LECTURE 3 ANALYSIS OF FINANCIAL STATEMENTS

(Difficulty: E = Easy, M = Me iu!, a" T = T#u$%&

T'ue(False Easy:
Ratio analysis
1

Answer: a

Diff: E

Ratio analysis involves a comparison of the relationships between financial statement accounts so as to analyze the financial position and strength of a firm. a. True b. False

Liquidity ratios
2

Answer: b

Diff: E

The current ratio and inventory turnover ratio measure the liquidity of a firm. The current ratio measures the relationship of a firm's current assets to its current liabilities and the inventory turnover ratio measures how rapidly a firm turns its inventory bac into a !quic ! asset or cash. a. True b. False

Current ratio
"

Answer: b

Diff: E

#f a firm has high current and quic ratios$ this is always a good indication that a firm is managing its liquidity position well. a. True b. False

Asset management ratios

%

Answer: a

Diff: E

The inventory turnover ratio and days sales outstanding &'()* are two ratios that can be used to assess how effectively the firm is managing its assets in consideration of current and pro+ected operating levels. a. True b. False

Inventory turnover ratio

,

Answer: b

Diff: E

- decline in the inventory turnover ratio suggests that the firm's liquidity position is improving. a. True

b. False Debt management ratios

.

Answer: a

Diff: E

The degree to which the managers of a firm attempt to magnify the returns to owners' capital through the use of financial leverage is captured in debt management ratios. a. True b. False

TIE ratio
/

Answer: a

Diff: E

The times0interest0earned ratio is one indication of a firm's ability to meet both long0term and short0term obligations. a. True b. False

Profitability ratios
1

Answer: a of

Diff: E asset

2rofitability ratios show the combined effects management$ and debt management on operations. a. True b. False

liquidity$

ROA
3

Answer: b

Diff: E

(ince R)- measures the firm's effective utilization of assets &without considering how these assets are financed*$ two firms with the same 45#T must have the same R)-. a. True b. False

ar!et value ratios

16

Answer: a

Diff: E

7ar et value ratios provide management with a current assessment of how investors in the mar et view the firm's past performance and future prospects. a. True b. False

Trend analysis
11

Answer: a

Diff: E

'etermining whether a firm's financial position is improving or deteriorating requires analysis of more than one set of financial statements. Trend analysis is one method of measuring a firm's performance over time. a. True b. False

Medium:
Liquidity ratios
12

Answer: b

Diff:

#f the current ratio of Firm - is greater than the current ratio of Firm 5$ we cannot be sure that the quic ratio of Firm - is greater than that of Firm 5. 8owever$ if the quic ratio of Firm - e9ceeds that of Firm 5$ we can be assured that Firm -'s current ratio also e9ceeds 5's current ratio. a. True b. False

Inventory turnover ratio

1"

Answer: a

Diff:

The inventory turnover and current ratios are related. The combination of a high current ratio and a low inventory turnover ratio relative to the industry norm might indicate that the firm is maintaining too high an inventory level or that part of the inventory is obsolete or damaged. a. True b. False

"i#ed assets turnover

1%

Answer: b

Diff:

:e can use the fi9ed assets turnover ratio to legitimately compare firms in different industries as long as all the firms being compared are using the same proportion of fi9ed assets to total assets. a. True b. False

$EP and ROE

1,

Answer: a

Diff:

(uppose two firms have the same amount of assets$ pay the same interest rate on their debt$ have the same basic earning power &542*$ and have the same ta9 rate. 8owever$ one firm has a higher debt ratio. #f 542 is greater than the interest rate on debt$ the firm with the higher debt ratio will also have a higher rate of return on common equity. a. True b. False

Equity multi%lier
1.

Answer: a

Diff:

#f the equity multiplier is 2.6$ the debt ratio must be 6.,. a. True b. False

TIE ratio
1/

Answer: a

Diff:

(uppose a firm wants to maintain a specific T#4 ratio. #f the firm nows the level of its debt$ the interest rate it will pay on that debt$ and the applicable ta9 rate$ the firm can then calculate the earnings level required to maintain its target T#4 ratio. a. True b. False

Profit margin and leverage

11

Answer: b

Diff:

#f sales decrease and financial leverage increases$ we can say with certainty that the profit margin on sales will decrease. a. True b. False

Multi)le C%#ice: C#"ce)tual Easy:

Current ratio
13

Answer: &

Diff: E

)ther things held constant$ which of the following will not affect the current ratio$ assuming an initial current ratio greater than 1.6; a. b. c. d. e. Fi9ed assets are sold for cash. <ong0term debt is issued to pay off current liabilities. -ccounts receivable are collected. =ash is used to pay off accounts payable. - ban loan is obtained$ and the proceeds are credited to the firm's chec ing account. Answer: d Diff: E

'ui&! ratio
26

)ther things held constant$ which of the following will not affect the quic ratio; &-ssume that current assets equal current liabilities.* a. b. c. d. e. Fi9ed assets are sold for cash. =ash is used to purchase inventories. =ash is used to pay off accounts payable. -ccounts receivable are collected. <ong0term debt is issued to pay off a short0term ban

loan. Diff: E

"inan&ial statement analysis

21

Answer: a

=ompany > and =ompany ? each recently reported the same earnings per share &42(*. =ompany >@s stoc $ however$ trades at a higher price. :hich of the following statements is most correct;

a. b. c. d. e.

=ompany > must have a higher 2A4 ratio. =ompany > must have a higher mar et to boo ratio. =ompany > must be ris ier. =ompany > must have fewer growth opportunities. -ll of the statements above are correct. Answer: e Diff: E

Leverage and finan&ial ratios

22

(tennett =orp.'s =F) has proposed that the company issue new debt and use the proceeds to buy bac common stoc . :hich of the following are li ely to occur if this proposal is adopted; &-ssume that the proposal would have no effect on the company's operating earnings.* a. b. c. d. e. Return on assets &R)-* will decline. The times interest earned ratio &T#4* will increase. Ta9es paid will decline. Bone of the statements above is correct. (tatements a and c are correct.

Medium:
Liquidity ratios
2"

Answer: d

Diff:

:hich of the following statements is most correct; a. #f a company increases its current liabilities by C1$666 and simultaneously increases its inventories by C1$666$ its current ratio must rise. b. #f a company increases its current liabilities by C1$666 and simultaneously increases its inventories by C1$666$ its quic ratio must fall. c. - company@s quic ratio may never e9ceed its current ratio. d. -nswers b and c are correct. e. Bone of the answers above is correct.

