a 42 43 45 a7 4.10 412 a3 DAYS SALES OUTSTANDING Baker Brothers has a DSO of 40 days, and its annual sales are $7,300,000, What is its accounts receivable balance? Assume that it uses a 365-day year. DEBT RATIO Bartley Barstools has an equity multiplier of 2.4, and its assets are financed ‘with some combination of long-term debt and common equity. What is its debt ratio? DUPONT ANALYSIS Doublewide Dealers has an ROA of 10%, a 2% profit margin, and an ROE of 15%. What is its total assets turnover? What is its equity multiplier? MARKET/BOOK RATIO. Jaster Jets has $10 billion in total assets. Is balance sheet shows $1 billion in current abilities, $3 billion in long-term debt, and $6 billion in common equity. It hhas 800 million shares of common stock outstanding, and its stock price is $32 per share. What is Jaster’s market/book ratio? PRICE/EARNINGS RATIO A company has an EPS of $2.00, a cash flow per share of $3.00, and a price/cash flow ratio of 8.0. What is its P/E ratio? DUPONT AND ROE A firm has a profit margin of 2% and an equity multiplier of 20. Is sales are $100 million, and it has total assets of $50 million. What is its ROE? DUPONT AND NET INCOME _Ebersoll Mining has $6 million in sales, its ROE is 12%, and its total assets tumover is 3.2«. The company is 50% equity financed. What is its net income? BASIC EARNING POWER Duval Manufacturing recently reported the following information: Net income 600,000 ROA 8% Interest expense $225,000 ‘Duval’ tax rate is 35%, What is its basic eaming power (BEP)? MIB AND SHARE PRICE You ate given the following information: Stockholders’ equity = $3.75 billion, price /earnings ratio = 35, common shares outstanding = 50 million, and ‘market/book ratio = 1.9. Calculate the price of a share of the company’s common stock, RATIO CALCULATIONS Assume the following relationships for the Brauer Corp. Sales total assets 15x Return on assets (ROA) 3% Return on equity (ROE) 5% Calculate Braver’s profit margin and debt ratio, RATIO CALCULATIONS. Graser Trucking has $12 billion in assets, and its tax rate is 40%. Its basic earning power (BED) rato is 15%, and its return on assets (ROA) is 5%. What is its times-interesteeared (TIE) ratio? TIERATIO. The H.R. Pickett Corp. has $500,000 of debt outstanding, and it pays an annwal interest rate of 10%. Its annual sales are $2 million, its average tax rate is 30%, and its net ‘profit margin is 5%, What is ite TIE ratio? RETURN ON EQUITY Midwest Packaging’s ROE last year was only 3%; but its manage- ‘ment has developed a new operating pian that cals for a total debt ratio of 6%, which will, ‘result in annual interest charges of $300,000. 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%. If the changes are made, what will be the company’s return on equity?415 416 RETURN ON EQUITY AND QUICK RATIO. Lloyd Inc. has sales of $200,000, a net income of '$15,000, and the following balance sheet: cash $ 10,000 ‘Accounts payable $ 30,000 Receivables, 50,000 Other current liabilities 20.000 Inventories 150,000 Longrterm debt 50,000 Net fed assets 90,000 Common equity 200,000 Total assets $300,000 ‘otal liabilities and equity $300,000 The new owner thinks that inventories are excessive and can be lowered to the point where the current ratio is equal tothe industry average, 2.5x, without affecting sales or net income, If inventories are sold off and not replaced (thus reducing the current ratio to 2.5», if the funds generated are used to reduce common equity (stock can be repurchased at book value), and if no other changes occur, by how much will the ROE change? What will be the firm’s new quick ratio? RETURN ON EQUITY Central City Construction (CCC) needs $1 million of assets to get started, and it expects to have a basic earning power ratio of 20%. CCC will own no securities, so all o its income will be operating income-If it so chooses, CCC can finance up to 50% of its assets with debt, which will have an 8% interest rate. Assuming, a 40% tax rate ‘onal taxable income, what isthe difference between CCC's expected ROE ifit finances with, 50% debt versus its expected ROE if it finances entirely with common stock? ‘CONCEPTUAL: RETURN ON EQUITY Which of the following statements is most correct? (Hint: Work Problem 4-15 before answering 4-16 ancl consider the solution setup for 4-15 as yyou think about 4-16.) ‘a. Ifa firm's expected basic earning power (BEP) is constant for al of its assets and texceeds the interest rate on its debt, adding assets and financing them with debt will raise the firm's expected return on common equity (ROE). b. The higher a firm's tax rate, the lower its BEP ratio other things held constant. The higher the interest rate on a firm’s debt, the lower its BEP ratio, other things held constant. dL The higher a firm’s debt ratio, the lower its BEP ratio, other things held constant. ‘e Statement a is false; but statements b, ¢, and dl are true. TIE RATIO. AEI Incorporated has $5 billion in assets, and its tax rate is 40%. Its basic ‘earning power (BEP) ratio is 10%, and its return on assets (ROA) is 5%, What is AET's times interestearned (TIE) ratio? ‘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 rotes payable and use them to increase inventory. How much can its short-term debt (notes payable) increase without pushing its current ratio below 2.0? DSO AND ACCOUNTS RECEIVABLE Harrelson Inc. currently has $750,000 in accounts receivable, and its days sales outstanding (DSO) is 55 days. It wants to reduce its DSO to 35, days by pressuring more ofits customers to pay ther bills on time. If this policy is adopted, the company’s average sales will fall by 15%. What will be the level of accounts receivable following the change? Assume a 365-day year. PIE AND STOCK PRICE Fontaine Inc. recently reported net income of $2 million. It has 500,000 shares of common stock, which currently trades at $40 a share. Fontaine continues to expand and anticipates that 1 year from now, its net income will be $3.25 million. Over ‘the next year, it also anticipates issuing an adeltional 150,000 shares of stock so that 1 year from now it will have 650,000 shares of common stock. Assuming Fontaine's price/earnings ratio remains a its current level, what will be its stock price 1 year from now?