intermediate calculations.

The inventory turnover ratio and days sales outstanding (DSO)are two ratios that are used to assess how effectively a firm is managing its current assets.

Other things held constant,the more debt a firm uses,the lower the firm's return on total assets will be.

Companies HD and LD have the same total assets,sales,operating costs,and tax rates,and they pay the same interest rate on their debt.Both firms finance using only debt and common equity,and total assets equal total invested capital.However,company HD has a higher total debt to total capital ratio.Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

If a bank loan officer were considering a company's loan request,which of the following statements would be CORRECT,other things held constant?

Companies E and P each reported the same earnings per share (EPS),but Company E's stock trades at a higher price.Which of the following statements is CORRECT?

Meyer Inc's total invested capital is $610,000,and its total debt outstanding is $185,000.The new CFO wants to establish a total debt to total capital ratio of 55%.The size of the firm will not change.How much debt must the company add or subtract to achieve the target debt to capital ratio?

Other things held constant,the higher a firm's total debt to total capital ratio [measured as (Short-term debt + Long-term debt)/(Debt + Preferred stock + Common equity)],the higher its TIE ratio will be.

If a firm sold some inventory for cash and left the funds in its bank account,its current ratio would probably not change much,but its quick ratio would decline.

Herring Corporation has operating income of $270,000 and a 40% tax rate.The firm has short-term debt of $119,000,long-term debt of $316,000,and common equity of $435,000.What is its return on invested capital?

Which of the following statements is CORRECT?

Companies HD and LD have the same tax rate,sales,total assets,and basic earning power.Both companies have positive net incomes.Both firms finance using only debt and common equity,and total assets equal total invested capital.Company HD has a higher total debt to total capital ratio and therefore a higher interest expense.Which of the following statements is CORRECT?

Which of the following actions is an example of "window dressing?"