Current ratio
2%

Answer: e

Diff:

:hich of the following actions can a firm ta e to increase its current ratio; a. #ssue short0term debt and use the proceeds to buy bac long0term debt with a maturity of more than one year. b. Reduce the company@s days sales outstanding to the industry average and use the resulting cash savings to purchase plant and equipment. c. Dse cash to purchase additional inventory. d. (tatements a and b are correct. e. Bone of the statements above is correct.

'ui&! ratio

Answer: e

Diff:

2,

:hich of the following actions will cause an increase in the quic ratio in the short run; a. C1$666 worth of inventory is sold$ and an account receivable is created. The receivable e9ceeds the inventory by the amount of profit on the sale$ which is added to retained earnings. b. - small subsidiary which was acquired for C166$666 two years ago and which was generating profits at the rate of 16 percent is sold for C166$666 cash. &-verage company profits are 1, percent of assets.* c. 7ar etable securities are sold at cost. d. -ll of the answers above. e. -nswers a and b above.

Ratio analysis
2.

Answer: &

Diff:

-s a short0term creditor concerned with a company's ability to meet its financial obligation to you$ which one of the following combinations of ratios would you most li ely prefer; =urrent ratio a. 6., b. 1.6 c. 1., d. 2.6 e. 2., T#4 6., 1.6 1., 1.6 6., 'ebt ratio 6."" 6.,6 6.,6 6../ 6./1 Answer: a Diff:

"inan&ial statement analysis

2/

:hich of the following statements is most correct; a. #f two firms pay the same interest rate on their debt and have the same rate of return on assets$ and if that R)- is positive$ the firm with the higher debt ratio will also have a higher rate of return on common equity. b. )ne of the problems of ratio analysis is that the relationships are sub+ect to manipulation. For e9ample$ we now that if we use some of our cash to pay off some of our current liabilities$ the current ratio will always increase$ especially if the current ratio is wea initially. c. Eenerally$ firms with high profit margins have high asset turnover ratios$ and firms with low profit margins have low turnover ratiosF this result is e9actly as predicted by the e9tended 'u 2ont equation. d. -ll of the statements above are correct. e. Bone of the statements above is correct.

"inan&ial statement analysis

21

Answer: a

Diff:

:hich of the following statements is most correct; a. -n increase in a firm's debt ratio$ with no changes in its sales and operating costs$ could be e9pected to lower its profit margin on sales. b. -n increase in the '()$ other things held constant$ would generally lead to an increase in the total asset turnover ratio. c. -n increase in the '()$ other things held constant$ would generally lead to an increase in the R)4. d. #n a competitive economy$ where all firms earn similar returns on equity$ one would e9pect to find lower profit margins for airlines$ which require a lot of fi9ed assets relative to sales$ than for fresh fish mar ets. e. #t is more important to ad+ust the 'ebtA-ssets ratio than the inventory turnover ratio to account for seasonal fluctuations.

Leverage and finan&ial ratios

23

Answer: a

Diff:

=ompany - is financed with 36 percent debt$ whereas =ompany 5$ which has the same amount of total assets$ is financed entirely with equity. 5oth companies have a marginal ta9 rate of ", percent. :hich of the following statements is most correct; a. #f the two companies have the same basic earning power &542*$ =ompany 5 will have a higher return on assets. b. #f the two companies have the same return on assets$ =ompany 5 will have a higher return on equity. c. #f the two companies have the same level of sales and basic earning power &542*$ =ompany 5 will have a lower profit margin. d. -ll of the answers above are correct. e. Bone of the answers above is correct.

Leverage and finan&ial ratios

"6

Answer: d

Diff:

- firm is considering actions which will raise its debt ratio. #t is anticipated that these actions will have no effect on sales$ operating income$ or on the firm@s total assets. #f the firm does increase its debt ratio$ which of the following will occur; a. b. c. d. e. Return on assets will increase. 5asic earning power will decrease. Times interest earned will increase. 2rofit margin will decrease. Total assets turnover will increase.

is&ellaneous ratios
"1

Answer: e

Diff:

Reeves =orporation forecasts that its operating income &45#T* and total assets will remain the same as last year$ but that the company@s debt ratio will increase this year. :hat can you conclude about the company@s financial ratios; &-ssume that there will be no change in the company@s ta9 rate.* a. b. c. d. e. The company@s basic earning power &542* will fall. The company@s return on assets &R)-* will fall. The company@s equity multiplier &47* will increase. -ll of the answers above are correct. -nswers b and c are correct.

is&ellaneous ratios
"2

Answer: b

Diff:

:hich of the following statements is most correct; a. #f two companies have the same return on equity$ they should have the same stoc price. b. #f =ompany - has a higher profit margin and higher total assets turnover relative to =ompany 5$ then =ompany - must have a higher return on assets. c. #f =ompany - and =ompany 5 have the same debt ratio$ they must have the same times interest earned &T#4* ratio. d. -nswers b and c are correct. e. Bone of the answers above is correct.

is&ellaneous ratios
""

Answer: e

Diff:

:hich of the following statements is most correct; a. #f a firm@s R)4 and R)- are the same$ this implies that the firm is financed entirely with common equity. &That is$ common equity G total assets*. b. #f a firm has no lease payments or sin ing fund payments$ its times0 interest0earned &T#4* ratio and fi9ed charge coverage ratios must be the same. c. #f Firm - has a higher mar et to boo ratio than Firm 5$ then Firm must also have a higher price earnings ratio &2A4*. d. -ll of the statements above are correct. e. -nswers a and b are correct.

is&ellaneous ratios
"%

Answer: b

Diff:

:hich of the following statements is most correct; a. #f Firms - and 5 have the same level of earnings per share$ and the same mar et to boo ratio$ they must have the same price earnings ratio. b. Firms - and 5 have the same level of net income$ ta9es paid$ and total assets. #f Firm - has a higher interest e9pense$ its basic earnings power ratio &542* must be greater than that of Firm 5. c. Firms - and 5 have the same level of net income. #f Firm - has a higher interest e9pense$ its return on equity &R)4* must be greater than that of Firm 5. d. -ll of the answers above are correct. e. Bone of the answers above is correct.

Tough:
ROE and debt ratios
",

Answer: b

Diff: T

:hich of the following statements is most correct; a. #f =ompany - has a higher debt ratio than =ompany 5$ then we can be sure that - will have a lower times0interest0earned ratio than 5. b. (uppose two companies have identical operations in terms of sales$ cost of goods sold$ interest rate on debt$ and assets. 8owever$ =ompany - uses more debt than =ompany 5F that is$ =ompany - has a higher debt ratio. Dnder these conditions$ we would e9pect 5's profit margin to be higher than -'s. c. The R)4 of any company which is earning positive profits and which has a positive net worth &or common equity* must e9ceed the company's R)-. d. (tatements a$ b$ and c are true. e. (tatements a$ b$ and c are false.

