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Financial Management: Theory and Practice

Eugene F. Brigham, Michael C. Ehrhardt

Chapter 4

Analysis of Financial Statements - all with Video Answers

Educators

Chapter Questions

01:20

Problem 1

Greene Sisters has a DSG of 20 days. The company's average daily sales are $\$ 20,000$. What is the level of its accounts receivable? Assume there are 365 days in a year.

Kratika Bhadauria
Kratika Bhadauria
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05:28

Problem 2

Vigo Vacations has an equity multiplier of $2.5 .$ The company's assets are financed with some combination of long-term debt and common equity. What is the company's debt ratio?

Puneet Prajapati
Puneet Prajapati
Numerade Educator
01:23

Problem 3

Winston Washers' stock price is $\$ 75$ per share. Winston has $\$ 10$ billion in total assets. Its balance sheet shows $\$ 1$ billion in current liabilities, $\$ 3$ billion in longterm debt, and $\$ 6$ billion in common equity. It has 800 million shares of common stock outstanding. What is Winston's market/book ratio?

Jennifer Stoner
Jennifer Stoner
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02:24

Problem 4

A company has an EPS of $\$ 1.50,$ a cash flow per share of $\$ 3.00,$ and a price/cash flow ratio of 8.0 times. What is its $\mathrm{P} / \mathrm{E}$ ratio?

Dwijendra Rao
Dwijendra Rao
Numerade Educator
02:25

Problem 5

Needham Pharmaceuticals has a profit margin of $3 \%$ and an equity multiplier of 2.0. Its sales are $\$ 100$ million and it has total assets of $\$ 50$ million. What is its ROE?

Riham Bassal
Riham Bassal
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02:26

Problem 6

Donaldson \& Son has an ROA of $10 \%,$ a $2 \%$ profit margin, and a return on equity equal to $15 \% .$ What is the company's total assets turnover? What is the firm's equity multiplier?

Saad Ali Khan
Saad Ali Khan
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05:28

Problem 7

Ace Industries has current assets equal to $\$ 3$ million. The company's current ratio is $1.5,$ and its quick ratio is $1.0 .$ What is the firm's level of current liabilities? What is the firm's level of inventories?

Puneet Prajapati
Puneet Prajapati
Numerade Educator
01:54

Problem 8

Assume you are given the following relationships for the Clayton Corporation:
Sales/total assets $1.5 \times$
Return on assets (ROA) $3 \%$
Return on equity (ROE) $5 \%$ Calculate Clayton's profit margin and debt ratio.

Natalie Britton
Natalie Britton
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05:28

Problem 9

The Nelson 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 Nelson's shortterm debt (notes payable) increase without pushing its current ratio below $2.0 ?$ What will be the firm's quick ratio after Nelson has raised the maximum amount of short-term funds?

Puneet Prajapati
Puneet Prajapati
Numerade Educator
00:41

Problem 10

The Manor Corporation has $\$ 500,000$ of debt outstanding, and it pays an interest rate of $10 \%$ annually: Manor's annual sales are $\$ 2$ million, its average tax rate is $30 \%,$ and its net profit margin on sales is $5 \%$. 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 Manor's TIE ratio?

Zach Steedman
Zach Steedman
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Problem 11

Cumplete the balance sheet and sales information in the table that follows for Huffmeister Industries using the fulluwing financial data: Debt rativ: $50 \%$
Quick ratio: $0.80 \times$
Total assets turnover: $1.5 \times$
Days sales outstanding: 36.5 days $^{\text {and }}$ Gross profit margin on sales: (Sales $-$ cost of goods sold)/Sales $=25 \%$ Inventory turnover ratio: $5 \times$ The Kretovich Company had a quick ratio of $1.4,$ a current ratio of $3.0,$ an inventory turnover of 6 times, total current assets of $\$ 810,000$, and cash and marketable securities of $\$ 120,000$. What were Kretovich's annual sales and its DSO? Assume a 365 -day year

Jason Gerber
Jason Gerber
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05:28

Problem 12

The Kretovich Company had a quick ratio of $1.4,$ a current ratio of $3.0,$ an inventory turnover of 6 times, total current assets of $\$ 810,000,$ and cash and marketable securities of $\$ 120,000 .$ What were Kretovich's annual sales and its DSO? Assume a 365-day year.

Puneet Prajapati
Puneet Prajapati
Numerade Educator
03:38

Problem 13

Data for Morton Chip Company and its industry averages follow.
a. Calculate the indicated ratios for Morton.
b. Construct the extended Du Pont equation for both Morton and the industry.
c. Outline Morton's strengths and weaknesses as revealed by your analysis.
d. Suppose Morton had doubled its sales as well as its inventories, accounts receivable, and common equity during $2007 .$ How would that information affect the validity of your ratio analysis? (Hint: Think about averages and the effects of rapid growth on ratios if averages are not used. No calculations are needed.)

Jameson Kuper
Jameson Kuper
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05:16

Problem 14

The Jimenez Corporation's forecasted 2008 financial statements follow, along with some industry average ratios.
a. Calculate Jimenez's 2008 forecasted ratios, compare them with the industry average data, and comment briefly on Jimenez's projected strengths and weaknesses.
b. What do you think would happen to Jimenez's ratios if the company initiated cost-cutting measures that allowed it to hold lower levels of inventory and substantially decreased the cost of goods sold? No calculations are necessary. Think about which ratios would be affected by changes in these two accounts.

Foster Wisusik
Foster Wisusik
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06:21

Problem 15

Start with the partial model in the file $F M 12$ Ch 04 P15 Build a Model.xls from the textbook's Web site. This problem requires you to further analyze the financial data given for Cumberland Industries in the Build a Model problem for Chapter 3.

Cumberland Industries' cummon stock has increased in price from $\$ 14.75$ to $\$ 17.25$ frum the end of 2006 to the end of $2007,$ and its shares outstanding increased from 9 to 10 million shares during that same period. Cumberland has annual lease payments uf $\$ 75,000$ (which are included in operating costs on the income statement), but no sinking fund payments are required. Now answer the following questions.
Using Cumberland's financial statements as given in the Chapter 3 Build a Model problem, perform a ratio analysis for 2006 and 2007 . Consider its liquidity, asset management, debt management, profitability, and market value ratios. a. Has Cumberland's liquidity position improved or worsened? Explain.
b. Has Cumberland's ability to manage its assets improved or worsened? Explain.
c. How has Cumberland's profitability changed during the last year?
d. Perform an extended Du Pont analysis for Cumberland for 2006 and 2007 .
e. Perform a common size analysis. What has happened to the composition (that is, percentage in each category ) of assets and liabilities?
f. Perform a percent change analysis. What does this tell you about the change in profitability and asset utilization?

Heather Duong
Heather Duong
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