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Essentials of Corporate Finance

Stephen Ross, Randolph Westerfield, Bradford Jordan

Chapter 3

Working with Financial Statements - all with Video Answers

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Chapter Questions

05:28

Problem 1

SDJ, Inc., has net working capital of $$\$ 1,410$$, current liabilities of $$\$ 5,810$$, and inventory of $$\$ 1,315$$. What is the current ratio? What is the quick ratio?

Puneet Prajapati
Puneet Prajapati
Numerade Educator

Problem 2

Here and Gone, Inc., has sales of $$\$ 18$$ million, total assets of $$\$ 13$$ million, and total debt of $$\$ 3.8$$ million. If the profit margin is 8 percent, what is net income? What is ROA? What is ROE?

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Problem 3

Pujols Lumber Yard has a current accounts receivable balance of $$\$ 438,516$$. Credit sales for the year just ended were $\$ 6,257,380$. What is the receivables turnover? The days' sales in receivables? How long did it take on average for credit customers to pay off their accounts during the past year?

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Problem 4

Ermy Corporation has ending inventory of $$\$ 682,173$$ and cost of goods sold for the year just ended was $$\$ 6,487,318$$. What is the inventory turnover? The days' sales in inventory? How long on average did a unit of inventory sit on the shelf before it was sold?

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Problem 5

Boyd, Inc., has a total debt ratio of 0.45 . What is its debt-equity ratio? What is its equity multiplier?

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Problem 6

Crabtree, Inc., had additions to retained earnings for the year just ended of $$\$ 625,000$$. The firm paid out $$\$ 130,000$$ in cash dividends, and it has ending total equity of $$\$ 7.2$$ million. If the company currently has 570,000 shares of common stock outstanding, what are earnings per share? Dividends per share? What is book value per share? If the stock currently sells for $$\$ 29$$ per share, what is the market-to-book ratio? The price-earnings ratio? If total sales were $$\$ 10.5$$ million, what is the price-sales ratio?

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Problem 7

If jPhone, Inc., has an equity multiplier of 1.35 , total asset turnover of 1.64 , and a profit margin of 7 percent, what is its ROE?

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Problem 8

Jiminy Cricket Removal has a profit margin of 8 percent, total asset turnover of 1.16 , and ROE of 14.30 percent. What is this firm's debtequity ratio?

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Problem 9

For the past year, De Vries, Inc., had a cost of goods sold of $$\$ 59,382$$. At the end of the year, the accounts payable balance was $$\$ 13,689$$. How long on average did it take the company to pay off its suppliers during the year? What might a large value for this ratio imply?

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Problem 10

Rainbow Company has a debtequity ratio of 1.25 . Return on assets is 7.5 percent, and total equity is $$\$ 625,000$$. What is the equity multiplier? Return on equity? Net income?

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Problem 11

If Mudvayne, Inc., has a 9 percent ROA and a 15 percent payout ratio, what is its internal growth rate?

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Problem 12

If the Crash Davis Driving School has a 13.1 percent $\mathrm{ROE}$ and a 30 percent payout ratio, what is its sustainable growth rate?

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Problem 13

Based on the following information, calculate the sustainable growth rate for Southern Lights $\mathrm{Co}$.:
Profit margin $=8.4 \%$
Capital intensity ratio $=0.45$
Debt-equity ratio $=0.60$
Net income $$=\$ 95,000$$
Dividends $$=\$ 40,000$$

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Problem 14

Assuming the following ratios are constant, what is the sustainable growth rate?
Total asset turnover $=2.15$
Profit margin $=4.3 \%$
Equity multiplier $=1.62$
Payout ratio $=40 \%$
Bethesda Mining Company reports the following balance sheet information for 2009 and 2010 . Use this information to work Problems 15 through 17.
TABLE CANT COPY

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Problem 15

Prepare the 2009 and 2010 common-size balance sheets for Bethesda Mining.

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Problem 16

Based on the balance sheets given for Bethesda Mining, calculate the following financial ratios for each year:
a. Current ratio
b. Quick ratio
c. Cash ratio
d. Debt-equity ratio and equity multiplier
e. Total debt ratio

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Problem 17

Suppose that the Bethesda Mining Company had sales of $$\$ 2,156,873$$ and net income of $$\$ 109,381$$ for the year ending December 31, 2010. Calculate the Du Pont identity.

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Problem 18

The Delson Company has an ROA of 9 percent, an 8 percent profit margin, and an ROE of 14 percent. What is the company's total asset turnover? What is the equity multiplier?

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Problem 19

Hahn's Pianos has a profit margin of 6.35 percent on sales of $$\$ 22,000,000$$. If the firm has debt of $$\$ 8,400,000$$ and total assets of $$\$ 15,000,000$$, what is the firm's ROA?