Ratio analysis
".

Answer: a

Diff: T

Hou are an analyst following two companies$ =ompany I and =ompany H. Hou have collected the following informationJ The two =ompany =ompany =ompany =ompany companies have I has a higher I has a higher H has a higher H has a higher the same total assets. total assets turnover than =ompany H. profit margin than =ompany H. inventory turnover ratio than =ompany I. current ratio than =ompany I.

:hich of the following statements is most correct; a. =ompany I must have a higher net income. b. =ompany I must have a higher R)4. c. =ompany H must have a higher quic ratio.

d. (tatements a and b are correct. e. (tatements a and c are correct. Ratio analysis
"/

Answer: d

Diff: T

Hou have collected the following information regarding =ompanies = and 'J The two The two The two =ompany =ompany =ompany companies have the same total assets. companies have the same operating income &45#T*. companies have the same ta9 rate. = has a higher debt ratio and a higher interest e9pense than '. = has a lower profit margin than =ompany '.

5ased on this information$ which of the following statements is most correct; a. b. c. d. e. =ompany =ompany =ompany =ompany =ompany = = = = = must must must must must have have have have have a a a a a higher level of sales. lower R)4. higher times0interest0earned &T#4* ratio. lower R)-. higher basic earning power &542* ratio. Answer: d Diff: T

Leverage and finan&ial ratios

"1

5lair =ompany has C, million in total assets. The company@s assets are financed with C1 million of debt$ and C% million of common equity. The company@s income statement is summarized belowJ )perating #ncome &45#T* #nterest 49pense 4arnings before ta9 &45T* Ta9es &%6K* Bet #ncome C1$666$666 166$666 C 366$666 ".6$666 C ,%6$666

The company wants to increase its assets by C1 million$ and it plans to finance this increase by issuing C1 million in new debt. This action will double the company@s interest e9pense$ but its operating income will remain at 26 percent of its total assets$ and its average ta9 rate will remain at %6 percent. #f the company ta es this action$ which of the following will occurJ a. b. c. d. e. The company@s net income will increase. The company@s return on assets will fall. The company@s return on equity will remain the same. (tatements a and b are correct. -ll of the answers above are correct.

Multi)le C%#ice: *'#+le!s Easy:

"inan&ial statement analysis
"3

Answer: a

Diff: E

Russell (ecurities has C166 million in total assets and its corporate ta9 rate is %6 percent. The company recently reported that its basic earning power &542* ratio was 1, percent and that its return on assets &R)-* was 3 percent. :hat was the company@s interest e9pense; a. b. c. d. e. C 6 C 2$666$666 C .$666$666 C1,$666$666 C11$666$666 Answer: d Diff: E

ROA
%6

- firm has a profit margin of 1, percent on sales of C26$666$666. #f the firm has debt of C/$,66$666$ total assets of C22$,66$666$ and an after0ta9 interest cost on total debt of , percent$ what is the firm's R)-; a. b. c. d. e. 1.%K 16.3K 12.6K 1"."K 1,.1K Answer: & Tapley 'ental (upply =ompany has the following dataJ Bet incomeJ 'ebt ratioJ 542 ratioJ C2%6 /,K 1".""K (alesJ T#4 ratioJ C16$666 2.6 Total assetsJ =urrent ratioJ C.$666 1.2 Diff: E

ROE
%1

#f Tapley could streamline operations$ cut operating costs$ and raise net income to C"66$ without affecting sales or the balance sheet &the additional profits will be paid out as dividends*$ by how much would its R)4 increase; a. b. c. d. e. ".66K ".,6K %.66K %.2,K ,.,6K

Profit margin
%2

Answer: & following balance sheet and income

Diff: E

Hour company had the information for 266"J 5alance sheetJ =ash -AR #nventories Total =.-. Bet F.-. Total -ssets

statement

26 1$666 ,$666 C .$626 2$316 C 3$666 #ncome statementJ (ales =ost of goods sold 45#T #nterest &16K* 45T Ta9es &%6K* Bet #ncome

'ebt 4quity Total claims C16$666 3$266 C 166 %66 C %66 1.6 C 2%6

C %$666 ,$666 C 3$666

The industry average inventory turnover is ,. Hou thin you can change your inventory control system so as to cause your turnover to equal the industry average$ and this change is e9pected to have no effect on either sales or cost of goods sold. The cash generated from reducing inventories will be used to buy ta90e9empt securities which have a / percent rate of return. :hat will your profit margin be after the change in inventories is reflected in the income statement; a. b. c. d. e. 2.1K 2.%K %.,K ,."K ../K

Medium:
A&&ounts re&eivable
%"

Answer: a

Diff:

Ruth =ompany currently has C1$666$666 in accounts receivable. #ts days sales outstanding &'()* is ,6 days &based on a ".,0day year*. -ssume a ".,0day year. The company wants to reduce its '() to the industry average of "2 days by pressuring more of its customers to pay their bills on time. The company's =F) estimates that if this policy is adopted the company's average sales will fall by 16 percent. -ssuming that the company adopts this change and succeeds in reducing its '() to "2 days and does lose 16 percent of its sales$ what will be the level of accounts receivable following the change; a. C,/.$666

b. c. d. e.

C./.$../ C//.$666 C366$666 C3/.$../

ROA
%%

Answer: a

Diff:

The 7eryl =orporation's common stoc is currently selling at C166 per share$ which represents a 2A4 ratio of 16. #f the firm has 166 shares of common stoc outstanding$ a return on equity of 26 percent$ and a debt ratio of .6 percent$ what is its return on total assets &R)-*; a. b. c. d. e. 1.6K 16.6K 12.6K 1../K 26.6K Answer: a Diff:

ROA
%,

L =orp. has a basic earnings power &542* ratio of 1, percent$ and has a times interest earned &T#4* ratio of .. Total assets are C166$666. The corporate ta9 rate is %6 percent. :hat is L =orp.'s return on assets &R)-*; a. b. c. d. e. /.,K 16.6K 12.2K 1".1K 1%.,K Answer: e Diff:

ROA
%.

