Ratio Analysis Section 1. Perfect Solutions, Inc. has a return on sales of 40%, 1,000,000 stocks outstanding, and $3.2 earnings per share. Based on this information, sales would amount to: a. $3,200,000 b. $312,500 c. $8,000,000 d. 1,280,000 Answer: Earnings per share = 3.2 = πππ‘ ππππππ ππ’ππππ ππ π βππππ ππ’π‘π π‘ππππππ πππ‘ ππππππ 1,000,000 Net income = 3,200,000 Return on sales = 0.4 = πππ‘ ππππππ πππππ 3,200,000 πππππ Sales = 8,000,000 Choice (c) 2. Turner Electronics, Inc. has total current liabilities of $312,000, total long term liabilities of $723,000, a debt ratio of 55%, EBIT of $800,000, interest expense of $112,000, and a tax expense of $15,000. The return on assets for this company is: a. 95.65% b. 35.76% c. 37.2% d. 65.1% Answer: Net income = EBIT – Interest – taxes = 800,000 – 112,000 – 15,000 = 673,000 Total liabilities = current liabilities + long term liabilities = 312,000 + 723,000 = 1,035,000 Debt ratio = 0.55 = πππ‘ππ ππππ‘ πππ‘ππ ππ π ππ‘π 1,035,000 πππ‘ππ ππ π ππ‘π Total assets = 1,881,818.182 Return on assets = 673,000 1,881,818.182 = 0.3576 = 35.76% Choice (b) 3. Silver Cloud, Inc. has total stockholder’s equity of $648,000, an interest expense of $50,000, a tax expense of $38,000, and a return on equity of 20%. Based on this information, the times interest earned ratio is: a. 0.33 times b. 12.96 times c. 4.35 times d. 1.48 times Answer: Return on equity = 0.2 = πππ‘ ππππππ ππ€πππ ′ π πππ’ππ‘π¦ πππ‘ ππππππ 648,000 Net income = 129,600 EBIT = Net income + interest + taxes = 129,600 + 50,000 + 38,000 = 217,600 Times interest earned = = πΈπ΅πΌπ πΌππ‘ππππ π‘ 217,600 50,000 = 4.352 Choice (c) 4. Plow Corn, Inc. has an inventory turnover of 3.4 turns, and fixed assets of $425,000. The sum of the company’s liabilities and equity is $785,000. Cost of goods sold is 35% of sales and the company has a current ratio of 4, and a quick ratio of 2.6. Based on this information, what is the amount of sales? a. $1,224,000 b. $4,284,000 c. $1,205,000 d. $900,000 Answer: Total assets = Total liabilities + Owner's equity Total assets = 785,000 Current assets = Total assets – Fixed assets = 785,000 – 425,000 = 360,000 Current ratio = 4= πΆπ’πππππ‘ ππ π ππ‘π πΆπ’πππππ‘ ππππππππ‘πππ 360,000 πΆπ’πππππ‘ ππππππππ‘πππ Current liabilities = 90,000 Quick ratio = 2.6 = πΆπ’πππππ‘ ππ π ππ‘π −πππ£πππ‘πππ¦ πΆπ’πππππ‘ ππππππππ‘πππ 360,000−πππ£πππ‘πππ¦ 90,000 360,000 – Inventory = 234,000 Inventory = 126,000 Inventory turnover = 3.4 = πΆππ π‘ ππ πππππ π πππ πΌππ£πππ‘πππ¦ πΆππ π‘ ππ πππππ π πππ 126,000 Cost of goods sold = 428,400 Cost of goods sold = 0.35 x Sales 428,400 = 0.35 x Sales Sales = 1,224,000 Choice (a) 5. Solid Zone, Co. has a debt-equity ratio of 42%, and total stockholder’s equity of $1,321,000. The company’s gross working capital is $143,000, which is 165% of its net working capital. Based on this information, the capital structure ratio of this company is: