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fin 335 problems




Question;[i]. Jefferson;Co. has $2 million in total assets and $3 million in sales. The company has the;following balance sheet;Cash $ 100,000 Accounts;payable $ 200,000;Accounts receivable 200,000 Accruals 100,000;Inventories 500,000 Notes;payable 200,000;Net fixed assets;1,200,000 Long-term debt;700,000;Common;equity 800,000;Total liabilities;Total assets $2,000,000 and equity $2,000,000;Jefferson wants to improve its inventory turnover to the;industry average of 10.0?. The change is not expected to;have an effect on sales. If successful;the company would use the freed-up cash from the reduction in inventories and;use half of it to reduce notes payable and the other half to reduce common;equity. If successful, what will be Jefferson?s current ratio?;a.1.43;b.1.50;c.2.50;d.2.00;e.1.20;[ii]. Daggy;Corporation has the following simplified balance sheet;Cash $ 25,000 Current liabilities $200,000;Inventories 190,000;Accounts receivable 125,000 Long-term debt 300,000;Net fixed assets;360,000 Common equity 200,000;Total assets $700,000 Total;claims $700,000;The company has been advised to tighten their;credit policy and reduce their days sales outstanding to 36 days. The increase in cash resulting from the decrease;in accounts receivable will be used to reduce the company?s long-term;debt. The interest rate on long-term;debt is 10% and the company?s tax rate is 30%.;The new credit policy is expected to reduce the company?s sales to;$730,000 and EBIT to $70,000. What is;the company?s expected ROE after the change in credit policy?;a.14.88%;b.16.63%;c.15.86%;d.18.38%;e.16.25%;[iii]. Austin;Company has a debt ratio of 0.5, a total assets turnover ratio of 0.25;and a profit margin of 10%. The Board of;Directors is unhappy with the current return on equity (ROE), and they think it;could be doubled. This could be;accomplished (1) by increasing the profit margin to 12% and (2) by increasing;debt utilization. Total assets turnover;will not change. What new debt ratio;along with the new 12% profit margin, would be required to double the ROE?;a.55%;b.60%;c.65%;d.70%;e.75%;[iv]. Shepherd;Enterprises has an ROE of 15%, a debt ratio of 40%, and a profit margin of;5%. The company?s total assets equal;$800 million. What are the company?s;sales? (Assume that the company has no;preferred stock.);a.$1,440,000,000;b.$2,400,000,000;c.$;120,000,000;d.$;360,000,000;e.$;960,000,000;[v]. Samuels;Equipment has $10 million in sales. Its;ROE is 15% and its total assets turnover is 3.5?. The;company is 100% equity financed. What is;the company?s net income?;a.$1,500,000;b.$2,857,143;c.$ 428,571;d.$2,333,333;e.$ 52,500;[vi]. Georgia;Electric reported the following income statement and balance sheet for the;previous year;Balance Sheet;Cash $ 100,000;Inventories;1,000,000;Accounts receivable 500,000;Current assets $1,600,000;Total;debt $4,000,000;Net fixed assets;4,400,000 Total equity 2,000,000;Total assets $6,000,000 Total;claims $6,000,000;Income;Statement;Sales $3,000,000;Operating;costs 1,600,000;Operating;income (EBIT) $1,400,000;Interest 400,000;Taxable income;(EBT) $1,000,000;Taxes (40%) 400,000;Net income $ 600,000;The company?s interest cost is 10%, so the;company?s interest expense each year is 10% of its total debt.;While;the company?s financial performance is quite strong, its CFO is always looking;for ways to improve. The CFO has noticed;that the company?s inventory turnover ratio is considerably weaker than the industry;average, which is 6.0. As an exercise;the CFO asks what the company?s ROE would have been last year if the following;had occurred;?;The company maintained the same sales, but;reduced