8umphrey 8otels@ operating income &45#T* is C%6 million. The company@s times0interest0earned &T#4* ratio is 1.6$ its ta9 rate is %6 percent$ and its basic earning power &542* ratio is 16 percent. :hat is the company@s return on assets &R)-*; a. b. c. d. e. ..%,K ,.3/K %.""K 1.,.K ,.2,K Answer: & Diff: R

ROE
%/

(elzer #nc. sells all its merchandise on credit. #t has a profit margin of % percent$ days sales outstanding equal to .6 days &based on a ".,0day year*$ receivables of C1%/$3%,.2$ total assets of C" million$ and a debt ratio of 6..%. :hat is the firm's return on equity &R)4*;

a. /.1K b. ""."K c. "."K d. /1.6K e. 1.1K

ROE
%1

Answer: b

Diff:

Hou are considering adding a new product to your firm's e9isting product line. #t should cause a 1, percent increase in your profit margin &i.e.$ new 27 G old 27 1.1,*$ but it will also require a ,6 percent increase in total assets &i.e.$ new T- G old T- 1.,*. Hou e9pect to finance this asset growth entirely by debt. #f the following ratios were computed before the change$ what will be the new R)4 if the new product is added and sales remain constant; Ratios before new product 2rofit margin G 6.16 Total assets turnover G 2.66 4quity multiplier G 2.66 a. b. c. d. e. 11K %.K %6K 26K ,"K

ROE
%3

Answer: d -ssume 7eyer =orporation is 166 percent equity financed. return on equity$ given the following informationJ &1* &2* &"* &%* &,* a. b. c. d. e. 2,K "6K ",K %2K ,6K 4arnings before ta9es (ales G C,$666 'ividend payout ratio Total assets turnover -pplicable ta9 rate G G C1$,66 G .6K G 2.6 "6K

Diff:

=alculate the

Liquidity ratios
,6

Answer: a

Diff:

)liver #ncorporated has a current ratio G 1..$ and a quic ratio equal to 1.2. The company has C2 million in sales and its current liabilities are C1 million. :hat is the company@s inventory turnover ratio; a. b. c. d. e. ,.6 ,.2 ,., ..6 .."

Debt ratio
,1

Answer: &

Diff:

?ansas )ffice (upply had C2%$666$666 in sales last year. The company@s net income was C%66$666. #ts total assets turnover was ..6. The company@s R)4 was 1, percent. The company is financed entirely with debt and common equity. :hat is the company@s debt ratio; a. b. c. d. e. 6.26 6."6 6."" 6..6 6...

Profit margin
,2

Answer: a

Diff:

The 7erriam =ompany has determined that percent. 7anagement is interested in the into this calculation. Hou are given the debtAtotal assets G 6.", and total assets profit margin; a. ".%1K b. ,.%2K c. ..3.K d. 2.%,K e. 12.12K

its return on equity is 1, various components that went following informationJ total turnover G 2.1. :hat is the

(ales volume
,"

Answer: a

Diff:

8arvey (upplies #nc. has a current ratio of ".6$ a quic ratio of 2.%$ and an inventory turnover ratio of .. 8arvey's total assets are C1 million and its debt ratio is 6.26. The firm has no long0term debt. :hat is 8arvey's sales figure; a. b. c. d. e. C /26$666 C 126$666 C1$.26$666 C ".6$666 C 116$666

"inan&ial statement analysis

,%

Answer: e

Diff:

=ollins =ompany had the following partial balance sheet and complete annual income statementJ 2artial 5alance (heetJ =ash -AR #nventories Total current assets Bet fi9ed assets Total assets #ncome (tatementJ (ales =ost of goods sold 45#T #nterest &16K* 45T Ta9es &%6K* Bet #ncome C 26 1$666 2$666 C "$626 2$316 C .$666 C16$666 3$266 C 166 %66 C %66 1.6 C 2%6

The industry average '() is "6 &based on a ".,0day year*. =ollins plans to change its credit policy so as to cause its '() to equal the industry average$ and this change is e9pected to have no effect on either sales or cost of goods sold. #f the cash generated from reducing receivables is used to retire debt &which was outstanding all last year and which has a 16 percent interest rate*$ what will =ollins' debt ratio &Total debtATotal assets* be after the change in '() is reflected in the balance sheet; a. b. c. d. e. "".""K %,.21K ,2./,K .6.66K .,./1K

"inan&ial ratios
,,

Answer: b

Diff:

Taft Technologies has the following relationshipsJ -nnual sales =urrent liabilities 'ays sales outstanding &'()* &".,0day year* #nventory Turnover ratio =urrent ratio C1$266$666 C "/,$666 %6 %.1 1.2

The company@s current assets consist of cash$ inventories$ and accounts receivable. 8ow much cash does Taft have on its balance sheet; a. 0C 1$""" b. C .1$%3" c. C12,$666 d. C266$666 e. C"1.$../ 'ui&! ratio
,.

Answer: &

Diff:

<ast year$ Luayle 4nergy had sales of C266 million$ and its inventory turnover ratio was ,.6. The company@s current assets totaled C166 million$ and its current ratio was 1.2. :hat was the company@s quic ratio; a. b. c. d. e. 1.26 1."3 6./2 6.,, 2.%3

'ui&! ratio
,/

Answer: e

Diff:

Thomas =orp. has the following simplified balance sheetJ =ash #nventory -ccounts receivable Bet fi9ed assets Total C ,6$666 1,6$666 166$666 266$666 C,66$666 =urrent liabilities <ong0term debt =ommon equity Total C12,$666 1/,$666 266$666 C,66$666

(ales for the year totaled C.66$666. The company president believes the company carries e9cess inventory. (he would li e the inventory turnover ratio to be 1 and would use the freed up cash to reduce current liabilities. #f the company follows the president's recommendation and sales remain the same$ the new quic ratio would beJ a. 2.% b. %.6 c. %.,

d. 1.2 e. ".6

Current ratio
,1

Answer: b

Diff:

7ondale 7otors has forecasted the following year0end balance sheetJ -ssetsJ =ash and mar etable securities #nventories -ccounts receivable Total current assets Bet fi9ed assets Total assets <iabilities and 4quityJ Botes payable -ccounts payable Total current liabilities <ong0term debt (toc holders@ equity Total liabilities and equity C "66 ,66 /66 C1$,66 ,$666 C.$,66 C 166 %66 C1$266 "$666 2$"66 C.$,66

The company also forecasts that its days sales outstanding &'()* on a ".,0day basis will be ",.%1. days. Bow$ assume instead that 7ondale is able to reduce its '() to the industry average of "6.%1/ days without reducing its sales. Dnder this scenario$ the reduction in accounts receivable would generate additional cash. This additional cash would be used to reduce its notes payable. #f this scenario were to occur$ what would be the company@s current ratio; a. b. c. d. e. 1.", 1.2/ 1.66 1.1/ 2.%,

