Exam 4: Analysis of Financial Statements

Klein Cosmetics has a profit margin of 5.0%,a total assets turnover ratio of 1.5 times,no debt and therefore an equity multiplier of 1.0,and an ROE of 7.5%.The CFO recommends that the firm borrow money,use the funds to buy back stock,and raise the equity multiplier to 2.0.The size of the firm (assets)would not change.She thinks that operations would not be affected,but interest on the new debt would lower the profit margin to 4.5%.This would probably be a good move,as it would increase the ROE from 7.5% to 13.5%.

High current and quick ratios always indicate that the firm is managing its liquidity position well.

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 market-to-book ratio? Do not round your intermediate calculations.

Ajax Corp's sales last year were $400,000,its operating costs were $362,500,and its interest charges were $12,500.What was the firm's times-interest-earned (TIE)ratio?

Suppose all firms follow similar financing policies,face similar risks,have equal access to capital,and operate in competitive product and capital markets.However,firms face different operating conditions because,for example,the grocery store industry is different from the airline industry.Under these conditions,firms with high profit margins will tend to have high asset turnover ratios,and firms with low profit margins will tend to have low turnover ratios.

Companies HD and LD have the same sales,tax rate,interest rate on their debt,total assets,and basic earning power.Both firms finance using only debt and common equity,and total assets equal total invested capital.Both companies have positive net incomes.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 statements is CORRECT?

Faldo Corp sells on terms that allow customers 45 days to pay for merchandise.Its sales last year were $425,000,and its year-end receivables were $60,000.If its DSO is less than the 45-day credit period,then customers are paying on time.Otherwise,they are paying late.By how much are customers paying early or late? Base your answer on this equation: DSO - Credit Period = Days early or late,and use a 365-day year when calculating the DSO.A positive answer indicates late payments,while a negative answer indicates early payments.Assume all sales to be on credit.Do not round your intermediate calculations.

Determining whether a firm's financial position is improving or deteriorating requires analyzing more than the ratios for a given year.Trend analysis is one method of examining changes in a firm's performance over time.

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 equity multiplier? Do not round your intermediate calculations.

The "apparent," but not necessarily the "true," financial position of a company whose sales are seasonal can change dramatically during a given year,depending on the time of year when the financial statements are constructed.

Which of the following statements is CORRECT?

The times-interest-earned ratio measures the extent to which operating income can decline before the firm is unable to meet its annual interest costs.

Other things held constant,the more debt a firm uses,the lower the firm's operating margin will be.

You observe that a firm's ROE is above the industry average,but both its profit margin and equity multiplier are below the industry average.Which of the following statements is CORRECT?

The return on invested capital (ROIC)differs from the return on assets (ROA).First,ROIC is based on total invested capital rather than total assets.Second,the numerator of the ROIC is after-tax operating income rather than net income.

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 EPS? Do not round your intermediate calculations.

If the CEO of a large and diversified firm were filling out a fitness report on a division manager (i.e. ,"grading" the manager),which of the following situations would be likely to cause the manager to receive a better grade? In all cases,assume that other things are held constant.

Since the ROA measures the firm's effective utilization of assets without considering how these assets are financed,two firms with the same EBIT must have the same ROA.

Precision Aviation had a profit margin of 6.25%,a total assets turnover of 1.5,and an equity multiplier of 1.8.What was the firm's ROE?