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Exercise 5.1

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94 views5 pages

Exercise 5.1

Uploaded by

aquarius21012003
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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1. Oliver Incorporated has a current ratio = 1.6, and a quick ratio equal to 1.2.

The company has $2


million in sales and its current liabilities are $1 million. What is the company’s inventory turnover
ratio?

a. 5.0

b. 5.2

c. 5.5

d. 6.0

e. 6.3

2. Last year, Quayle Energy had sales of $200 million, and its inventory turnover ratio was 5.0. The
company’s current assets totaled $100 million, and its current ratio was 1.2. What was the
company’s quick ratio?

a. 1.20

b. 1.39

c. 0.72

d. 0.55

e. 2.49

3. Thomas Corp. has the following simplified balance sheet:

Cash $ 50,000 Current liabilities $125,000

Inventory 150,000

Accounts receivable 100,000 Long-term debt 175,000

Net fixed assets 200,000 Common equity 200,000

Total $500,000 Total $500,000

Sales for the year totaled $600,000. The company president believes the company carries excess
inventory. She would like the inventory turnover ratio to be 8 and would use the freed up cash to
reduce current liabilities. If the company follows the president's recommendation and sales
remain the same, the new quick ratio would be:

a. 2.4

b. 4.0

c. 4.5

d. 1.2

e. 3.0
4. Stallworth Industries recently reported the following balance sheet:

Assets:

Cash $ 300,000

Accounts receivable 700,000

Inventories 500,000

Current assets $1,500,000

Net fixed assets 3,500,000

Total assets $5,000,000

Liabilities and Equity:

Current liabilities $1,000,000

Long-term debt 2,000,000

Common equity 2,000,000

Total liabilities and equity $5,000,000

The company’s current inventory turnover ratio is 4. The company wishes to maintain its current
level of sales, but lower its inventory so that its inventory turnover ratio equals the industry average,
which is 6. Half of the cash freed up by the inventory decrease would be used to purchase
additional fixed assets, while the remainder would be used to reduce current liabilities. What
would be the company’s quick ratio, if it were able to reduce inventory as planned?

a. 1.091

b. 1.273

c. 1.342

d. 1.454

e. 1.761

5. Mondale Motors has forecasted the following year-end balance sheet:

Assets:

Cash and marketable securities $ 300


Inventories 500

Accounts receivable 700

Total current assets $1,500

Net fixed assets 5,000

Total assets $6,500

Liabilities and Equity:

Notes payable $ 800

Accounts payable 400

Total current liabilities $1,200

Long-term debt 3,000

Stockholders’ equity 2,300

Total liabilities and equity $6,500

The company also forecasts that its days sales outstanding (DSO) on a 365-day basis will be
35.486 days.

Now, assume instead that Mondale is able to reduce its DSO to the industry average of 30.417 days
without reducing its sales. Under this scenario, the reduction in accounts receivable would
generate additional cash. This additional cash would be used to reduce its notes payable. If this
scenario were to occur, what would be the company’s current ratio?

a. 1.35

b. 1.27

c. 1.00

d. 1.17

e. 2.45
6. Perry Technologies Inc. had the following financial information for the past year:

Inventory turnover = 8

Quick ratio = 1.5

Sales = $860,000
Current ratio = 1.75

What were Perry’s current liabilities?

a. $430,000

b. $500,000

c. $107,500

d. $ 61,429

e. $573,333

7. Kansas Office Supply had $24,000,000 in sales last year. The company’s net income was $400,000. Its total
assets turnover was 6.0. The company’s ROE was 15 percent. The company is financed entirely with debt and
common equity. What is the company’s debt ratio?

a. 0.20

b. 0.30

c. 0.33

d. 0.60

e. 0.66

8. (Tough)Vance Motors has current assets of $1.2 million. The company’s current ratio is 1.2, its quick ratio
is 0.7, and its inventory turnover ratio is 4. The company would like to increase its inventory turnover ratio to
the industry average, which is 5, without reducing its sales. Any reductions in inventory will be used to reduce
the company’s current liabilities. What will be the company’s current ratio, assuming that it is successful in
improving its inventory turnover ratio to 5?

a. 1.33

b. 1.67

c. 1.22

d. 0.75

e. 2.26

9. (Tough) 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%; and 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

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