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Problem 20

The most recent financial statements for Shinoda Manufacturing $\mathrm{Co}$. are shown below:
TABLE CANT COPY

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00:34

Problem 21

For Shinoda Manufacturing in Problem 20, what is the sustainable growth rate?

Amrita Bhasin
Amrita Bhasin
Numerade Educator

Problem 22

Kaleb's Karate Supply had a profit margin of 10 percent, sales of $$\$21$$ million, and total assets of $$\$9.5$$ million. What was total asset turnover? If management set a goal of increasing total asset turnover to 2.75 times, what would the new sales figure need to be, assuming no increase in total assets?

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Problem 23

Xero, Inc., has a total debt ratio of 0.55 , total debt of $$\$ 315,000$$, and net income of $$\$ 38,250$$. What is the company's return on equity?

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Problem 24

Young Trucking, Inc., has a current stock price of $$\$ 46$$. For the past year, the company had net income of $$\$ 6,250,000$$, total equity of $$\$ 21,580,000$$, sales of $$\$ 39,000,000$$, and 4.1 million shares of stock outstanding. What are earnings per share (EPS)? Price-earnings ratio? Price-sales ratio? Book value per share? Market-to-book ratio?

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Problem 25

Dimeback Co. has total assets of $$\$ 8,500,000$$ and a total asset turnover of 2.35 times. If the return on assets is 9 percent, what is its profit margin?

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Problem 26

Y $3 \mathrm{~K}$, Inc., has sales of $$\$ 7,385$$, total assets of $$\$ 3,480$$, and a debt-equity ratio of 0.25 . If its return on equity is 16 percent, what is its net income?

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Problem 27

The Hooya Company has a long-term debt ratio (i.e., the ratio of long-term debt to long-term debt plus equity) of 0.45 and a current ratio of 1.25 . Current liabilities are $$\$ 2,385$$, sales are $$\$ 10,435$$, profit margin is 9 percent, and ROE is 14 percent. What is the amount of the firm's net fixed assets?

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02:23

Problem 28

In response to complaints about high prices, a grocery chain runs the following advertising campaign: "If you pay your child $$\$1$$ to go buy $$\$ 33$$ worth of groceries, then your child makes twice as much on the trip as we do." You've collected the following information from the grocery chain's financial statements:
TABLE CANT COPY
Evaluate the grocery chain's claim. What is the basis for the statement? Is this claim misleading? Why or why not?

Prashant Bana
Prashant Bana
Numerade Educator

Problem 29

The Rose Company has net income of $$\$ 149,850$$. There are currently 25.45 days' sales in receivables. Total assets are $$\$ 838,000$$, total receivables are $$\$ 146,300$$, and the debt-equity ratio is 0.75 . What is the company's profit margin? Its total asset turnover? Its ROE?

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Problem 30

Delectable Radish, Inc.'s, net income for the most recent year was $$\$ 8,912$$. The tax rate was 34 percent. The firm paid $$\$ 3,987$$ in total interest expense and deducted $$\$ 4,873$$ in depreciation expense. What was the company's cash coverage ratio for the year?

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Problem 31

For the most recent year, Grohl, Inc., had sales of $$\$ 435,000$$, cost of goods sold of $$\$ 219,600$$, depreciation expense of $$\$ 59,300$$, and additions to retained earnings of $$\$ 51,500$$. The firm currently has 20,000 shares of common stock outstanding, and the previous year's dividends per share were $$\$ 1.25$$. Assuming a 34 percent income tax rate, what was the times interest earned ratio?

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Problem 32

A fire has destroyed a large percentage of the financial records of the Inferno Company. You have the task of piecing together information in order to release a financial report. You have found the return on equity to be 14.3 percent. Sales were $$\$ 1,735,000$$, the total debt ratio was 0.35 , and total debt was $$\$ 648,000$$. What is the return on assets (ROA)?

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01:00

Problem 33

Prince Albert Canning PLC had a 2010 net loss of $£ 24,382$ on sales of $£ 489,162$. What was the company's profit margin? Does the fact that these figures are quoted in a foreign currency make any difference? Why? In dollars, sales were $$\$ 695,266$$. What was the net loss in dollars?
Some recent financial statements for Smolira Golf, Inc., follow. Use this information to work Problems 34 through 37.
TABLE CANT COPY

Nick Johnson
Nick Johnson
Numerade Educator

Problem 34

Find the following financial ratios for Smolira Golf (use year-end figures rather than average values where appropriate):
Short-term solvency ratios
a. Current ratio
b. Quick ratio
c. Cash ratio
Asset utilization ratios
d. Total asset turnover
e. Inventory turnover
f. Receivables turnover
Long-term solvency ratios
g. Total debt ratio
h. Debt-equity ratio
i. Equity multiplier
j. Times interest earned ratio
k. Cash coverage ratio
Profitability ratios
l. Profit margin
m. Return on assets
n. Return on equity

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01:21

Problem 35

Construct the Du Pont identity for Smolira Golf.

