Chapter 8 problem set PDF

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Practical exercises for Chapter 8 Intermediate Financial Management...

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PROBLEM SET Chapter 8 1.

Russell Securities has $100 million in total assets and its tax rate is 40 percent. The company recently reported that earning power (BEP) ratio was 15 percent and that its return (ROA) was 9 percent. What was the company’s interest expense?

2.

You are given the following information: Stockholders' equity = $1,250; price/earnings ratio = 5; shares outstanding = 25; market/book ratio = 1.5. Calculate the market price of a share of the company's stock. $75

3.

Culver Inc. has earnings after interest but before taxes of $300. The company's before-tax times-interest-earned ratio is 7.00. Calculate the company's interest charges. $50

4.

Your company had the information for 2005: Balance sheet: Cash A/R Inventories Total C.A. Net F.A. Total Assets

following

balance

20 1,000 5,000 $ 6,020 2,980 $ 9,000

sheet

and

corporate its basic on assets $0

income

statement

$

Income statement: Sales Cost of goods sold EBIT Interest (10%) EBT Taxes (40%) Net Income

Debt Equity Total claims

$ 4,000 5,000 $ 9,000

$10,000 9,200 $ 800 400 $ 400 160 $ 240

The industry average inventory turnover is 5. You think you can change your inventory control system so as to cause your turnover to equal the industry average, and this change is expected to have no effect on either sales or cost of goods sold. The cash generated from reducing inventories will be used to buy tax-exempt securities which have a 7 percent rate of return. What will your profit margin be after the change in inventories is reflected in the income statement? 4.5%

5.

The Wilson Corporation has the following relationships: Sales/Total assets Return on assets (ROA) Return on equity (ROE)

2.0 4% 6%

What is Wilson’s profit margin and debt ratio? 33.33% 6.

Cannon Company has enjoyed a rapid increase in sales in recent years, following a decision to sell on credit. However, the firm has noticed a recent increase in its collection period. Last year, total sales were $1 million, and $250,000 of these sales were on credit. During the year, the accounts receivable account averaged $41,096. It is expected that sales will increase in the forthcoming year by 50 percent, and, while credit sales should continue to be the same proportion of total sales, it is expected that the days sales outstanding will also increase by 50 percent (assume a 365-day year). If the resulting increase in accounts receivable must be financed by external funds, how much external funding will Cannon need? $51,370

7.

The Meryl Corporation's common stock is currently selling at $100 per share, which represents a P/E ratio of 10. If the firm has 100 shares of common stock outstanding, a return on equity of 20 percent, and a debt ratio of 60 percent, what is its return on total assets (ROA)? 8%

8.

A fire has destroyed a large percentage of the financial Carter Company. You have the task of piecing together order to release a financial report. You have found equity to be 18 percent. If sales were $4 million, the 0.40, and total liabilities were $2 million, what was assets (ROA)? 10.8%

9.

Q Corp. has a basic earnings power (BEP) ratio of 15 percent, and has a times interest earned (TIE) ratio of 6. Total assets are $100,000. The corporate tax rate is 40 percent. What is Q Corp.'s return on assets (ROA)? 7.5%

10.

Selzer Inc. sells all its merchandise on credit. It has a profit margin of 4 percent, days sales outstanding equal to 60 days (based on a 365-day year), receivables of $147,945.2, total assets of $3 million, and a debt ratio of 0.64. What is the firm's return on equity (ROE)? 3.3%

11.

A firm has total assets of $1,000,000 and a debt ratio of Currently, it has sales of $2,500,000, total fixed costs of and EBIT of $50,000. If the firm's before-tax cost of percent and the firm's tax rate is 40 percent, what is the 1.7%

12.

A firm has a debt/equity ratio of 50 percent. Currently, it has interest expense of $500,000 on $5,000,000 of total debt outstanding,

records of the information in the return on debt ratio was the return on

30 percent. $1,000,000, debt is 10 firm's ROE?

and a tax rate of 40 percent. If the firm's ROA is 6 percent, by how many percentage points is the firm's ROE greater than its ROA? 3% 13.

Assume Meyer Corporation is 100 percent equity financed. return on equity, given the following information: 42% (1) (2) (3) (4) (5)

14.

Earnings before taxes Sales = $5,000 Dividend payout ratio Total assets turnover Applicable tax rate =

Calculate the

= $1,500 = 60% = 2.0 30%

The Amer Company has the following characteristics: Sales Total assets Total debt/Total assets Basic Earning Power (BEP) ratio Tax rate Interest rate on total debt

$1,000 $1,000 35% 20% 40% 4.57%

What is Amer's ROE? 16.99% 15. 16.

A firm which has an equity multiplier of 4.0 will have a debt ratio of 0.75 A firm has total interest charges of $10,000 per year, sales of $1 million, a tax rate of 40 percent, and a net profit margin of 6 percent. What is the firm's times-interest-earned ratio? 11

17.

Alumbat Corporation has $800,000 of debt outstanding, and it pays an interest rate of 10 percent annually on its bank loan. Alumbat's annual sales are $3,200,000; its average tax rate is 40 percent; and its net profit margin on sales is 6 percent. If the company does not maintain a TIE ratio of at least 4 times, its bank will refuse to renew its loan, and bankruptcy will result. What is Alumbat's current TIE ratio? 5

18.

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? 5

19.

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? 0.33333

20.

Perry Technologies Inc. had the following financial information for the past year: Inventory turnover Quick ratio Sales Current ratio

= = = =

8 1.5 $860,000 1.75

What were Perry’s current liabilities? $430,000

21.

Austin & Company has a debt ratio of 0.5, a total assets turnover ratio of 0.25, and a profit margin of 10 percent. The Board of Directors is unhappy with the current return on equity (ROE), and they think it could be doubled. This could be accomplished (1) by increasing the profit margin to 12 percent, and (2) by increasing debt utilization. Total assets turnover will not change. What new debt ratio, along with the new 12 percent profit margin, would be required to double the ROE? 70%

22.

Southeast Packaging's ROE last year was only 5 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 $8,000 per year. Management projects an EBIT of $26,000 on sales of $240,000, and it expects to have a total assets turnover ratio of 2.0. Under these conditions, the average tax rate will be 40 percent. If the changes are made, what return on equity will Southeast earn? 22.5%

23.

Roland & Company has a new management team that has developed an operating plan to improve upon last year's ROE. The new plan would place the debt ratio at 55 percent which will result in interest charges of $7,000 per year. EBIT is projected to be $25,000 on sales of $270,000, and it expects to have a total assets turnover ratio of 3.0. The average tax rate will be 40 percent. What does Roland & Company expect return on equity to be following the changes? 26.67%

24.

Robertson Steel is forecasting the following numbers: EBIT Interest Expense ROE

$1,000,000 300,000 20%

The company is in the 40 percent tax bracket. After putting together the forecast the company is considering a proposal from its CFO (Chief Financial Officer) which calls for an increase in the company’s debt ratio. If the CFO’s policy is adopted, the company will reduce the number of common shares by 25 percent and increase its interest expense by 20 percent. What will be the company’s forecasted ROE if the company adopts the CFO’s recommendation? (Assume that the change in financing has no impact on EBIT.)24.38%

TEXTBOOK PROBLEMS – D0 1 THROUGH 12...