Current liabilities
,3

Answer: a

Diff:

2erry Technologies #nc. had the following financial information for the past yearJ #nventory turnover Luic ratio (ales =urrent ratio G G G G 1 1., C1.6$666 1./,

:hat were 2erry@s current liabilities; a. b. c. d. e. C%"6$666 C,66$666 C16/$,66 C .1$%23 C,/"$"""

Tough:
ROE
.6

Answer: d

Diff: T

(outheast 2ac aging's R)4 last year was only , percent$ but its management has developed a new operating plan designed to improve things. The new plan calls for a total debt ratio of .6 percent$ which will result in interest charges of C1$666 per year. 7anagement pro+ects an 45#T of C2.$666 on sales of C2%6$666$ and it e9pects to have a total assets turnover ratio of 2.6. Dnder these conditions$ the average ta9 rate will be %6 percent. #f the changes are made$ what return on equity will (outheast earn; a. b. c. d. e. 3.66K 11.2,K 1/.,6K 22.,6K ",.66K Answer: & Diff: T

ROE
.1

Roland M =ompany has a new management team that has developed an operating plan to improve upon last year's R)4. The new plan would place the debt ratio at ,, percent which will result in interest charges of C/$666 per year. 45#T is pro+ected to be C2,$666 on sales of C2/6$666$ and it e9pects to have a total assets turnover ratio of ".6. The average ta9 rate will be %6 percent. :hat does Roland M =ompany e9pect return on equity to be following the changes; a. b. c. d. e. 1/..,K 21.12K 2.../K %%.%%K ,1.2,K

ROE
.2

Answer: d

Diff: T

Eeorgia 4lectric reported the following income statement and balance sheet for the previous yearJ 5alance sheetJ -ssets =ash #nventory -ccounts receivable =urrent assets Bet fi9ed assets Total assets <iabilities M 4quity C 166$666 1$666$666 ,66$666 C1$.66$666 %$%66$666 C.$666$666 Total debt Total equity Total claims C"$666$666 1$.66$666 C1$%66$666 %66$666 C1$666$666 %66$666 C .66$666 C%$666$666 2$666$666 C.$666$666

#ncome (tatementJ (ales )perating costs )perating income &45#T* #nterest e9pense Ta9able income &45T* Ta9es &%6K* Bet income

The company@s interest cost is 16 percent$ so the company@s interest e9pense each year is 16 percent of its total debt. :hile the company@s financial performance is quite strong$ its =F) &=hief Financial )fficer* is always loo ing for ways to improve. The =F) has noticed that the company@s inventory turnover ratio is considerably wea er than the industry average which is ..6. -s an e9ercise$ the =F) as s what would the company@s R)4 have been last year if the following had occurredJ &1* &2* The company maintained the same level of sales$ but was able to reduce inventory enough to achieve the industry average inventory turnover ratio. The cash that was generated from the reduction in inventory was used to reduce part of the company@s outstanding debt. (o$ the company@s total debt would have been C% million less the cash freed up from the improvement in inventory policy. The company@s interest e9pense would have been 16 percent of the new level of total debt. -ssume equity does not change. &The company pays all net income as dividends.*

&"*

Dnder this scenario$ what would have been the company@s R)4 last year; a. b. c. d. e. 2/.6K 23.,K "6."K "1.,K "".6K

Current ratio
."

Answer: &

Diff: T

Nance 7otors has current assets of C1.2 million. The company@s current ratio is 1.2$ its quic ratio is 6./$ and its inventory turnover ratio is %. The company would li e to increase its inventory turnover ratio to the industry average$ which is ,$ without reducing its sales. -ny reductions in inventory will be used to reduce the company@s current liabilities. :hat will be the company@s current ratio$ assuming that it is successful in improving its inventory turnover ratio to ,; a. b. c. d. e. 1."" 1../ 1.22 6./, 2.2. Answer: a Diff: T

"inan&ial statement analysis

.%

- company has +ust been ta en over by new management which believes that it can raise earnings before ta9es &45T* from C.66 to C1$666$ merely by cutting overtime pay and thus reducing the cost of goods sold. 2rior to the change$ the following data appliedJ Total assetsJ Ta9 rateJ 45TJ C1$666 ",K C.66 'ebt ratioJ 542 ratioJ (alesJ %,K 1"."12,K C1,$666

These data have been constant for several years$ and all income is paid out as dividends. (ales$ the ta9 rate$ and the balance sheet will remain constant. :hat is the company's cost of debt; &8intJ :or only with old data.* a. b. c. d. e. E$IT
.,

12.32K 1".2"K 1".,1K 1"./,K 1%.66K Answer: e Diff: T

<one (tar 2lastics has the following dataJ -ssetsJ C166$666F 2rofit marginJ ..6KF Ta9 rateJ %6KF %6.6KF #nterest rateJ 1.6KJ Total assets turnoverJ ".6. :hat is <one (tar's 45#T; a. b. c. d. e. C "$266 C12$666 C11$666 C"6$666 C""$266 'ebt ratioJ

LECTURE 3 ANS,ERS AND SOLUTIONS

1) 2) ") %) ,) .) /) 1) 3) 16) 11) 12) 1") 1%) 1,) 1.)

Ratio analysis Liquidity ratios Current ratio Asset management ratios Inventory turnover ratio Debt management ratios TIE ratio Profitability ratios ROA ar!et value ratios Trend analysis Liquidity ratios Inventory turnover ratio "i#ed assets turnover $EP and ROE Equity multi%lier 47 G 2.6 G Total assetsATotal equity G 2A1. Therefore$ 2 G Total debt O 1$ or Total debt G 1. Total debtATotal assets G 1A2 G 6.,6.

