Exam 4: Analysis of Financial Statements

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 quick ratio? Do not round your intermediate calculations.

One problem with ratio analysis is that relationships can sometimes be manipulated.For example,if our current ratio is greater than 1.5,then borrowing on a short-term basis and using the funds to build up our cash account would cause the current ratio to INCREASE.

In general,if investors believe that a company is relatively risky and/or has relatively poor growth prospects,then the company will have relatively high P/E,M/B,and EV/EBITDA ratios.

Ratio analysis involves analyzing financial statements to help appraise a firm's financial position and strength.

A firm wants to strengthen its financial position.Which of the following actions would increase its current ratio?

Suppose a firm wants to maintain a specific TIE ratio.It knows the amount of its debt,the interest rate on that debt,the applicable tax rate,and its operating costs.With this information,the firm can calculate the amount of sales required to achieve its target TIE ratio.

Which of the following would indicate an improvement in a company's financial position,holding other things constant?

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 assets turnover? Do not round your intermediate calculations.

A new firm is developing its business plan.It will require $735,000 of assets (which equals total invested capital),and it projects $450,000 of sales and $355,000 of operating costs for the first year.Management is reasonably sure of these numbers because of contracts with its customers and suppliers.It can borrow at a rate of 7.5%,but the bank requires it to have a TIE of at least 4.0,and if the TIE falls below this level the bank will call in the loan and the firm will go bankrupt.The firm will use only debt and common equity for financing.What is the maximum debt to capital ratio (measured as debt/total invested capital)the firm can use? (Hint: Find the maximum dollars of interest,then the debt that produces that interest,and then the related debt to capital ratio. )Do not round your intermediate calculations.

The current and quick ratios help us measure a firm's liquidity.The current ratio measures the relationship of the firm's current assets to its current liabilities,while the quick ratio measures the firm's ability to pay off short-term obligations without relying on the sale of inventories.

In general,it's better to have a low inventory turnover ratio than a high one,as a low ratio indicates that the firm has an adequate stock of inventory relative to sales and thus will not lose sales as a result of running out of stock.

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 TIE? Do not round your intermediate calculations.

If a firm sold some inventory on credit as opposed to cash,there is no reason to think that either its current or quick ratio would change.

Even though Firm A's current ratio exceeds that of Firm B,Firm B's quick ratio might exceed that of A.However,if A's quick ratio exceeds B's,then we can be certain that A's current ratio is also larger than B's.

Safeco's current assets total to $20 million versus $10 million of current liabilities,while Risco's current assets are $10 million versus $20 million of current liabilities.Both firms would like to "window dress" their end-of-year financial statements,and to do so they tentatively plan to borrow $10 million on a short-term basis and to then hold the borrowed funds in their cash accounts.Which of the statements below best describes the results of these transactions?

HD Corp and LD Corp have identical assets,sales,interest rates paid on their debt,tax rates,and EBIT.Both firms finance using only debt and common equity,and total assets equal total invested capital.However,HD uses more debt than LD.Which of the following statements is CORRECT?

Ryngard Corp's sales last year were $43,000,and its total assets were $16,000.What was its total assets turnover ratio (TATO)?

The inventory turnover and current ratio are related.The combination of a high current ratio and a low inventory turnover ratio,relative to industry norms,suggests that the firm has an above-average inventory level and/or that part of the inventory is obsolete or damaged.

The profit margin measures net income per dollar of sales.

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 profit margin? Do not round your intermediate calculations.