Question

Discuss some of the limitations associated with performing ratio (financlal statement) analysis. What is the most important ingredient (input) In completing ratio analysis? Explain why. Robust Robots (RR) recently issued 100,000 shares of common stock at $7 per share. The stock has a par value equal to $3 per share.What amount of the $700,000 that RR raised should be reported in the "common stock at par" ac- count, and what amount should be reported in the "Paid-in capital" account? Wiley's Wilderness pays 6 percent interest on Its outstanding debt, which equals $200,000. The company's sales are $540,000, its tax rate is 40 percent, and Its net profit margin is 4 perocent (a) What is Wiley's TIE7 (b) If Wiley's wants to main- tain a TIE equal to 6.0, what must its sales equal? The most recent balance sheet of Infinity Infor- mation Systems (IS) shows that the company has $35 million of common equity and 7 mil- lion shares of common stock outstanding. The company's common stock has a market value equal to $8 per share. IIS's net income was $14 million. What are IIS's (a) P/E ratio and (b) M/B ratio? 2-14 2-5 Crooked Golf's 2014 income statement shows that net income was $90,000, depreciation was $25,000, and taxes were $60,000. What was Crooked Golf's net cash flow in 2014? 2-15 Smitty's Finger-Licking BBQ has a total assets turnover equal to 2.0, a return on equity (ROE) equal to 15 percent, and a debt ratio equal to 60 percent. If Smitty's is financed with debt and common stock, what are its (a) return on assets (ROA) and (b) net profit margin? HighTech Wireless just published its 2014 in- come statement, which shows net income equal to $240,000. The statement also shows that op- erating expenses were $500,000 before includ- ing depreciation, depreciation was $100,000, and the tax rate was 40 percent. If HighTech has 2-6 2-16 Duncan Boutique's total assets are $440,000, its return on assets (ROA) is 8 percent, and its debt ratio is 20 percent. What are Duncan's (a) net income and (b) return on equity (ROE)? no debt, what were its sales revenues in 2014? What was its 2014 net cash flow? 2-7 Credit Card of America (CCA) has a current ra- tio of 3.5 and a quick ratio of 3.0. If its total current assets equal $73,500, what are CCAS (a) current liabilities and (b) inventory? Horatio's Hot Dogs current assets equal $260,000. The company's return on assets (ROA) is 4 percent, its net income is $140,000, its long- term debt equals $1,755,000, and 35 percent of its assets are financed with common equity. Horatio's has no preferred stock. Compute the company's current ratio. 2-17 2-8 At the end of the year, Wrinkle Free Laundry (WFL) had $150,000 in total assets. (a) If WFL's total assets turnover was 2.0, what were its sales revenues? (b) If WFL's return on assets was 6 percent. what were its net income and net profit margin? Fido's Dog Spa's financial statements show that 2-18

Answer 1

2-4.

Common stock at par : $ 300,000.

Paid-in Capital $ 400,000.

2-5. :

Net cash flow : Net income + depreciation = $ 90,000 + $ 25,000 = $ 115,000

2-6 :

Sales revenue: $ 1,000,000

Net cash flow = $ 240,000 + $ 100,000 = $ 340,000.

Sales Revenue	$ 1,000,000
Operating Expenses	500,000
EBITDA	500,000
Less: Depreciation	100,000
Income before Taxes	400,000
Tax ( 40 % )	160,000
Net Income	$ 240,000

2-7:

a. Current liabilities = $ 73,500 / 3.5 = $ 21,000

b. Inventory : $ 10,500

3 = ( 73,500 - x ) / 21,000

63,000 = 73,500 - x

x = $ 10,500

2-8.

Sales revenue = $ 150,000 x 2 = $ 300,000

Net income = $ 150,000 x 6 % = $ 9,000.

Net profit margin = $ 9,000 / $ 300,000 * 100 = 3 %

2-13:

a. TIE = $ 48,000 / $ 12,000 = 4 times.

b. Sales required to maintain a TIE of 6 times : $ 564,000

EBIT required = $12,000 x 6 = $ 72,000

Sales required = $ 492,000 + $ 72,000 = $ 564,000

Sales	$ 540,000
Operating Expenses	492,000
EBIT	48,000
Interest Expense	12,000
Income before Taxes	36,000
Tax @ 40%	14,400
Net income	$ 21,600