Answer: a Answer: b Answer: b Answer: a Answer: b Answer: a Answer: a Answer: a Answer: b Answer: a Answer: a Answer: b Answer: a Answer: b Answer: a Answer: a

Diff: E Diff: E Diff: E Diff: E Diff: E Diff: E Diff: E Diff: E Diff: E Diff: E Diff: E Diff: Diff: Diff: Diff: Diff:

1/) 11) 13) 26)

TIE ratio Profit margin and leverage Current ratio 'ui&! ratio The quic ratio is calculated as followsJ

Answer: a Answer: b Answer: & Answer: d

Diff: Diff: Diff: E Diff: E

=urrent -ssets P #nventories . =urrent <iabilities The only action that doesn't affect the quic ratio is statement d. :hile this action decreases receivables &a current asset*$ it increases cash &also a current asset*. The net effect is no change in the quic ratio. 21) 22) "inan&ial statement analysis Leverage and finan&ial ratios (tatements a and c are correct. net income and hence reduce R)-. Answer: a Answer: e Diff: E

Diff: E

The increase in debt payments will reduce -lso$ higher debt payments will result in

lower ta9able income and less ta9. choice. 2") 2%) 2,) 2.) 2/) 21) Liquidity ratios Current ratio 'ui&! ratio Ratio analysis "inan&ial statement analysis "inan&ial statement analysis

Therefore$ statement e is the best Answer: d Answer: e Answer: e Answer: & Answer: a Answer: a Diff: Diff: Diff: Diff: Diff: Diff:

(tatement a is true because$ if a firm ta es on more debt$ its interest e9pense will rise$ and this will lower its profit margin. )f course$ there will be less equity than there would have been$ hence the R)4 might rise even though the profit margin fell. 23) Leverage and finan&ial ratios Answer: a Diff:

(tatement a is correct. 5oth companies have the same 45#T and total assets$ so =ompany 5$ which has no interest e9pense$ will have a higher net income. Therefore$ =ompany 5 will have a higher R)-. "6) "1) Leverage and finan&ial ratios is&ellaneous ratios Answer: d Answer: e Diff: Diff:

(tatements b and c are correct. R)- G B#AT-. -n increase in the debt ratio will result in an increase in interest e9pense$ and a reduction in B#. Thus R)- will fall. 47 G -ssetsA4quity. -s debt increases$ the amount of equity in the denominator decreases$ thus causing the equity multiplier &47* to increase. Therefore$ statement e is the correct choice. "2) "" ) is&ellaneous ratios Answer: e Diff: is&ellaneous ratios Answer: b Diff:

(tatements a and b are correct. Dse the 'u 2ont equation to find that the equity multiplier equals 1$ so the company is 166K equity financed. #f a firm has no lease payments or sin ing fund payments$ then its T#4 and fi9ed charge coverage ratios are the same. T#4 G

45#T $ while #nterest

Fi9ed charge coverage ratio G

45#T O <ease 2ayments (F 2ymts . #nterest O <ease 2ymts O &1 0 T*

Therefore$ statement e is the correct choice. "%) is&ellaneous ratios Answer: b Diff:

(tatement b is correct. 45#T G 45T O #nterest. (tatement c is incorrect because higher interest e9pense doesn@t necessarily imply greater debt. For this statement to be correct$ -@s amount of debt would have to be greater than 5@s. ",) ".) ROE and debt ratios Ratio analysis Answer: b Answer: a Diff: T Diff: T

(tatement a is correctF the others are false. #f =ompany I has a higher total assets turnover &(alesAT-* but the same total assets$ it must have higher sales than H. #f I has higher sales and also a higher profit margin &B#A(ales* than H$ it must follow that I has a higher net income than H. (tatement b is false. R)4 G B#A4L or R)4 G R)- 4quity multiplier. #n either case we need to now the amount of equity that both firms have. This is impossible to determine given the information in the question. Therefore$ we cannot say that I must have a higher R)4 than H. (tatement c is false. -n e9ample demonstrates this. (ay I has =- G C266$ =< G 166$ therefore$ I has =R G C266AC166 G 2. #f I had inventory of C,6$ I@s quic ratio would be &C266 0 C,6*AC166 G 1.,. Bow$ we now that H has a higher current ratio than I$ say H has =- G "6$ =< G 16F therefore$ H's =R G C"6AC16 G ". :e also now that H has less inventory than I because the problem states that H has a higher inventory turnover than I and from the facts given I@s sales are higher than H. Therefore$ for H to have a higher inventory turnover &(A#* than I$ H must have less inventory than I. (o$ say H has inventory of C26. Therefore$ H@s quic ratio G &C"6 0 C26*AC16 G 1. (o$ in this e9ample H has a higher current ratio$ lower inventory$ but a lower quic ratio than I. Thus$ (tatement c is false. &Bote that the numbers used in the e9ample are made up but they are consistent with the rest of the question.* "/) Ratio analysis Answer: d Diff: T

(tatement d is correctF the others are false. R)- G B#AT-. =ompany = has higher interest e9pense than =ompany 'F therefore$ it must have lower net income. (ince the two firms have the same total assets$ R)- = Q R)-'. (tatement a is falseF we cannot tell what sales are. From the facts as stated above$ they could be the same or different. (tatement b is falseF =ompany = must have lower equity than =ompany '$ which could lead it to have a higher R)4 because its equity multiplier would be greater than company ''s. (tatement c is false as T#4 G 45#TA#nterest$ and = has higher interest than ' but the same 45#TF therefore$ T#4= Q T#4'. (tatement e is falseF they have the same 542 G 45#TAT- from the facts as given in this problem. "1 ) Leverage and finan&ial ratios The new income statement will )perating #ncome &45#T* #nterest 49pense 4arnings 5efore Ta9 &45T* Ta9es &%6K* Bet #ncome be as followsJ C1$266$666 266$666 C1$666$666 %66$666 C .66$666 Answer: d 6.2 C.$666$666 Diff: T

B# C,%6$666 = G 16.1K F -ssets C,$666$666 Therefore$ R)- falls.

R)-)ld G R)4)ld G

R)4Bew G C.$666$666 G 16K.

C.66$666 = 1,.6K. C%$666$666

C.66$666

B# C,%6$666 = = 1".,K F 4quity C%$666$666

R)4Bew G

(ince Bet #ncome increases$ R)- falls$ and R)4 increases$ statement d is the correct choice. "3) "inan&ial statement analysis 542 G 45#TAT6.1, G 45#TAC166$666$666 45#T G C1,$666$666. R)- G B#AT6.63 G B#AC166$666$666 B# G C3$666$666. 45T G B#A&1 0 T* 45T G C3$666$666A6.. 45T G C1,$666$666. Therefore interest e9pense G C6. %6 ) ROA Bet income G 6.1,&C26$666$666* G C"$666$666. R)- G C"$666$666AC22$,66$666 G 1"."K. %1) ROE 4quity G 6.2,&C.$666* G C1$,66. =urrent R)4 G Answer: & Diff: E Answer: d Diff: E Answer: a Diff: E

C2%6 B# G G 1.K. C1$,66 4

Bew R)4 G

C"66 G 6.26 G 26K. C1$,66

R)4 G 26K 0 1.K G %K. %2) Profit margin =urrent inventory turnover G Answer: & Diff: E

C16$666 ( G G 2. C,$666 #nv

Bew inventory turnover G

( C16$666 ( G ,F #nv G G G C2$666. , , #nv

Freed cash G C,$666 0 C2$666 G C"$666. #ncrease in B# G 6.6/&C"$666* G C216.

