FINA 210

Chapter 3
Analysis of Financial Statements
1. RGB, Inc., has a gross profit margin of $ 45,000 on sales of $ 150,000. The
balance sheet shows average total assets of $ 75,000 with an average inventory
balance of $ 15,000. What are RGB's total asset turnover and inventory
turnover, respectively?
2. If RGB, Inc., has annual sales of $ 100,000, average accounts payable of $
30,000, and average accounts receivable of $ 25,000, what is RGB's
receivables turnover and average collection period?
3. What is RGB, Inc.'s, return on equity given the following information?
EBIT/Sales= 10%
Sales/Assets= 1.8 times
Interest/Assets= 2%
Assets/Equity=1.9 times

Tax rate= 40%

Current ratio= 2 times

4. Beta Co. has a loan covenant requiring it to maintain a current ratio of 1.5 or
better. As Beta approaches year-end, current assets are $ 20 million ($ 1 in
cash, $ 9 in accounts receivable, and $ 10 in inventory) and current liabilities
are $ 13.5 million.
What is Beta's current ratio?
What is Beta's quick ratio?
If Beta sells $ 2 million in inventory on credit, what will happen to the current
ratio?
5. The RRR Company has a target current ratio of 2.5. Presently, the current ratio
is 3.4 based on current assets of $6,902,000. If RRR expands its inventory
using short-term liabilities (maturities less than one year), how much
additional funding can it obtain before its target current ratio is reached?
6. Last year YYY Company had a 9.00% net profit margin based on $22,000,000
in sales and $15,000,000 of total assets. During the coming year, the president
has set a goal of attaining a 14% return on total assets. How much must firm
sales equal, other things being the same, for the goal to be achieved?
7. U KNO, Inc. uses only debt and common equity funds to finance its assets.
This past year the firm's return on total assets was 13%. The firm financed
42% percent of its assets using debt. What was the firm's return on common
equity?
8. Russell Securities has $237 million in total assets and its corporate tax rate is
40%. The company recently reported that its basic earning power (BEP) ratio
was 35% and its return on assets (ROA) was 11%. What was the companys
interest expense?
9. Strack Houseware Supplies Inc. has $439 million in total assets. The other
side of its balance sheet consists of $57.07 million in current liabilities,
$140.48 million in long-term debt, and $241.45 million in common equity.
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The company has 26,900,000 shares of common stock outstanding, and its
stock price is $49 per share. What is Stracks market-to-book ratio?
10. Moss Motors has $272 million in assets, and its tax rate is 40%. The
companys basic earning power (BEP) ratio is 41%, and its return on assets
(ROA) is 11%. What is Moss times-interest-earned (TIE) ratio?
11. All else being equal, which of the following will increase a companys current
ratio?
a. an increase in accounts receivable
b. an increase in accounts payable
c. an increase in net fixed assets
d. a and b are correct
e. all of the above statements are correct

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Solutions:
1.

TAT=(sales/total assets)=150/75=2
Inventory turnover=(COGS/average inventory)=(150-45)/15=7

2.

RT=(Sales/Average AR)=100/25=4
CP=365/4=91.25

3.

ROE=((EBIT/S)(S/A)-(I/A))(A/EQ)(1-t)
= ((01)(1.8)-(0.02))(1.9)(0.6)=0.1824

4.

Current ratio=Current assets /current liabilities= (1+9+10)/13.5=1.48

Quick ratio= (cash+marketable securities+receivables)/current
liabilities=10/13.5=0.74
If inventory goes down and receivables rise by the same amount, the
numerator would be unchanged. QR=(cash+AR)/AP. AP will decrease
without any change to the numerator, thus increasing the overall ratio.

5.

$1,218,000. First, calculate the current liabilities based on present

information. Now, determine the amount that must be added to both
current assets and current liabilities to make the current ratio equal the
target value (let the additional amount be your variable).

6.

$23,333,333. Use the return on assets formula (ROA = (NI)/(TA)) to

calculate the net income needed to generate a 14% return on assets.
Use the needed net income value in the profit margin formula to
calculate the needed sales.

7.

22.41%The equity multiplier equals total assets divided by common

equity. We know total assets equal debt plus common equity.
Therefore, the equity multiplier equals 100% divided by (100% 42%). 100% represents total assets. We know 58% of total assets are
financed with equity since 42% are financed with debt. Return on
equity equals the return on assets times the equity multiplier.

8.

$39.50. Use the BEP formula to calculate EBIT. Use the ROA formula
to calculate net income. Use net income = (EBIT INT)(1 tax rate)
to calculate the interest expense.

9.

5.46. Calculate the book value per share by dividing common equity by
the share outstanding. Market-to-book equals the stock price per share
(which is given) divided by the book value per share.

10.

1.81. Use the BEP formula to calculate EBIT. Use the ROA formula to
calculate net income. Use net income = (EBIT INT)(1 tax rate) to
calculate the interest expense. Plug information into the TIE formula to
get the answer.

11.

Correct. Increasing current assets increases the current ratio.

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