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Investments

Zvi Bodie, Alex Kane, Alan J. Marcus

Chapter 19

Financial Statement Analysis - all with Video Answers

Educators

Chapter Questions

Problem 1

Use the financial statements of Heifer Sports Inc. in Table 19A to find the following information for Heifer's:
a. Inventory turnover ratio in 2023.
b. Debtlequity ratio in 2023.
c. Cash flow from operating activities in 2023.
d. Average collection period.
c. Asset turnover ratio.
f. Interest coverage ratio.
g. Operating profit margin.
h. Return on equity.
L. P/E ratio.
j. Compound Ieverage ratio.
k. Net cash provided by operating activities.

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Problem 2

What is the major difference between the approach of international financial reporting standards versus U.S. GAAP accounting? What are the advantages and disadvantages of each?

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Problem 3

If markets are truly efficient, does it matter whether firms engage in earnings management? On the other hand, if firms manage earnings, what does that say about management's view on efficient markets?

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Problem 4

What financial ratios would a credit rating agency such as Moody's or Standard \& Poor's be most interested in? Which ratios would be of most interest to a stock market analyst deciding whether to buy a stock for a diversified portfolio?

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05:50

Problem 5

The Crusty Pie Co., which specializes in apple turnovers, has a return on sales higher than the industry average, yet irs ROA is the same as the industry average. How can you explain this?

Narayan Hari
Narayan Hari
Numerade Educator
02:58

Problem 6

The ABC Corporation has a profit margin on sales below the industry average, yet its ROA is above the industry average. What does this imply about its asset turnover?

Narayan Hari
Narayan Hari
Numerade Educator

Problem 7

Firm $A$ and Firm $B$ have the same ROA, yet Firm A's ROE is higher. How can you explain this?

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Problem 8

Use the DuPont system and the following data to find return on equity.
$$
\begin{array}{lr}
\text { Leverage rato (assets/equity) } & 2.2 \\
\text { Total asset tumover } & 2.0 \\
\text { Net proft margin } & 5.5 \% \\
\text { Dividend payout ratio } & 31.8 \%
\end{array}
$$

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02:46

Problem 9

Recently, Galaxy Corporation lowered its allowance for doubtful accounts by reducing bad debt expense from $2 \%$ of sales to $1 \%$ of sales. Ignoring taxes, what are the immediate effects on (a) operating income and (b) operating cash flow?

Kratika Bhadauria
Kratika Bhadauria
Numerade Educator
03:28

Problem 10

Labor officials believe that the management of Hatfield is attempting to understate its net income to avold making any concessions in the labor negotiations. Which of the following actions by management will most likely result in low-quality earnings?
a. Lengthening the life of a depreciable asset in order to lower the depreciation expense.
b. Lowering the discount rate used to value pension obligations.
c. Recognizing revenue at the time of delivery rather than when payment is received.

Puneet Prajapati
Puneet Prajapati
Numerade Educator

Problem 11

Hatfield has begun reconding all new equipment leases on its books as operating leases, a change from its consistent past use of capital leases, in which the present value of lease payments is recognized as a debt obligation. What is the most likely motivation behind Hatfield's change in accounting methodology? Hatfield is attempting to:
a. Improve its leverage ratios and reduce its perceived leverage.
b. Reduce its cost of goods sold and increase its profitability.
c. Increase its operating margins relative to industry peers.

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Problem 12

The SEC due diligence team is searching for the reason behind Hatfield's inventory build-up relative to its sales growth. One way to identify a deliberate manipulation of financial results by Hatfield is to search for:
a. A decline in inventory turnover.
b. Receivables that are growing faster than sales.
c. A delay in the recognition of expenses.

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02:02

Problem 13

A firm has an ROE of $3 \%$, a debt-lo-equity ratio of .5 , and a tax rate of $21 \%$ and pays an interest rate of $6 \%$ on its debt. What is its operating ROA?

Narayan Hari
Narayan Hari
Numerade Educator
01:59

Problem 14

A firm has a tax burden ratio of .75 , a leverage ratio of 1.25 , an interest burden of . 6 , and a return on sales of $10 \%$. The firm generates $\$ 2.40$ in sales per dollar of assets. What is the firm's ROE?

Narayan Hari
Narayan Hari
Numerade Educator

Problem 15

Use the following cash flow data for Rocket Transport to find Rocke1's
a. Net cash provided by or used in investing activities.
b. Net cash provided by or used in financing activities.
c. Net increase or decrease in cash for the year.
$$
\begin{array}{ll}
\text { Cash dmdend } & \$ 80.000 \\
\text { Purchase of bus } & \$ 33,000 \\
\text { Interest paid on debt } & \$ 25,000 \\
\text { Sales of old equipment } & \$ 72.000 \\
\text { Repurchase of stock } & \$ 55,000 \\
\text { Cash payments to suppiers } & \$ 95,000 \\
\text { Cash collections from customers } & \$ 300.000
\end{array}
$$

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Problem 16

Consider the following data for the firms Acme and Apex:
$$
\begin{array}{lcccc}
& \begin{array}{c}
\text { Equity } \\
\text { (\$ million) }
\end{array} & \begin{array}{c}
\text { Debt } \\
\text { (\$ million) }
\end{array} & \begin{array}{c}
\text { ROC } \\
\text { (\%) }
\end{array} & \begin{array}{c}
\text { Cost of Capital } \\
\text { (\%) }
\end{array} \\
\hline \text { Acme } & 100 & 50 & 17 & 9 \\
\text { Aper } & 450 & 150 & 15 & 10
\end{array}
$$
a. Which firm has the higher economic value added?
b. Which firm has the higher economic value added per dollar of invested capital?

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