Exam 3: Analysis of financial statements

Stewart Inc.'s latest EPS was $3.50, its book value per share was $22.75, it had 215, 000 shares outstanding, and its debt-to-assets ratio was 46%.How much debt was outstanding?

Last year Vaughn Corp.had sales of $315, 000 and a net income of $17, 832, and its year-end assets were $210, 000.The firm's total-debt-to-total-assets ratio was 42.5%.Based on the DuPont equation, what was Vaughn's ROE?

Amram Company's current ratio is 1.9.Considered alone, which of the following actions would reduce the company's current ratio?

Hutchinson Corporation has zero debt¾it is financed only with common equity.Its total assets are $410, 000.The new CFO wants to employ enough debt to bring the debt/assets ratio to 40%, using the proceeds from the borrowing to buy back common stock at its book value.How much must the firm borrow to achieve the target debt ratio?

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 that of B.

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 measuring changes in a firm's performance over time.

Exhibit 3.1 The balance sheet and income statement shown below are for Pettijohn 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. -Refer to Exhibit 3.1.What is the firm's P/E ratio?

For the coming year, Crane Inc.is considering two financial plans.Management expects sales to be $301, 770, operating costs to be $266, 545, assets to be $200, 000, and its tax rate to be 35%.Under Plan A it would use 25% debt and 75% common equity.The interest rate on the debt would be 8.8%, but the TIE ratio would have to be kept at 4.00 or more.Under Plan B the maximum debt that met the TIE constraint would be employed.Assuming that sales, operating costs, assets, the interest rate, and the tax rate would all remain constant, by how much would the ROE change in response to the change in the capital structure?

A new firm is developing its business plan.It will require $565, 000 of assets, and it projects $452, 800 of sales and $354, 300 of operating costs for the first year.Management is quite 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.What is the maximum debt-to-assets ratio the firm can use? (Hint: Find the maximum dollars of interest, then the debt that produces that interest, and then the related debt ratio.)

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

Exhibit 3.1 The balance sheet and income statement shown below are for Pettijohn 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. -Refer to Exhibit 3.1.What is the firm's current ratio?

Last year Central Chemicals had sales of $205, 000, assets of $127, 500, a profit margin of 5.3%, and an equity multiplier of 1.2.The CFO believes that the company could reduce its assets by $21, 000 without affecting either sales or costs.Had it reduced its assets in this amount, and had the debt-to-assets ratio, sales, and costs remained constant, by how much would the ROE have changed?

Last year Urbana Corp.had $197, 500 of assets, $307, 500 of sales, $19, 575 of net income, and a debt-to-total-assets ratio of 37.5%.The new CFO believes a new computer program will enable it to reduce costs and thus raise net income to $33, 000.Assets, sales, and the debt ratio would not be affected.By how much would the cost reduction improve the ROE?

Bonner Corp.'s sales last year were $415, 000, and its year-end total assets were $355, 000.The average firm in the industry has a total assets turnover ratio (TATO)of 2.4.Bonner's new CFO believes the firm has excess assets that can be sold so as to bring the TATO down to the industry average without affecting sales.By how much must the assets be reduced to bring the TATO to the industry average, holding sales constant?

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

Although a full liquidity analysis requires the use of a cash budget, the current and quick ratios provide fast and easy-to-use measures of a firm's liquidity position.

Cordelion Communications is considering issuing new common stock and using the proceeds to reduce its outstanding debt.The stock issue would have no effect on total assets, the interest rate Cordelion pays, EBIT, or the tax rate.Which of the following is likely to occur if the company goes ahead with the stock issue?

The current ratio and inventory turnover ratios both help us measure the firm's liquidity.The current ratio measures the relationship of a firm's current assets to its current liabilities, while the inventory turnover ratio gives us an indication of how long it takes the firm to convert its inventory into cash.

Last year Swensen Corp.had sales of $303, 225, operating costs of $267, 500, and year-end assets of $195, 000.The debt-to-total-assets ratio was 27%, the interest rate on the debt was 8.2%, and the firm's tax rate was 37%.The new CFO wants to see how the ROE would have been affected if the firm had used a 45% debt ratio.Assume that sales and total assets would not be affected, and that the interest rate and tax rate would both remain constant.By how much would the ROE change in response to the change in the capital structure?

Which of the following statements is CORRECT?