inventories enough to achieve the industry average inventory turnover;ratio.;?;Cash generated from the inventory reduction was;used to reduce the company?s outstanding debt.;So, the company?s total debt would have been $4 million less the;freed-up cash from the improvement in inventory policy.;?;Assume equity does not change and all earnings;are paid out as dividends.;Under this;scenario, what would have been the company?s ROE last year?;a.27.0%;b.29.5%;c.30.3%;d.31.5%;e.33.0%;[vii]. Roland;Company has a new management team that has developed an operating plan to;improve upon last year?s ROE. The new;plan would make the debt ratio 55%, which will result in interest charges of;$7,000 per year. EBIT is projected to be;$25,000 on sales of $270,000, it expects to have a total assets turnover ratio;of 3.0, and the average tax rate will be 40%.;What does Roland & Company expect its ROE to be?;a.17.65%;b.21.82%;c.26.67%;d.44.44%;e.51.25%;[viii].Savelots;Stores? current financial statements are shown below;Balance Sheet;Inventories $ 500 Accounts;payable $ 100;Other current assets 400 Short-term;notes payable 370;Fixed assets 370 Common;equity 800;Total assets $1,270 Total;liab. and equity $1,270;Income;Statement;Sales $2,000;Operating;costs 1,843;EBIT $;157;Interest 37;EBT $ 120;Taxes;(40%) 48;Net income $ 72;Savelots? current ratio of 1.9 is in line with the;industry average. However, its accounts payable;which have no interest cost and are due entirely to purchases of inventories;amount to only 20% of inventories versus an industry average of 60%. Suppose Savelots increased its accounts;payable-to-inventories ratio to the 60% industry average, but it (1) kept all;of its assets at their present levels and (2) held its current ratio at;1.9. Assume that Savelots? tax rate is;40%, that its cost of short-term debt is 10%, and that the change in payments;does not affect operations. In addition;common equity will not change. What will;be Savelots? new ROE?;a.10.5%;b. 7.8%;c. 9.0%;d.13.2%;e.12.0%;[ix]. Aurillo;Equipment Company (AEC) projected next year?s ROE to be 6%. However, the firm can increase its ROE by;refinancing some high interest bonds currently outstanding. The firm?s total debt will remain at $200,000;and the debt ratio will hold constant at 80%, but the interest rate on the;refinanced debt will be 10%. The rate on;the old debt is 14%. Refinancing will;not affect sales, which are projected to be $300,000. The basic earning power will be 11% and the;firm?s tax rate is 40%. If AEC;refinances, what will be its projected new ROE?;a. 3.0%;b. 8.2%;c.10.0%;d. 9.0%;e.18.7%;[x]. Lombardi;Trucking Company has the following data;Assets $10,000;Profit margin 3.0%;Tax rate 40%;Debt ratio 60.0%;Interest rate 10.0%;Total assets turnover 2.0;What is Lombardi?s TIE ratio?;a.0.95;b.1.75;c.2.10;d.2.67;e.3.45;[xi]. Victoria;Enterprises has $1.6 million of accounts receivable.The company?s DSO is 40, its;current assets are $2.5 million, and its current ratio is 1.5. The company plans to reduce its DSO to the;industry average of 30 without causing a decline in sales. The freed-up;cash will be used to reduce current liabilities.If the company succeeds, what;will Victoria?s new current ratio be?;a.1.50;b.1.97;c.1.26;d.0.72;e.1.66;[xii]. XYZ?s;balance sheet and income statement are given below;Balance Sheet;Cash $ 50 Accounts;payable $ 100;A/R 150 Notes payable 0;Inventories 300 Long-term debt (10%);700;Fixed assets 500 Common;equity (20 shares) 200;Total assets $1,000 Total liabilities and equity$1,000;Income Statement;Sales $1,000;Cost of goods sold 855;EBIT $ 145;Interest 70;EBT $ 75;Taxes (33.333%) 25;Net income $ 50;The industry average inventory turnover is 5, the;interest rate on the firm?s long-term debt is 10%, 20 shares are outstanding;and the stock?s P/E is 8.0. If XYZ;increased its inventory turnover to the industry average, if it used freed up;funds to buy back common stock at the current market price and thus to reduce;common equity, and if sales, the cost of goods sold, and the P/E ratio remained;constant, by what dollar amount would its stock price increase?;a.