Jeremy Low
Jeremy Low
Numerade Educator

Problem 36

Smolira Golf has 10,000 shares of common stock outstanding, and the market price for a share of stock at the end of 2010 was $$\$73$$. What is the price-earnings ratio? What is the price-sales ratio? What are the dividends per share? What is the market-to-book ratio at the end of 2010 ?

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02:31

Problem 37

After calculating the ratios for Smolira Golf, you have uncovered the following industry ratios for 2010:
$$
\begin{array}{lccc}
\hline & \text { Lower Quartile } & \text { Median } & \text { Upper Quartile } \\
\hline \text { Current ratio } & 1.3 & 2.6 & 5.3 \\
\text { Total asset turnover } & 2.1 & 2.7 & 4.1 \\
\text { Debt-equity ratio } & .25 & .40 & .60 \\
\text { Profit margin } & 8.4 \% & 11.9 \% & 16.3 \% \\
\hline
\end{array}
$$
How is Smolira Golf performing based on these ratios?

James Kiss
James Kiss
Numerade Educator

Problem 38

Fulkerson Manufacturing wishes to maintain a sustainable growth rate of 8 percent a year, a debt-equity ratio of 0.55 , and a dividend payout ratio of 25 percent. The ratio of total assets to sales is constant at 1.20. What profit margin must the firm achieve?

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Problem 39

Abercrombie & Fitch and Ann Taylor reported the following numbers (in millions) for fiscal year 2008. Calculate the earnings per share, market-to-book ratio, and price-earnings ratio for each company.
$$
\begin{array}{lrr}
\hline & \text { Abercrombie } & \text { Ann Taylor } \\
\hline \text { Net income } & \$ 475.70 & \$ 97.24 \\
\text { Shares outstanding } & 87.05 & 57.10 \\
\text { Stock price } & \$ 80.59 & \$ 25.26 \\
\text { Total equity } & \$ 1,618.31 & \$ 839.48 \\
\hline
\end{array}
$$

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Problem 40

A firm wishes to maintain an internal growth rate of 6.5 percent and a dividend payout ratio of 30 percent. The current profit margin is 5.2 percent and the firm uses no external financing sources. What must total asset turnover be?

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Problem 41

Based on the following information, calculate the sustainable growth rate for Perks, Inc.:
Profit margin $=4.3 \%$
Total asset turnover $=2.10$
Total debt ratio $=0.30$
Payout ratio $=15 \%$
What is the ROA here?

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Problem 42

You've collected the following information about Fox, Inc.:
$$
\begin{aligned}
\text { Sales } & =\$ 245,000 \\
\text { Net income } & =\$ 17,000 \\
\text { Dividends } & =\$ 5,800 \\
\text { Total debt } & =\$ 53,000 \\
\text { Total equity } & =\$ 84,000
\end{aligned}
$$
What is the sustainable growth rate for the company? If it does grow at this rate, how much new borrowing will take place in the coming year, assuming a constant debt-equity ratio? What growth rate could be supported with no outside financing at all?

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Problem 43

High Flyer, Inc., wishes to maintain a growth rate of 13 percent per year and a debt-equity ratio of 0.30 . The profit margin is 5 percent, and total asset turnover is constant at 1.20 . Is this growth rate possible? To answer, determine what the dividend payout ratio must be. How do you interpret the result?

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Problem 44

Best Buy reported the following numbers (in millions) for the years ending February 2007 and 2008. What are the internal and sustainable growth rates? What are the internal and sustainable growth rates using $\mathrm{ROE} \times b$ (and ROA $\times b$ ) and the end of period equity (assets)? What are the growth rates if you use the beginning of period equity in this equation? Why aren't the growth rates the same? What is your best estimate of the internal and sustainable growth rates?
$$
\begin{array}{lrr}
\hline & \mathbf{2 0 0 7} & \mathbf{2 0 0 8} \\
\hline \text { Net income } & & \$ 1,407 \\
\text { Dividends } & & 204 \\
\text { Total assets } & \$ 13,570 & 12,758 \\
\text { Total equity } & 6,201 & 4,484 \\
\end{array}
$$

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Problem 45

Hershey Co. reported the following income statement and balance sheet (in millions) for 2008. Construct the expanded Du Pont identity similar to Figure 3.1 . What is the company's return on equity?
TABLE CANT COPY

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