FIN101/102/103/105 Exercises on Analysis of Financial Statements

1. You have collected the following information regarding Companies C and D:

The two companies have the same total assets.
The two companies have the same operating income (EBIT).
The two companies have the same tax rate.
Company C has a higher debt ratio and interest expense than Company D.
Company C has a lower profit margin than Company D.
On the basis of this information, which of the following statements is most correct?
a.
b.
c.
d.
e.

Company C must have a higher level of sales.

Company C must have a lower ROE.
Company C must have a higher times interest earned (TIE) ratio.
Company C must have a lower ROA.
Company C must have a higher basic earning power (BEP) ratio.

2. Taft Technologies has the following relationships:

Annual sales
Current liabilities
Days sales outstanding (DSO) (365-day year)
Inventory turnover ratio
Current ratio

$1,200,000.00
$ 375,000.00
40.00
4.80
1.20

The companys current assets consist of cash, inventories, and accounts receivable. How much cash
does Taft have on its balance sheet?
a. -$ 8,333
b. $ 68,493
c. $125,000
d. $200,000
e. $316,667
3. Aurillo Equipment Company (AEC) projected that its ROE for next year would be just 6 percent.
However, the financial staff has determined that the firm can increase its ROE by refinancing some
high interest bonds currently outstanding. The firms total debt will remain at $200,000 and the debt
ratio will hold constant at 80 percent, but the interest rate on the refinanced debt will be 10 percent.
The rate on the old debt is 14 percent. Refinancing will not affect sales, which are projected to be
$300,000. EBIT will be 11 percent of sales and the firms tax rate is 40 percent. If AEC refinances its
high interest bonds, what will be its projected new ROE?
a. 3.0%
b. 8.2%
c. 10.0%
d. 15.6%
e. 18.7%
4. Company A has sales of $1,000, assets of $500, a debt ratio of 30 percent, and an ROE of 15 percent.
Company B has the same sales, assets, and net income as Company A, but its ROE is 30 percent. What
is Bs debt ratio? (Hint: Begin by looking at the Du Pont equation.)
a.
b.
c.
d.
e.

25.0%
35.0%
50.0%
52.5%
65.0%