$ 3.33;b.$ 6.67;c.$ 8.75;d.$10.00;e.$12.50;Du Pont equation and debt ratio Answer: e;[xiii].Company A;has sales of $1,000, assets of $500, a debt ratio of 30%, and an ROE of;15%. Company B has the same sales;assets, and net income as Company A, but its ROE is 30%. What is B?s debt ratio? (Hint: Begin by looking at the Du Pont;equation.);a.25.0%;b.35.0%;c.50.0%;d.52.5%;e.65.0%;[xiv]. A company;has just been taken over by new management that believes it can raise earnings;before taxes (EBT) from $600 to $1,000, merely by cutting overtime pay and;reducing cost of goods sold. Prior to;the change, the following data applied;Total assets $8,000;Debt ratio 45%;Tax rate 35%;BEP ratio 13.3125%;EBT $600;Sales $15,000;These data have been constant for several years;and all income is paid out as dividends.;Sales, the tax rate, and the balance sheet will remain constant. What is the company?s cost of debt?;a.12.92%;b.13.23%;c.13.51%;d.13.75%;e.14.00%;[xv]. Lone Star;Plastics has the following data;Assets $100,000;Profit margin 6.0%;Tax rate 40%;Debt ratio 40.0%;Interest rate 8.0%;Total assets turnover 3.0;What is Lone Star?s EBIT?;a.$ 3,200;b.$12,000;c.$18,000;d.$30,000;e.$33,200;[xvi]. Ricardo;Entertainment recently reported the following income statement;Sales $12,000,000;Cost of goods sold 7,500,000;EBIT $;4,500,000;Interest 1,500,000;EBT $;3,000,000;Taxes (40%) 1,200,000;Net income $ 1,800,000;The;company?s CFO, Fred Mertz, wants to see a 25% increase in net income over the;next year. In other words, his target;for next year?s net income is $2,250,000.;Mertz has made the following observations;?;Ricardo?s;operating margin (EBIT/Sales) was 37.5% this past year. Mertz expects that next year this margin will;increase to;40%.;?;Ricardo?s;interest expense is expected to remain constant.;?;Ricardo?s tax;rate is expected to remain at 40%.;On;the basis of these numbers, what is the percentage increase in sales that;Ricardo needs in order to meet Mertz?s target for net income?;a.72.92%;b. 9.38%;c. 2.50%;d.48.44%;e.25.00%;Multiple Part;(The;following information applies to the next two problems.);Fama?s French Bakery has a return on assets (ROA) of 10%;and a return on equity (ROE) of 14%.;Fama?s total assets equal total debt plus common equity (that is, there;is no preferred stock). Furthermore, we;know that the firm?s total assets turnover is 5.;[xvii].What is Fama?s debt ratio?;a.14.29%;b.28.00%;c.28.57%;d.55.56%;e.71.43%;[xviii]. What is Fama?s profit margin?;a.2.00%;b.4.00%;c.4.33%;d.5.33%;e.6.00%;(The following information applies to the;next two problems.);Miller Technologies recently reported the following;balance sheet in its annual report (all numbers are in millions of dollars);Cash $;100 Accounts payable $;300;Accounts receivable;300 Notes payable 500;Inventory 500 Total current liabilities $;800;Total current assets $;900 Long-term debt 1,500;Total;debt $2,300;Common;stock 500;Retained;earnings 400;Net fixed assets 2,300 Total common equity $ 900;Total assets $3,200 Total liabilities and equity $3,200;Miller also reported sales revenues of $4.5 billion and a;20% ROE for this same year.;[xix]. What is Miller?s ROA?;a.2.500%;b.3.125%;c.4.625%;d.5.625%;e.7.826%;[xx]. Miller Technologies is considering issuing;$300 million in notes payable to purchase new fixed