Bew 2rofit margin G %") A&&ounts re&eivable

C2%6 O C216 B# G G 6.6%,6 G %.,K. C16$666 (ales

Answer: a Diff: R

First solve for current annual sales using the '() equation as followsJ ,6 G C1$666$666A&(alesA".,* to find annual sales equal to C/$"66$666. #f sales fall by 16K$ the new sales level will be C/$"66$666&6.3* G C.$,/6$666. -gain$ using the '() equation$ solve for the new accounts receivable figure as followsJ "2 G -RA&C.$,/6$666A".,* or -R G C,/.$666. %%) ROA 4quity multiplier G 1A&1 0 'A-* G 1A&1 0 6..6* G 2.,. R)4 G R)- 4quity multiplier. 26K G &R)-*&2.,*. R)- G 1.6K. %, ) ROA 542 G Answer: a Diff: Answer: a Diff:

45#T G 6.1,. T-

T- G C166$666. 45#T G 6.1,&C166$666* G C1,$666. T#4 G

45#T G .. #BT
45#T C1,$666 G G C2$,66. . .

#BT G

=alculate Bet incomeJ 45#T C1,$666 #BT 2$,66 45T C12$,66 Ta9 &%6K* ,$666 B# C /$,66 R)- G %.) ROA (tep 1 :e must find T-. 542 G :e are given 542 and 45#T.

C/$,66 B# G G /.,K. C166$666 TAnswer: e Diff:

Therefore$ T- G C%6$666$666A6.1$ or C%66 million. (tep 2 B#AT- G R)-$ so now we need to find net income. by wor ing through the income statementJ Bet income is found

45#T 45#T and T- G . T542

45#T #nterest 45T Ta9es B# (tep " %/) ROE

C%67 ,7 C",7 1%7 C217

&from T#4 ratioJ &%6K ta9 rate*

1 G 45#TA#nt*

R)- G C217AC%667 G 6.6,2, G ,.2,K. Answer: & Diff: R

&(ales per day*&'()* G -AR &(alesA".,*&.6* G C1%/$3%,.2 (ales G C366$666. 2rofit margin G Bet incomeA(ales. Bet income G 6.%&C366$666* G C".$666. 'ebt ratio G 6..% G Total debtAC"$666$666. Total debt G C1$326$666. Total equity G C"$666$666 0 C1$326$666 G C1$616$666. R)4 G C".$666AC1$616$666 G "."K. %1) ROE Bew profit marginJ &6.16*&1.1,* G 6.11,. Bew total asset turnoverJ 2.6A1., G 1."". Bew R)-J &6.11,*&1.""* G 6.1,". Bew equity multiplierJ 2.6&1.,* G ".6. R)4J &6.1,"*&".6* G 6.%. G %.K. %3) ROE Answer: d Diff: Answer: b Diff:

2rofit margin G &C1$,66&1 0 6."**AC,$666 G 21K. 4quity multiplier G 1.6 since firm is 166K equity financed. R)4 G &2rofit margin*&-ssets turnover*&4quity multiplier* G &21K*&2.6*&1.6* G %2K. -lternate solutionJ R)4 G 45T&1 0 T*A&(alesA2.6* G C1$,66&6./*A&C,$666A2.6* G C1$6,6AC2$,66 G %2K. ,6) Liquidity ratios Answer: a Diff:

LR G &=urrent assets 0 #nventory*A=urrent liabilities 1.2 G &=- 0 #*AC1$666$666 =- 0 # G C1$266$666. =R 1.. C1$.66$666 #nventory G G G G &=urrent assets 0 #nventory O #nventory*A=urrent liabilities &C1$266$666 O #nventory*AC1$666$666 C1$266$666 O #nventory C%66$666.

#nventory turnover G (alesA#nventory G C2$666$666AC%66$666 G ,. ,1) Debt ratio 'ebt ratio G 'ebtATotal assets. Answer: & Diff:

Total assets G C2%$666$666A. G C%$666$666. &T-T) G . G (alesATotal assets.* R)4 G B#A4quity 4quity G B#AR)4 G C%66$666A6.1, G C2$...$../. 'ebt G Total assets 0 4quity G C%$666$666 0 C2$...$../ G C1$"""$""". ,2 ) 'ebt ratio G C1$"""$"""AC%$666$666 G 6."""". Profit margin 4quity multiplier G 1A&1 0 6.",* G 1.,%. R)4 G &2rofit margin*&-ssets utilization*&4quity multiplier* 1,K G &27*&2.1*&1.,%* 27 G ".%1K. ,") (ales volume Answer: a Diff: Answer: a Diff:

=urrent liabilitiesJ &6.2*&C1$666$666* G C266$666. =urrent assetsJ =-AC266$666 G ".6F =- G C.66$666. #nventoryJ &C.66$666 0 #*AC266$666 G 2.%F # G C126$666. (alesJ (AC126$666 G .F ( G C/26$666. ,%) "inan&ial statement analysis =urrent '() G
C1$666 G ". days. C16$1"3A".,

Answer: e

Diff:

#ndustry average '() G "6 days.

Reduce receivables by .

'ebt G C%66A6.16 G C%$666. C%$666 0 C1..../ T' G G .,./1K. C.$666 0 C1..../ T,,) "inan&ial ratios

C16$1"3 G C1..../. ".,

Answer: b

Diff:

First$ find the amount of current assetsJ =urrent ratio G =urrent assetsA=urrent liabilities =urrent assets G &=urrent liabilities*&=urrent ratio* G C"/,$666&1.2* G C%,6$666. Be9t$ '() G -R G G find the accounts receivablesJ -RA&(alesA".,* '()&(ales*&1A".,* &%6*&C1$266$666*&1A".,* G C1"1$,6/.

Be9t$ find the inventoriesJ #nventory turnover G (alesA#nventory #nventory G (alesA&#nventory turnover* G C1$266$666A%.1 G C2,6$666. Finally$ find the amount of cashJ =ash G =urrent assets 0 -R 0 #nventory G C%,6$666 0 C1"1$,6/ 0 C2,6$666 G C.1$%3". ,.) 'ui&! ratio Answer: & Diff:

(tep 1

=alculate inventoryJ Luayle 4nergy has C%6 million in inventory because the inventory turnover ratio is equal to ,. (A#nv G ,F #nv G

C266 $ 666 $ 666 G C%6$666$666. ,

conclude that they have C1".""

