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365
$10,139
6 = $166.67.
Debt = $400/0.10 = $4,000.
TA
TD
=
$166.67 - $6,000
$166.67 - $4,000
= 65.71%.
55. Financial ratios Answer: b Diff: M R
First, find the amount of current assets:
Current ratio = Current assets/Current liabilities
Current assets = (Current liabilities)(Current ratio)
= $375,000(1.2) = $450,000.
Next, find the accounts receivables:
DSO = AR/(Sales/365)
AR = DSO(Sales)(1/365)
= (40)($1,200,000)(1/365) = $131,507.
Next, find the inventories:
Inventory turnover = Sales/Inventory
Inventory = Sales/(Inventory turnover)
= $1,200,000/4.8 = $250,000.
Finally, find the amount of cash:
Cash = Current assets - AR - Inventory
= $450,000 - $131,507 - $250,000 = $68,493.
56. Quick ratio Answer: c Diff: M
Step 1 Calculate inventory:
Quayle Energy has $40 million in inventory because the
inventory turnover ratio is equal to 5.
S/Inv = 5; Inv =
5
000 , 000 , 200 $
= $40,000,000.
Step 2 Calculate current liabilities:
From the current ratio, we can conclude that they have $83.33
million in current liabilities.
CR =
CL
000 , 000 , 100 $
= 1.2; CL = $83.33 million.
Step 3 Find quick ratio:
CL
Inv CA
=
333 , 333 , 83 $
000 , 000 , 40 $ 000 , 000 , 100 $
= 0.72.
57. Quick ratio Answer: e Diff: M
If sales remain at $600,000, then for the inventory turnover ratio to
be 8x inventory must be $600,000/8 = $75,000. Current inventory minus
the new level of inventory reflects the amount of cash freed up or
$150,000 - $75,000 = $75,000. Current liabilities will be reduced to
$125,000 - $75,000 = $50,000. Thus, new current assets are $50,000 +
$75,000 + $100,000 = $225,000. The new quick ratio is then: ($225,000 -
$75,000)/$50,000 = 3.
58. Current ratio Answer: b Diff: M R
Step 1 We must find sales using DSO of 35. AR/(Sales/365) = 35.486.
If AR is $700, then Sales = $7,200.
Step 2 Now, to reduce DSO to 30.417, AR/($7,200/365) = 30.417 and AR
becomes $600. Thus, we reduced AR by $100.
Step 3 To find the new CR (CA/CL), it is just ($1,500 - $100)/($1,200
- $100) = 1.2727. (Remember, notes payable were also reduced
by $100.)
59. Current liabilities Answer: a Diff: M
We can solve for inventory (because were given the inventory turnover
ratio) as 8 = $860,000/Inventory or Inventory = $107,500. Given the
quick ratio, we know (CA - $107,500)/CL = 1.5. We can rewrite this as
CA/CL - $107,500/CL = 1.5. Recognizing the first term as the current
ratio or 1.75, we now have 1.75 - $107,500/CL = 1.5. Solve this
expression for CL = $430,000.
60. ROE Answer: d Diff: T
ROE = Profit Margin TA Turnover Equity Multiplier
Set up an income statement:
Sales (given) $240,000
Cost na
EBIT (given) $ 26,000
I (given) 8,000
EBT $ 18,000
Taxes (40%) 7,200
NI $ 10,800
Turnover = 2 = S/TA; TA = S/2 = $240,000/2 = $120,000.
D/A = 60%; so E/A = 40%; and, therefore, TA/E = 1/(E/A) = 1/0.4 = 2.50.
Complete the Du Pont equation to determine ROE:
ROE = $10,800/$240,000 $240,000/$120,000 $120,000/$48,000
= 0.045 2 2.5 = 0.225 = 22.5%.
61. ROE Answer: c Diff: T
Given: New D/A = 0.55 Interest = $7,000
EBIT = $25,000 Tax rate = 40%
Sales = $270,000 TATO = 3.0
Recall the Du Pont equation: ROE = (PM)(TATO)(EM).
ROE = (ROA)(EM).
ROE = NI/Equity.
EBIT $25,000
I 7,000 (Given)
EBT $18,000
T 7,200 ($18,000 40%)
NI $10,800
TATO = Sales/Total assets
Total assets = Sales/TATO = $270,000/3 = $90,000.
Equity = [1 - (D/A)](Total assets)
Equity = [1 - 0.55](Total assets)
Equity = 0.45($90,000) = $40,500.
ROE = NI/Equity = $10,800/$40,500 = 26.67%.
62. ROE Answer: d Diff: T
Industry average inventory turnover = 6 = Sales/Inventory.
To match this level: Inventory = Sales/6
$3,000,000/6 = $500,000.
Current inventory = $1,000,000. Reduction in inventory = $1,000,000 -
$500,000 = $500,000. This $500,000 is to be used to reduce the debt of
the company.
New debt level = $4,000,000 - $500,000 = $3,500,000. Interest on this
level of debt = $3,500,000 0.1 = $350,000.
Look at the income statement to get net income:
EBIT $1,400,000
Int 350,000
EBT $1,050,000
Tax 420,000
NI $ 630,000
ROE = Net income/Equity = $630,000/$2,000,000 = 0.3150 or 31.50%.
63. Current ratio Answer: c Diff: T
Step 1 Solve for the current inventory level:
CA/CL = 1.2 and CA = $1,200,000, so CL = $1,000,000.
Step 2 Solve for current level of inventories:
Since QR = 0.7, ($1,200,000 - Inv)/$1,000,000 = 0.7, Inv =
$500,000.
Step 3 Next we find the sales level using the old inventory turnover
ratio:
Sales/$500,000 = 4. So sales are $2,000,000.
Step 4 Using the current sales level and the new target inventory
turnover ratio of 5, we can solve for the new inventory level:
$2,000,000/Inv
New
= 5. Inv
New
= $400,000.
Step 5 Solve for the new current ratio:
AInv = $400,000 - $500,000 = -$100,000. So, our new CR =
($1,200,000 - $100,000)/($1,000,000 - $100,000) = 1.222.
64. Financial statement analysis Answer: a Diff: T
Sales $15,000
Cost of goods sold _______
EBIT $ 1,065
Interest 465
EBT $ 600
Taxes (35%) 210
NI $ 390
BEP =
TA
EBIT
=
$8,000
EBIT
= 0.133125; EBIT = $1,065.
Now fill in: EBIT = $1,065.
Interest = EBIT - EBT = $1,065 - $600 = $465.
A
D
=
$8,000
D
= 0.45; D = 0.45($8,000) = $3,600.
Interest rate =
Debt
Interest
=
$3,600
$465
= 0.1292 = 12.92%.
65. EBIT Answer: e Diff: T
Write down equations with given data, then find unknowns:
Profit margin =
S
NI
= 0.06.
Debt ratio =
A
D
=
$100,000
D
= 0.4; D = $40,000.
TA turnover =
A
S
= 3.0.
=
$100,000
S
= 3; S = $300,000.
Now plug sales into profit margin ratio to find NI:
$300,000
NI
= 0.06; NI = $18,000.
Now set up an income statement:
Sales $300,000
Cost of goods sold ________
EBIT $ 33,200 (EBIT = EBT + Interest)
Interest 3,200 ($40,000(0.08) = $3,200)
EBT $ 30,000 (EBT = $18,000/(1 - T) = $30,000)
Taxes (40%) 12,000
NI $ 18,000