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Total retained earnings increased by Rs.12 million during the year, while book value per
share at year-end was Rs.40. Billingsworth has no preferred stock, and no new common
stock was issued during the year. If Billingsworth's year-end debt (which equals its total
liabilities) was Rs.120 million, what was the company's year-end debt/assets ratio?
Q.2 The following data apply to A.L. Kaiser & Company (millions of rupees):
Cash and marketable securities Rs. 100.00
Fixed assets Rs. 283.50
Sales Rs. 1,000.00
Net income Rs 50.00
Quick ratio 2.0x
Current ratio 3.0x
DSO 40 days
ROE 12%
Kaiser has no preferred stock---only common equity, current liabilities, and long-term debt.
a) Find Kaiser's (1) accounts receivable (A/R), (2) current liabilities, (3) current
assets, (4) total assets, (5) ROA, (6) common equity; and (7) long-term debt.
b) In part a, you should have found Kaiser's accounts receivable (A/R) = Rs.111.l
million. If Kaiser could reduce its DSO from 40 days to 30 days while holding other
things constant, how much cash would it generate? If this cash were used to buy back
common stock (at book value), thus reducing the amount of common equity, how would
this affect (1) the ROE, (2) the ROA, and (3) the total debt/total assets ratio?
Q.3 Ace Industries has current assets equal to Rs.3 million. The company's current ratio is 1.5,
and its quick ratio is 1.0. What is the firm's level of current liabilities? What is the firm's level
of inventories?
Q.4 Baker Brothers has a DSO of 40 days. The company's average daily sales are Rs.20,000.
What is the level of its accounts receivable? Assume there are 360 days in a year.
Q.5 Bartley Barstools has an equity multiplier of 2.4. The company's assets are financed with
some combination of long-term debt and common equity. What is the company's debt ratio?
Q.6 Doublewide Dealers has an ROA of 10 percent, a 2 percent profit margin, and a return on
equity equal to 15 percent. What is the company's total assets turnover? What is the firm's
equity multiplier?
Q.7 Assume you are given the following relationships for the Bauer Corporation:
Sales/total assets 1.5x
Return on assets (ROA) 3%
Return on equity (ROE) 5%
Calculate Bauers profit margin and debt ratio.
Q.8 The Petry Company has Rs.1,312,500 in current assets and Rs.525,000 in current liabilities.
Its initial inventory level is Rs.375,000, and it will raise funds as additional notes payable and
use them to increase inventory. How much can Petry's short-term debt (notes payable)
increase without pushing its current ratio below 2.0? What will be the firm's quick ratio after
Petry has raised the maximum amount of short-term funds?
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Q.9 The Kretovich Company had a quick ratio of 1.4, a current ratio of 3.0, an inventory
turnover of 6 times, total current assets of Rs.810,000, and cash and marketable securities
of Rs.120,000. What were Kretovich's annual sales and its DSO?
Q.10 The H.R. Pickett Corporation has Rs.500,000 of debt outstanding, and it pays an interest
rate of 10 percent annually. Pickett's annual sales are Rs.2 million, its average tax rate is 30
percent, and its net profit margin on sales is 5 percent. If the company does not maintain a
TIE ratio of at least 5 times, its bank will refuse to renew the loan, and bankruptcy will
result. What is Pickett's TIE ratio?
Q.11 Midwest Packaging's ROE last year was only 3 percent, but its management has developed
a new operating plan designed to improve things. The new plan calls for a total debt ratio of
60 percent, which will result in interest charges of Rs.300,000 per year. Management
projects an EBIT of Rs.1,000,000 on sales of Rs.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 percent. If the
changes are made, what return on equity will the company earn?
Q.12 Central City Construction Company, which is just being formed, needs Rs.1 million of
assets, and it expects to have a basic earning power ratio of 20 percent. Central City will
own no securities, so all of its income will be operating income. If it chooses to, Central
City can finance up to 50 percent of its assets with debt, which will have an 8 percent
interest rate. Assuming a 40 percent federal-plus-state tax rate on all taxable income, what
is the difference between its expected ROE if Central City finances with 50 percent debt
versus its expected ROE if it finances entirely with common stock?
Q.14 Lloyd and Daughters Inc. has sales of Rs.200,000, a net income of Rs.15,000, and the
following balance sheet:
Cash Rs. 10,000 Accounts payable Rs. 30,000
Receivables 50,000 Other current liabilities 20,000
Inventories 150,000 Long-term debt 50,000
Net fixed assets 90,000 Common equity 200,000
Total assets Rs.300,000 Total liabilities and equity Rs.300,000
a) The company's new owner thinks that inventories are excessive and can be lowered to
the point where the current ratio is equal to the industry average, 2.5x, without affecting
either sales or net income. If inventories are sold off and not replaced so as to reduce
the current ratio to 2.5x, 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?
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b) Now suppose we wanted to take this problem and modify it for use on an exam, that is,
to create a new problem that you have not seen to test your knowledge of this type of
problem. How would your answer change if
(1) We doubled all the rupees amounts?
(2) We stated that the target current ratio was 3x?
(3) We stated that the target was to achieve an inventory turnover ratio of 2x rather than
a current ratio of 2.5x? (Hint: Compare the ROE obtained with an inventory
turnover ratio of 2x to the original ROE obtained before any changes are
considered.)
(4) We said that the company had 10,000 shares of stock outstanding, and we asked
how much the change in part (a) would increase EPS?
(5) What would your answer to (4) be if we changed the original problem to state that
the stock was selling for twice book value, so common equity would not be
reduced on a rupee-for-rupee basis?
c) Now explain how we could have set the problem up to have you focus on changing
accounts receivable, or fixed assets, or using the funds generated to retire debt (we
would give you the interest rate on outstanding debt), or how the original problem
could have stated that the company needed more inventories and it would finance them
with new common equity or with new debt.
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c. Outline ABC Limited strength and weakness as revealed by your analysis
Q.16 The following ratios are given for Minter Company
Q.17 With the help of given information, completes the balance of ABC Limited.
ABC Limited
Balance sheet
Cash Rs.100,000 Current liabilities
Accounts receivable Long term liabilities
Inventory Total debts
Current assets Common stock Rs.600,000
Net fixed assets
Total assets Total equities
Other information:
a) Total debt to total assets=40% (b) Current ratio =2.5 (c) Total asset turnover=2
d) Average collection period=54 days (e) Inventory turnover = 5