FIN CHAPTER 03 SOL complete

CHAPTER 3

3-1

DAYS SALES OUTSTANDING        Baker Brothers has a DSO of 40 days.  The company’s annual sales are $7,300,000.  (Assume there are 365 days in a year.)

WHAT IS THE LEVEL OF ITS ACCOUNTS RECEIVABLE?  

3-2

DEBT RATIO        Bartley Barstools has an equity multiplier of 2.4.  The company’s assets are financed with some combination of long-term debt and common equity.  

WHAT IS THE COMPANY’S DEBT RATIO?
        

3-3

DUPONT ANALYSIS        Doublewide Dealers has an ROA of 10 percent, a 2 percent profit margin, and a return on equity equal to 15 percent.  

WHAT IS THE COMPANY’S TOTAL ASSETS TURNOVER?  

WHAT IS THE FIRM’S EQUITY MULTIPLIER?
        

3-4

MARKET/BOOK RATIO        Jaster Jets, on the left side of the balance sheet has $10 billion in total assets.  

The right side of its balance sheet consists of $1 billion in current liabilities, $3 billion in long-term debt, and $6 billion in common equity. 

The company has 800 million shares of common stock outstanding, and its stock price is $32 per share.  

WHAT IS JASTER’S MARKET/BOOK RATIO?

3-5

RATIO CALCULATIONS        Graser Trucking has $12 billion in assets, and its tax rate is 40 percent.  The company’s basic earning power (BEP) ratio is 15 percent, and its return on assets (ROA) is 5 percent.  

WHAT IS GRASER’S TIMES-INTEREST-EARNED (TIE) RATIO?

            
3-6

RATIO CALCULATIONS        ASSUME YOU ARE GIVEN THE FOLLOWING RELATIONSHIPS FOR THE BRAUER CORPORATION:
            Sales/total assets
Return on assets (ROA)
Return on equity (ROE)
    1.5 
3%
5%    
        Calculate Brauer’s profit margin and debt ratio.

            
3-7

CURRENT RATIO        The Petry Company has $1,312,500 in current assets and $525,000 in current liabilities.  Its initial inventory level is $375,000, and it will raise funds as additional notes payable and use them to increase inventory.  

HOW MUCH CAN PETRY’S SHORT-TERM DEBT (NOTES PAYABLE) INCREASE WITHOUT PUSHING ITS CURRENT RATIO BELOW 2.0?

3-8

TIMES-INTEREST- EARNED RATIO        The H.R. Pickett Corporation has $500,000 of debt outstanding, and it pays an interest rate of 10 percent annually.  Pickett’s annual sales are $2 million, its average tax rate is 30 percent, and its net profit margin on sales is 5 percent. 

If the company does not maintain a TIE ratio of at least 5 times, its bank will refuse to renew the loan and bankruptcy will result.  

WHAT IS PICKETT’S TIE RATIO?

3-10

RETURN ON EQUITY        Midwest Packaging’s ROE last year was only 3 percent, but its management has developed a new operating plan designed to improve things.  The new plan calls for a total debt ratio of 60 percent, which will result in interest charges of $300,000 per year.  Management projects an EBIT of $1,000,000 on sales of $10,000,000, and it expects to have a total assets turnover ratio of 2.0.  Under these conditions, the tax rate will be 34 percent.  

IF THE CHANGES ARE MADE, WHAT RETURN ON EQUITY WILL THE COMPANY EARN?

3-11

RETURN ON EQUITY        Central City Construction Company, which is just being formed, needs $1 million of assets, and it expects to have a basic earning power ratio of 20 percent.  Central City will own no securities, so all of its income will be operating income.  If it chooses to, Central City can finance up to 50 percent of its assets with debt, which will have an 8 percent interest rate.  

Assuming a 40 percent federal-plus-state tax rate on all taxable income,

WHAT IS THE DIFFERENCE BETWEEN ITS EXPECTED ROE IF CENTRAL CITY FINANCES WITH 50 PERCENT DEBT VERSUS ITS EXPECTED ROE IF IT FINANCES ENTIRELY WITH COMMON STOCK?

3-21

BALANCE SHEET ANALYSIS        Complete the balance sheet and sales information in the table that follows for Hoffmeister Industries using the following financial data:

Debt Ratio:
Current Ratio:
Total Asset Turn
Days Sales Out
Gross Profit Margin on Sales    50%
1.8X
1.5X
36.5 days
25%
5X    
(Cur Assets / Cur Liab)
(Sales / Total Assets)
(Rec   Annl Sales/365)
(Sales-COGS) / Sales)
(Sales Inventory)

BALANCE SHEET
Cash        Accounts payable    $90,000
Accounts receivable            
Inventories        Long term Debt    $60,000
Fixed Assets        Common Stock    
        Retained Earnings      $97,000
TOTAL ASSETS    $300,000    TOTAL LIAB & EQUITY