(tep 2

=alculate current liabilitiesJ From the current ratio$ we can million in current liabilities. =R G

C166 $ 666 $ 666 G 1.2F =< G C1"."" million. =<

(tep "

Find quic

ratioJ C166 $ 666 $ 666 C%6 $ 666 $ 666 =- #nv G G 6./2. C1" $ """ $ """ =< Answer: e Diff:

,/)

'ui&! ratio

#f sales remain at C.66$666$ then for the inventory turnover ratio to be 19 inventory must be C.66$666A1 G C/,$666. =urrent inventory minus the new level of inventory reflects the amount of cash freed up or C1,6$666 0 C/,$666 G C/,$666. =urrent liabilities will be reduced to C12,$666 0 C/,$666 G C,6$666. Thus$ new current assets are C,6$666 O C/,$666 O C166$666 G C22,$666. The new quic ratio is thenJ &C22,$666 0 C/,$666*AC,6$666 G ". ,1) Current ratio (tep 1 (tep 2 (tep " :e must find sales using '() of ",. is C/66$ then (ales G C/$266. Answer: b Diff: R #f -R and -R

-RA&(alesA".,* G ",.%1.. G "6.%1/

Bow$ to reduce '() to "6.%1/$ -RA&C/$266A".,* becomes C.66. Thus$ we reduced -R by C166.

To find the new =R &=-A=<*$ it is +ust &C1$,66 0 C166*A&C1$266 0 C166* G 1.2/2/. &Remember$ notes payable were also reduced by C166.* Answer: a Diff:

,3)

Current liabilities

:e can solve for inventory &because we@re given the inventory turnover ratio* as 1 G C1.6$666A#nventory or #nventory G C16/$,66. Eiven the quic ratio$ we now &=- 0 C16/$,66*A=< G 1.,. :e can rewrite this as =-A=< 0 C16/$,66A=< G 1.,. Recognizing the first term as the current ratio or 1./,$ we now have 1./, 0 C16/$,66A=< G 1.,. (olve this e9pression for =< G C%"6$666. .6) ROE R)4 G 2rofit 7argin T- Turnover 4quity 7ultiplier Set up an income statement: (ales &given* =ost 45#T &given* # &given* 45T Ta9es &%6K* B# C2%6$666 na C 2.$666 1$666 C 11$666 /$266 C 16$166 Answer: d Diff: T

Turnover G 2 G (AT-F T- G (A2 G C2%6$666A2 G C126$666. 'A- G .6KF so 4A- G %6KF and$ therefore$ T-A4 G 1A&4A-* G 1A6.% G 2.,6. Complete the Du Pont equation to determine ROE: R)4 G C16$166AC2%6$666 C2%6$666AC126$666 C126$666AC%1$666 G 6.6%, 2 2., G 6.22, G 22.,K. .1) ROE EivenJ Bew 'A- G 6.,, 45#T G C2,$666 (ales G C2/6$666 #nterest G C/$666 Ta9 rate G %6K T-T) G ".6 R)4 G &27*&T-T)*&47*. Answer: & Diff: T

Recall the 'u 2ont equationJ R)4 G &R)-*&47*. R)4 G B#A4quity. 45#T # 45T T B# C2,$666 /$666 C11$666 /$266 C16$166 &Eiven* &C11$666 %6K*

T-T) G (alesATotal assets Total assets G (alesAT-T) G C2/6$666A" G C36$666. 4quity G R1 0 &'A-*S&Total assets* 4quity G R1 0 6.,,S&Total assets* 4quity G 6.%,&C36$666* G C%6$,66. R)4 G B#A4quity G C16$166AC%6$,66 G 2.../K. .2) ROE Answer: d Diff: T

#ndustry average inventory turnover G . G (alesA#nventory. To match this levelJ #nventory G (alesA. C"$666$666A. G C,66$666. =urrent inventory G C,66$666 G C,66$666. company. C1$666$666. Reduction in inventory G C1$666$666 0 This C,66$666 is to be used to reduce the debt of the #nterest on this level

Bew debt level G C%$666$666 0 C,66$666 G C"$,66$666. of debt G C"$,66$666 6.1 G C",6$666. <oo at the income statement to get net incomeJ 45#T C1$%66$666 #nt ",6$666 45T C1$6,6$666 Ta9 %26$666 B# C ."6$666

R)4 G Bet incomeA4quity G C."6$666AC2$666$666 G 6."1,6 or "1.,6K. .") Current ratio (tep 1 (tep 2 Answer: & Diff: T

(olve for the current inventory levelJ =-A=< G 1.2 and =- G C1$266$666$ so =< G C1$666$666. (olve for current level of inventoriesJ

(ince LR G 6./$ &C1$266$666 0 #nv*AC1$666$666 G 6./$ #nv G C,66$666. (tep " (tep % Be9t we find the sales level using the old inventory turnover ratioJ (alesAC,66$666 G %. (o sales are C2$666$666. Dsing the current sales level and the new target inventory turnover ratio of ,$ we can solve for the new inventory levelJ C2$666$666A#nvBew G ,. #nvBew G C%66$666. (olve for the new current ratioJ #nv G C%66$666 0 C,66$666 G 0C166$666. (o$ our &C1$266$666 0 C166$666*A&C1$666$666 0 C166$666* G 1.222. Answer: a new =R G

(tep ,

.%)

"inan&ial statement analysis (ales =ost of goods sold 45#T #nterest 45T Ta9es &",K* B# 542 G C1,$666 TTTTTTT C 1$6., %., C .66 216 C "36

Diff: T

Bow fill inJ 45#T G C1$6.,. #nterest G 45#T 0 45T G C1$6., 0 C.66 G C%.,. ' ' G G 6.%,F ' G 6.%,&C1$666* G C"$.66. C1$666 C%., #nterest #nterest rate G G G 6.1232 G 12.32K. C"$.66 'ebt .,) E$IT Answer: e Diff: T

45#T 45#T G G 6.1""12,F 45#T G C1$6.,. C1$666 T-

:rite down equations with given data$ then find un nownsJ

B# G 6.6.. ( ' ' 'ebt ratio G G G 6.%F ' G C%6$666. C166$666 ( T- turnover G G ".6. ( G G "F ( G C"66$666. C166$666
2rofit margin G Bow plug sales into profit margin ratio to find B#J B# G 6.6.F B# G C11$666. C"66$666 Bow set up an income statementJ (ales C"66$666 =ost of goods sold TTTTTTTT 45#T $ 33,200 #nterest "$266 45T C "6$666 Ta9es &%6K* 12$666

&45#T G 45T O #nterest* &C%6$666&6.61* G C"$266* &45T G C11$666A&1 0 T* G C"6$666*

B#

C 11$666