assets (for this problem;ignore depreciation). If this plan were;carried out, what would Miller?s current ratio be immediately following the;transaction?;a.0.455;b.0.818;c.1.091;d.1.125;e.1.800;(The following information;applies to the next three problems.);Dokic, Inc. reported the;following balance sheets for year-end 2004 and 2005 (dollars in millions);2005 2004;Cash $ 650 $ 500;Accounts receivable 450 700;Inventories;850 600;Total current assets $1,950 $1,800;Net fixed assets 2,450 2,200;Total assets $4,400 $4,000;Accounts payable $;680 $ 300;Notes payable 200 600;Wages payable;220 200;Total current liabilities $1,100 $1,100;Long-term bonds 1,000 1,000;Common stock 1,500 1,200;Retained earnings;800 700;Total common equity $2,300 $1,900;Total liabilities and equity $4,400 $4,000;[xxi]. Which of the following statements is NOT;correct?;a.The;company?s current ratio was higher in 2005 than it was in 2004.;b.The company?s debt ratio was;higher in 2005 than it was in 2004.;c.The company;issued new common stock during 2005.;d.If the company;paid no dividends, it must have had a positive net income.;e.The company?s;net working capital declined between 2004 and 2005.;[xxii].The total;dividends paid to the company?s common stockholders during 2005 was $50;million. What was the company?s net;income during the year 2005?;a.$;50 million;b.$150 million;c.$250 million;d.$350 million;e.$450 million;[xxiii]. When;reviewing the company?s performance for 2005, its CFO observed that the;company?s inventory turnover ratio was below the industry average inventory;turnover ratio of 6.0. In addition, the;company?s DSO was less than the industry average of 50. What is the most likely estimate of the company?s;sales (in millions of dollars) for 2005?;a.$;2,940;b.$ 5,038;c.$ 7,250;d.$10,863;e.$30,765;(The following information;applies to the next two problems.);Below are the 2004 and 2005;year-end balance sheets for Kewell Boomerangs;2005 2004;Cash $ 100,000 $ 85,000;Accounts receivable 432,000 350,000;Inventories;1,000,000 700,000;Total current assets $1,532,000 $1,135,000;Net fixed assets;3,000,000 2,800,000;Total assets $4,532,000 $3,935,000;Accounts payable $ 700,000 $ 545,000;Notes payable 800,000 900,000;Total current liabilities $1,500,000 $1,445,000;Long-term debt 1,200,000 1,200,000;Common stock 1,500,000 1,000,000;Retained earnings 332,000 290,000;Total common equity $1,832,000 $1,290,000;Total liabilities and equity $4,532,000 $3,935,000;Kewell Boomerangs has never paid a dividend on its common;stock. Kewell issued $1,200,000 of;long-term debt in 1997. This debt was;non-callable and is scheduled to mature in 2027. As of the end of 2005, none of the principal;on this debt has been repaid. Assume;that 2004 and 2005 sales were the same in both years.;[xxiv].Which of the following statements is most;correct?;a.Kewell?s;current ratio in 2005 was higher than it was in 2004.;b.Kewell?s inventory turnover ratio in 2005 was;higher than it was in 2004.;c.Kewell?s debt;ratio in 2005 was higher than it was in 2004.;d.Since retained;earnings increased, the company must have paid no dividends.;e.Because fixed;assets turnover increased slower than total assets, the total assets turnover;is greater than the fixed assets turnover.;[xxv]. During;2005, Kewell?s days sales outstanding was 40 days. The industry average DSO was 30 days. Assume instead that in 2005, Kewell had been;able to achieve the industry-average DSO without reducing its sales, and that;the freed-up cash would have been used to reduce accounts payable. If DSO were reduced, what would have been;Kewell?s current ratio in 2005?;a.1.018;b.1.021;c.1.023;d.1.027;e.1.033


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