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Financial Management Exercises

This document contains sample financial statement analysis exercises and questions. Exercise 1 calculates a company's debt-to-asset ratio given information about retained earnings, book value per share, total debt, and common stock. Exercise 2 calculates accounts receivable balance given days sales outstanding, annual sales, and the number of days in a year. Exercise 3 calculates a company's debt ratio given its equity multiplier and total assets.

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Leanne Quinto
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3K views

Financial Management Exercises

This document contains sample financial statement analysis exercises and questions. Exercise 1 calculates a company's debt-to-asset ratio given information about retained earnings, book value per share, total debt, and common stock. Exercise 2 calculates accounts receivable balance given days sales outstanding, annual sales, and the number of days in a year. Exercise 3 calculates a company's debt ratio given its equity multiplier and total assets.

Uploaded by

Leanne Quinto
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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MAS311 Financial Management

Exercises
Financial Statement Analysis
2/26

1. Debt ratio. Last year, Apex-Pal International Ltd. had earnings per share of $3.60 and dividends
per share of $2.20. Total retained earnings increased by $14M during the year, while book value
per share at year-end was $36. Apex-Pal has no preferred stock, and no new common stock was
issued during the year. If its year-end total debt was $126M, what was the company’s year-end
debt/asset ratio?

Retained Earnings increase 14,000,000


Divide Difference of earnings and dividend
(3.60 – 2.20 = 1.40) 1.40

# of shares in common stock 10,000,000


Multiply by the book value per share 36

Total equity 360,000,000


Add Total year-end debt 126,000,000
Total Assets 486,000,000

Debt-asset ratio = Total liabilities/Total Assets = 126M/486M


= 0.26

2. Days sales outstanding. Maruwa Co. has a DSO of 35 days, and its annual sales are $6,800,000.
What is its accounts receivable balance? Assume it uses a 365-day year.

DSO = Accounts Receivable/ Sales÷365


35 = Accounts Receivable/6,800,000 ÷365
35 = Accounts Receivable /18,630.14

Accounts Receivable = 18,630.14 x 35


Accounts Receivable = 652,054.79

3. Debt ratio. RMIH has an equity multiplier of 2.2, and its assets are financed with some
combination of long-term debt and common equity. What is its debt ratio?

Equity multiplier = Total Assets/Total Equity


2.2 = 2.2 / 1

Debt ratio = Total Liabilities/Total Assets


= (2.2 – 1 ) / 2.2
= 1.2/2.2
= .55
4. Relationships. The current ratio is 2.5:1; the acid test ratio (quick ratio) is 0.9:1; Cash and
Receivables are P270,000. The current assets are composed of Cash, Receivables, and
Inventory. Compute for:
a. Current liabilities
b. Inventory

Quick ratio = Current assets – inventory/ Current liabilities

0.9 = 270,000/ CL

Current Liabilities = 270,000 / 0.9

= 300,000

Current ratio = current assets/current liabilities

2.5 = CA / 300,000

CA = 300,000 x 2.5

= 750,000

Inventory = CA – (Cash + Receivables)

= 750,000 – 270,000

Inventory = 480,000

5. Relationships. The age of receivables is 45 days. Annual Sales of P900,000 is spread evenly
throughout the year. Compute for average Accounts Receivable. Assume a 360-day year.

DSO = Accounts receivable/ Ave. Sales ÷ 360


45 days = Accounts Receivable/ (900,000 ÷ 360)
45 days = Accounts Receivable/2,500

Accounts Receivable = 2,500 x 45


= 112,500
6. Relationships. a) Net sales total P100,000. Net profit margin is 12%. Times interest earned is 6
times. How much is the earnings before interest and taxes. Tax rate is 40%.

b) Assuming that inventory age (days inventory outstanding) is 30 days; and


average annual amount of inventory is P5,000, how much is the company’s
operating expenses? Assume 360-day year.

a. Earnings before interest and taxes (EBIT) 24,000 6


Less Interest expense 4,000 - 1
Earnings before taxes (EBT)(100%) 20,000 (20,000x 6/5) 5
Less Tax (40%) 8,000
Net profit (60%) 12,000 (12,000/60%)

Net profit margin = Net profit/ Sales


12% = Net profit/100,000

Net profit = 100,000 x 12%


= 12,000

Times interest earned = EBIT/interest expense


6 = 6/ 1

b. Sales 100,000
Less COGS 60,000
Gross profit 40,000
Less operating expenses 16,000
Earnings before interest and taxes (EBIT) 24,000

Days inventory outstanding = 360/Inventory turnover

30 days = 360/ ITO

ITO = 360/30

=12

Inventory turnover = COGS/ Ave. Inventory


12 = COGS/ 5,000

COGS = 5,000 X 12
= 60,000
7. Financial ratios. (Take home)

Lyn Merchandising has 1,000,000 common shares outstanding, with each share priced at P8.00.
In 2017, the company declared dividends of P0.10 per share. The balance sheet at the end of
2017 showed approximately the same amounts as that at the end of 2016. The financial
statements for Lyn Merchandising are as follows:

Income statement for 2017 (in thousand pesos)


Sales 4,700
Less Cost of Goods sold 2,300
Gross profit 2,400
Less Operating expenses:
Depreciation 320
Other 1,230 1,550
Income before interest and taxes 850
Less Interest expense 150
Income before taxes 700
Less Income taxes 280
Net Income 420

Balance Sheet at December 31, 2017 (in thousand pesos)


Assets Liabilities and Equity
Cash 220 Accounts Payable 190
Accounts Receivable 440 Accrued Expenses 180
Inventory 410 Total current liabilities 370
Total Current Assets 1,070 Long-term debt 1,960
Plant and Equipment 5,600 Common stock 1,810
Accumulated Depreciation (2,100) Retained earnings 430
Total Assets 4,570 Total liabilities and SHE 4,570

Required: Compute for the following: (round-off answers to two decimal places)

1. Current ratio
2. Acid-test ratio
3. Accounts receivable turnover
4. Inventory turnover
5. Gross profit margin
6. Operating profit margin
7. Return on Sales
8. Return on Equity
9. Earnings per share
10. P/E ratio
11. Debt ratio
12. Debt-equity ratio
13. Times interest earned
Current Ratio = Current Assets/Current Liabilities
= 1,070/370
= 2.89 times

Acid-test Ratio = Cash + Receivables/Current Liabilities


= 220 + 440 / 370
= 660/370
= 1.78

Accounts Receivable Turnover = Sales/Receivables


= 4,700/440
= 10.68 times

Inventory Turnover = Cost of Sales/Inventory


= 2,300/410
= 5.61 times

Gross Profit Margin = Gross Profit/Net Sales


= 2,400/4,700
= 51.06%

Operating Profit Margin = EBIT/Net Sales


= 850/4,700
= 18.09%

Return on Sales = Net Income/Net Sales


= 420/4,700
= 8.94%

Return on Equity = Net Income/Total Equity


= 420/2,240
= 18.75%

Earnings per Share = Net Income/Outstanding Shares


= 420/1,000,000
= 0.04

P/E Ratio = Price per share/Earnings per share


= 8/0.04
= 200

Debt Ratio = Total Liabilities/Total Assets


= 2,330/4,570
= 50.98%

Debt-to-Equity Ratio = Total Liablities/Total Equity Ratio


= 2,330/2,240
= 104.02%
Times Interest Earned = EBIT/Interest Expense
= 850/150
= 5.67 times

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