Lyrnx 1 - Lecture notes 1 PDF

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Question 1 [5 points] Choose the term that best matches each of the following descriptions: Marking: a) Du Pont Popular expression breaking ROE into three parts: profit margin, total identity asset turnover, and financial leverage. b) Financial Relationships determined from a firm's financial information and used ratios for comparison purposes. c) Common-base-year A standardized financial statement presenting all items statement relative to a certain base year amount. A standardized financial statement presenting all items in percentage d) Common-size terms. Statements of financial position are shown as a percentage of statement assets and statements of comprehensive income as a percentage of sales. e) Statement of cash A firm's financial statement that summarizes its sources and uses flows of cash over a specified period. Congratulations, your answers are all correct! Total marks for this question: 5

Question 2 [7 points] Your solution to the question was: The following events occured for Zcom Inc. : a) Classify each of the following events as a source or use of cash. Decrease in inventory$550 Use Of Cash Increase in accounts receivable$650 Source Of Cash Decrease in notes payable$490 Use Of Cash Increase in accounts payable$780 Source Of Cash Marking: A decrease in inventory of $550 is a source of cash, but you have not selected this. This will cost you 1 mark. A increase in accounts receivable of $650 is a use of cash, but you have not selected this. This will cost you 1 mark. An increase in an asset account or a decrease in a liability or equity account is a use of cash. Likewise, a decrease in an asset account or an increase in a liability (or equity)

account is a source of cash. You will lose 2 marks for this part.

b) Based only on the above information, did cash go up or down and by how much? Net cashincreasedby $390 Marking: Your answer was: Increased by $390 The correct answer was: Increased by $190 You have correctly deduced this from your earlier answers; however, at least one of your earlier answers was incorrect, causing your answer for this part to be incorrect. You will not lose any further marks for this.

Total marks for this question: 5

Question 2 [7 points] Your solution to the question was: The following events occured for Stake Technology Inc. : a) Classify each of the following events as a source or use of cash. Decrease in notes payable $510 Use Of Cash Decrease in inventory $620 Source Of Cash Decrease in accounts payable $450 Use Of Cash Decrease in accounts receivable $470 Source Of Cash Marking: Congratulations! You have answered this part correctly.

b) Based only on the above information, did cash go up or down and by how much? Net cashincreased by $130 Marking: Your answer was: Increased by $130 Congratulations! You have entered the correct answer.

Total marks for this question: 7

Question 3 [6 points] Your solution to the question was: Stake Technology Inc. has a debt/equity ratio of 2.00. The return on assets is 10 percent, and total equity is $420,000 a) What is the equity multiplier? Equity Multiplier =3 Marking Equity multiplier Your answer was: 3.00 Congratulations! You have entered the correct answer. b) What is the return on equity? (Enter your answer in percentage form) Return on equity =(1)%

Marking Return on equity Your answer was: -1.00% The correct answer was: 30.00% To find the return on equity we can use the formula: ROE = ROA × Equity Multiplier = 0.10 × 3.00 = 0.30 = 30.00% You will lose 2 marks for this part. c) What is the net income? Net income = $(420,000) Marking Net income Your answer was: -$420,000.00 The correct answer was: $126,000.00 We know that ROE =

Net Income Total Equity

Therefore, rearranging for Net Income: Net Income = ROE × Total Equity = 0.30 × $420,000 = $126,000 You will lose 2 marks for this part.

Total marks for this question: 2 a)1.5 (debt equity ratio) =Debt equity 1.5 = debt 460,000 =690,000 debt/ equity 460,000 b) A= L + OE 1,150,000 A = 690,000 + 460,000 Equity multiplier = total assets 1150,000 Total equity 460,000 = 2.5 c) Return on equity (ROE)= The return on assets (ROA) × Equity Multiplier = 0.10 * 2.5 =0.25 =25% d) We know that ROE =Net Income  Net Income = ROE × Total Equity Total Equity = 0.25 × $460,000 = $115,000

Question 3 [6 points] Your solution to the question was: Barton Corporation has a debt/equity ratio of 1.50. The return on assets is 10 percent, and total equity is $460,000 a) What is the equity multiplier? Equity Multiplier =2.50

Marking Equity multiplier Your answer was: 2.50 Congratulations! You have entered the correct answer. b) What is the return on equity? (Enter your answer in percentage form) Return on equity =25%

Marking Return on equity Your answer was: 25.00% Congratulations! You have entered the correct answer. c) What is the net income? Net income = $115,000

Marking Net income Your answer was: $115,000.00 Congratulations! You have entered the correct answer.

