Question 1

Hang Ten Surfing Supplies have annual sales of $25 million, of which 3% goes to net margin. Their balance sheet indicates that they carry $7.5 million in debt, on which they pay interest of 10%. They pay corporate taxes of 40%. What is their EBIT?

Accepted Answer

NI = Sales * NM = 25 million * 3% = 750,000;
EBT = NI / 1 − T = 750,000 / .6 = 1,250,000;
INT= 7.5 million * 10% = 750,000;
EBIT = EBT + INT = 1,250,000 + 750,000 = 2,000,000.

Question 2

Scranton Rubber has $1.5 million in current assets and $650,000 in current liabilities. Their present inventory level is $350,000. They want to increase inventory, and they intend to raise the funds by issuing short-term notes payable. How much can they increase their short-term debt (notes payable) without pushing their current ratio below 2.0?

Accepted Answer

Current ratio now = 1,500,000 / 650,000 = 2.31
Minimum current ratio = (1,500,000 + $\Delta$ NP) / (650,000 + $\Delta$ NP) = 2
1,500,000 + $\Delta$ NP = 1,300,000 + 2$\Delta$ NP
200,000 = $\Delta$ NP

Question 3

Harvest Biotech recently ended their fiscal year by paying $3,000,000 in total dividends and retaining $4,500,000 in earnings. If they have 10 million shares outstanding, what are their earnings per share and dividends per share for the fiscal year just ended?

Accepted Answer

EPS = NI / Shares OS = 7.5 / 10 = .75; DPS = Dividends / Shares OS = 3 / 10 = .30

Question 4

The controller of the firm where you work has determined that the firm's return on equity (ROE) is 15%. The president is interested in the various components that went into this calculation. You are given the following information: Total Debt / Total Assets = 0.35, and the total assets turnover ratio (TAT) is 2.8. What is the net margin (NM)?

Accepted Answer

The answer of The controller of the firm where you...

Question 5

A firm has a current ratio of 2.0 and a quick ratio of 1.6. If the firm doubles their inventory and intends to pay for it within 30 days of receipt, what will be their new current ratio?

Accepted Answer

The answer of A firm has a current ratio of...

Question 6

What purpose does the statement of cash flows serve?

Accepted Answer

The answer of What purpose does the statement of cash...

Question 7

Main Street Motors has $600,000 of debt on its balance sheet, on which it pays 15% interest annually. Their sales are $5 million per year, and the net margin on those sales is 4%. The corporate tax rate for Main Street is 35%. Their debt agreement requires them to maintain a times interest earned (TIE) ratio of 4, or else their loans will not be renewed and they will face bankruptcy. Should the managers be concerned?

Accepted Answer

The answer of Main Street Motors has $600,000 of debt...

Question 8

Bumstead Beauty Products has an ROA of 15%, a NM of 3%, and an ROE of 18%. What is their TAT ratio and EM?

Accepted Answer

The answer of Bumstead Beauty Products has an ROA of...

Question 9

What is the biggest difference between the income statement and the balance sheet?

Accepted Answer

The answer of What is the biggest difference between the...

Question 10

Burger Baron has a DSO of 45 days. Their annual sales are $3.6 million. What is the value of their accounts receivable?

Accepted Answer

The answer of Burger Baron has a DSO of 45...

Question 11

Ipswich Insurance has an equity multiplier of 2.5. The firm's assets are financed with a combination of long-term debt and common equity. What is their debt ratio?

Accepted Answer

The answer of Ipswich Insurance has an equity multiplier of...

Question 12

You are given the following data for the Susquahanna Hat Company:

Accepted Answer

The answer of You are given the following data for...

Question 13

Brand X has current assets of $30 million. Their current ratio is 1.5 and their quick ratio is 1.0. What are Brand X's current liabilities and inventory?

Accepted Answer

The answer of Brand X has current assets of $30...

Exam 9: Analyzing and Forecasting Financial Statements