Transactions may increase or decrease a particular ratio, or have no effect.

The first column below

lists a transaction. The second column lists a ratio along with its value just before the indicated
transaction. In the third column, indicate the immediate effect of the transaction on the ratio by
double-clicking on the related cell and select increase, decrease, or no effect from the popup list
provided. For each transaction, assume that the dollar amount of the transaction is not significant in
relation to the absolute amounts in the numerator and denominator of the relevant ratio before the
transaction.

Ratio and Value Before

Transaction Effect
Transaction
Write off inventory Return on equity, .20 (20%) Decrease
Sell goods costing $60 for $100 Profit margin, .09 (9%) Increase
Retire bonds Debt to equity, .64 (64%) Decrease
Purchase treasury stock Earnings per share, 2.25 Increase

Rationale:

Write off inventory: both net income and average total OE decrease but net income is
reduced by a greater percentage. The ratio decreases.

Sell goods costing $60 for $100: income and sales both increase but income increases by a
higher percentage than sales. The ratio increases.

Retire bonds: only liabilities are reduced; there is no effect on OE. Therefore the numerator
is reduced along with the ratio.

Purchase treasury stock: the number of outstanding shares is reduced, thus reducing the
denominator of EPS. There is no immediate impact on earnings. Thus, the ratio increases.

Using the information below, compute the following amounts and ratios for the Quant Corporation for
the current year. Assume that (1) the only effects on retained earnings are net income and cash
dividends for the year, and (2) only common stock dividends were declared (none for preferred stock).
Enter your amounts in the second column rounded to the nearest percent or nearest dollar, as
appropriate. For example, if your computation of a ratio is 249.38%, enter 2.49. Use the calculator
function available to you.

Current year financial statement information for the Quant Corporation:

Balance Sheet Jan. 1 Dec. 31

Cash $ 100 $ 150
Receivables, net 300 320
Inventories 600 660
Prepaids 200 270
Plants assets 2,000 2,400
Accumulated depreciation (800) (1,000)
Total assets $2,400 $2,800
Accounts payable $ 120 $ 160
Income tax payable 80 70
Accrued payables 90 210
Current maturity of long-term debt 300 300
Bonds payable 500 400
Preferred stock, $100 par 100 100
Common stock, $1 par 200 250
PIC-common 300 350
Retained earnings 810 1,080
Treasury stock (100) (120)
Total liabilites and OE $2,400 $2,800
Income Statement
Sales $3,800
Cost of goods sold (1,700)
Gross margin 2,100
Operating expenses (1,400)
Interest expense (100)
Income before tax 600
Income tax expense (180)
Net income $ 420
Ratio or amount Computation
Times interest earned ratio
Profit margin on sales
Return on total assets
Return on equity
Dividend payout ratio

Rationale:

Times interest earned ratio = (net income + interest expense + income tax
expense)/interest expense = (420 + 100 + 180)/100 = 7

Profit margin on sales = net income/sales = 420/3,800 = .11

Return on total assets = (net income + after-tax interest expense)/average total assets =
[420 + .70(100)]/.5(2,400 + 2,800) = .19. The tax rate is .30 = (income tax
expense)/(income before tax)= 180/600.

Return on equity = net income/average OE = 420/.5(100 + 200 + 300 + 810 - 100 + 100 +
250 + 350 + 1080 - 120) = 420/1,485 = .28

Dividend payout ratio = common dividends/net income = 150/420 = .36. Retained earnings
increased 270 (1,080 - 810). 270 = 420 net income - dividends declared. Therefore
dividends declared are 150.