Question 4 [28 points] Your solution was: Some recent financial statements for Star Inc. follow. Use this information to calculate financial ratios. (use year-end figures rather than average values where appropriate). For your analysis, assume that all other things have remained constant. Note: All values should be accurate to at least two decimal places.

Marking: Current ratio Your answer was: 5.40 The correct answer was: 5.00 Current Assets = Current Ratio = Current Liabilities

$12,500 $2,500

You will lose 2 marks for this part. Quick ratio Your answer was: 3.90 The correct answer was: 1.30 Quick Ratio Current Assets - Inventory = = Current Liabilities 12,500-9,250 /2500 = 1.30

Cash ratio Your answer was: 6.00 The correct answer was: 0.50 Cash Cash Ratio = = Current Liabilities $1,250 = 0.50 time(s) $2,500 You will lose 2 marks for this part. Total asset turnover Your answer was: 4.00 The correct answer was: 1.12 Total asset turnover ratio = $45,000

= 1.12

Sales = Total assets

$40,000

time(s)

You will lose 2 marks for this part. Inventory turnover Your answer was: 3.00 The correct answer was: 1.95 Inventory turnover ratio Cost of goods sold = = Inventory $18,000 = 1.95 $9,250 time(s) You will lose 2 marks for this part. Receivables turnover Your answer was: 2.00 The correct answer was: 22.50 Sales Receivables turnover ratio = = Accounts receivable $45,000 = 22.50 time(s) $2,000 You will lose 2 marks for this part. Total debt ratio Your answer was: 3.00 The correct answer was: 0.25 Total assets - Total equity Total debt ratio = = Total assets $40,000 - $30,000 = 0.25 $40,000 You will lose 2 marks for this part. Debt-equity ratio Your answer was: 5.00 The correct answer was: 0.33 Debt-equity ratio Total debt = = Total equity $10,000 = 0.33 $30,000 You will lose 2 marks for this part. Equity multiplier

Your answer was: 5.00 The correct answer was: 1.33 Equity Multiplier = 1 + Debt-Equity ratio = 1 + 0.33 = 1.33 There is an another way to calculate it. Equity multiplier = total assets ÷ total equity = $40,000 ÷ $30,000 = 1.33 You will lose 2 marks for this part. Times interest earned ratio Your answer was: 5.00 The correct answer was: 16.00 Earnings before interest and taxes Times interest earned ratio = = Interest paid $24,000 = 16 time(s) $1,500 You will lose 2 marks for this part. Cash coverage ratio Your answer was: 5.00 The correct answer was: 18.00 Cash coverage ratio Earnings before interest and taxes + Depreciation = = Interest paid $24,000 + $3,000 = 18 time(s) $1,500 You will lose 2 marks for this part. Profit margin Your answer was: 5.00 The correct answer was: 0.32 Profit margin Net income = = Sales $14,400 = 0.32 = 32% $45,000 You will lose 2 marks for this part. Return on assets Your answer was: 5.00 The correct answer was: 0.36 Net income Return on asset = = Total assets $14,400 = 0.36 = 36% $40,000 You will lose 2 marks for this part.

Return on equity Your answer was: 5.00 The correct answer was: 0.48 Return on equity Net income = = Total equity $14,400 = 0.48 = 48% $30,000 You will lose 2 marks for this part.

Total marks for this question: 0

Question 5 Zcom Inc. has an equity multiplier of 1.70, total asset turnover of 1.40, and a profit margin of 14 percent. Please make sure your final answer(s) are accurate to 2 decimal places. What is Zcom Inc.'s return on equity? ROE =5% Marking: Return on equity Your answer was: 5.00% The correct answer was: 33.32% To calculate return on equity (ROE), we can use the following formula: Return on equity = Equity multiplier × ROA = Equity multiplier × (Profit margin × Total asset turnover) = 1.70 × (0.14 × 1.40) = 0.3332 = 33.32%

Question 6 [2 points] Velor Inc. has a profit margin of 15 percent, total asset turnover of 1.70, and ROE of 51 percent. Note: Please make sure your final answer is accurate to 2 decimal places. What is Velor Inc.'s debt-equity ratio?

Marking: Debt-equity ratio Your answer was: 4.00 The correct answer was: 1.00 To calculate the debt-equity ratio, we can use the following formula: Debt-equity ratio = [Equity multiplier] - 1 ROE -1 = Profit margin × Total asset turnover

=

0.51 -1 0.15 × 1.70...