Exam 2: Analysis of Financial Statements

Given the following information, calculate the market price per share of WAM Inc. Earnings after interest and taxes = $200,000 Earnings per share = $2.00 Stockholders' equity = $2,000,000 Market/Book ratio = 0.20

Collins Company had the following partial balance sheet and complete income statement information for last year: \begin{array}{llcc} \text { Balance Sheet: } &\\ \text { Cash } &\$20\\ \text { \mathrm{A} / \mathrm{R} } &1,000\\ \text {Inventories } &\underline{2,000}\\ \text { Total current assets } &\$3,020\\ \text { Net fixed assets } &\underline{2,980}\\ \text {Total assets } &\underline{\$6,000}\\\\ \text { Income} &\\ \text {Statem } &\$10,000\\ \text { Cost of goods sold} &\underline{9,200}\\ \text {\( \mathrm{EBIT} \) } &\$800\\ \text {Interest \( (10 \%) \) } &\underline{400}\\ \text { EBT } &\$400\\ \text { Taxes (40\%)} &\underline{160}\\ \text { Net Income } &\underline{\$240}\\\end{array} The industry average DSO is 30 (360-day basis).Collins plans to change its credit policy so as to cause its DSO to equal the industry average, and this change is expected to have no effect on either sales or cost of goods sold.If the cash generated from reducing receivables is used to retire debt (which was outstanding all last year and which has a 10% interest rate), what will Collins' debt ratio (Total debt/Total assets) be after the change in DSO is reflected in the balance sheet?

As a short-term creditor concerned with a company's ability to meet its financial obligation to you, which one of the following combinations of ratios would you most likely prefer? Current Debt ratio TIE ratio a. $0.5\quad0.5\quad0.33$ b. $1.0 \quad1.0\quad0.50$ c. $1.5 \quad 1.5\quad0.50$ d. $2.0 \quad 1.0\quad0.67$ e. $2.5 \quad 0.5\quad0.71$

If the current ratio of Firm A is greater than the current ratio of Firm B, we cannot be sure that the quick ratio of Firm A is greater than that of Firm B.However, if the quick ratio of Firm A exceeds that of Firm B, we can be assured that Firm A's current ratio also exceeds B's current ratio.

Which of the following financial statements includes information about a firm's assets, equity, and liabilities?

The current ratio and inventory turnover ratio measure the liquidity of a firm.The current ratio measures the relation of a firm's current assets to its current liabilities and the inventory turnover ratio measures how rapidly a firm turns its inventory back into a "quick" asset or cash.

Suppose a firm wants to maintain a specific TIE ratio.If the firm knows the level of its debt, the interest rate it will pay on that debt and the applicable tax rate, the firm can then calculate the earnings level required to maintain its target TIE ratio.

The information contained in the annual report is used by investors to form expectations about future earnings and dividends.

The Amer Company has the following characteristics: Sales: \ 1,000 Total Assets: \ 1,000 Total Debt/Total Assets: 35\% EBIT: \2 00 Tax rate: 40\% Interest rate on total debt: 4.57\% What is Amer's ROE?

You are given the following information about a firm: The growth rate equals 8 percent; return on assets (ROA) is 10 percent; the debt ratio is 20 percent; and the stock is selling at $36.What is the return on equity (ROE)?

All of the following represent cash outflows to the firm except

The inventory turnover and current ratios are related.The combination of a high current ratio and a low inventory turnover ratio relative to the industry norm might indicate that the firm is maintaining too high an inventory level or that part of the inventory is obsolete or damaged.

A firm's net income reported on its income statement must equal the operating cash flows on the statement of cash flows.

Taxes, payment patterns, and reporting considerations, as well as credit sales and non-cash costs, are reasons why operating cash flows can differ from accounting profits.

The Meryl Corporation's common stock currently is selling at $100 per share, which represents a P/E ratio of 10.If the firm has 100 shares of common stock outstanding, a return on equity of 20 percent, and a debt ratio of 60 percent, what is its return on total assets (ROA)?

Savelots Stores' current financial statements are shown below: Inventories \ 500 Accounts payable \ 100 Other current assets 400 Short-term notes payable 370 Fixed assets Common equity Total assets \ 1,270 Total liab. and equity \ 1,270 Sales \ 2,000 Operating costs 1,843 EBIT 157 Less: Interest EBT EBT 120 Less: Taxes (40\%) Netincome 72 A recently released report indicates that Savelots' current ratio of 1.9 is in line with the industry average.However, its accounts payable, which have no interest cost and which are due entirely to purchases of inventories, amount to only 20% of inventory versus an industry average of 60%.Suppose Savelots took actions to increase its accounts payable to inventories ratio to the 60% industry average, but it (1) kept all of its assets at their present levels (that is, the asset side of the balance sheet remains constant) and (2) also held its current ratio constant at 1.9.Assume that Savelots' tax rate is 40%, that its cost of short-term debt is 10%, and that the change in payments will not affect operations.In addition, common equity would not change.With the changes, what would be Savelots' new ROE?

Which of the following statements about ratio analysis is incorrect?

Other things held constant, if a firm holds cash balances in excess of their optimal level in a non-interest bearing account, this will tend to lower the firm's

When a firm conducts a stock repurchase, it increases an equity account which is an example of a source of funds.

Genzyme Corporation has seen its days sales outstanding (DSO) decline from 38 days last year to 22 days this implying that more of the firm's suppliers are being paid on time.