a. 31.4% b. 22% c. 27.4% d. 15.8% Answer: Debt ratio = 0.42 = πππ‘ππ ππππ‘ ππ€πππ`π πππ’ππ‘π¦ πππ‘ππ ππππ‘ 1,321,000 Total debt = 554,820 Gross working capital = 1.65 x Net working capital 143,000 = 1.65 (143,000 – Current liabilities) 143,000 = 235,950 – 1.65 Current liabilities 1.65 Current liabilities = 235,950 – 143,000 Current liabilities = 56,333.33 Long term liabilities = Total liabilities – Current liabilities = 554, 820– 56,333.33 = 498,486.67 Capital structure ratio = = πΏπππ π‘πππ ππππ‘ πΏπππ π‘πππ πππππππππ πππ ππ’ππππ 498,486.67 498,486.67 + 1,321,000 = 0.274 = 27.4% Choice (C) 6. Silent Eagle Co. has 1,400,000 stocks outstanding, total current assets of $485,000, total fixed assets of $320,000, a debt ratio of 30%, and a market to book value of 1.7. What is the price-earnings ratio of this company if net income is $4,200,000? a. 0.4025 b. 0.68425 c. 4.38 d. 0.23 Answer: Earnings per share = = πππ‘ ππππππ ππ’ππππ ππ π βππππ 4,200,000 1,400,000 =3 Total assets = Current assets + fixed assets = 485,000 + 320,000 = 805,000 Debt ratio = 0.3 = πππ‘ππ ππππ‘ πππ‘ππ ππ π ππ‘π πππ‘ππ ππππ‘ 805,000 Total debt = 241,500 Owner's equity = Total assets – Total debt = 805,000 – 241,500 = 563,500 Book value per share = = ππ€πππ`π πππ’ππ‘π¦ ππ’ππππ ππ π βππππ 563,500 1,400,000 = 0.4025 Market to Book value = 1.7 = ππππππ‘ πππππ 0.4025 ππππππ‘ πππππ π΅πππ π£πππ’π Market price = 0.68425 ππππππ‘ πππππ Price earnings ratio = πΈπππππππ πππ π βπππ = 0.68425 3 = 0.228 Choice (d) 7. Void, Co. has a total asset turnover rate of 1.8, a debt-equity ratio of 1.5, and a return on assets of 9%. What is the return on equity? What is the return on sales? a. 22.5%; 5% b. 28.9%; 8% c. 34.1%; 7% d. 14.5%; 6% Answer: ROE = ROA x Equity multiplier Equity multiplier = 1 + debt-equity ratio = 1 + 1.5 = 2.5 ROE = 0.09 x 2.5 = 0.225 = 22.5% ROA = Total asset turnover x Return on sales 0.09 = 1.8 x Return on sales Return on sales = 0.05 = 5% Choice (a) 8. Traveler, Inc. currently has a dividend per share of $6 and retained earnings per share of $14. If an investor wishes to purchase 4 shares of stock in the company, he will need to pay $60. The company currently has a book value per share of $18.0, total assets of $140,000, and total current liabilities of $22,000, and net income for the period is $40,000. Based on this information, what is the price-earnings ratio? What is the value of stockholder’s equity? a. 0.75; 36,000 b. 0.75; $118,000 c. 0.25; $118,000 d. 0.25;$36,000 Answer: Price earnings ratio = ππππππ‘ πππππ πΈπππππππ πππ π βπππ Market price per share = 60 4 = 15 Earnings per share = Dividend per share + Retained earnings per share = 6 + 14 = 20 Price earnings ratio = 15 20 =0.75 Earnings per share = 20 = πππ‘ ππππππ ππ’ππππ ππ π βππππ 40,000 ππ’ππππ ππ π βππππ Number of shares = 2000 Book value per share = 18 = ππ€πππ`π πππ’ππ‘π¦ ππ’ππππ ππ π βππππ ππ€πππ`π πππ’ππ‘π¦ 2000 Owner's equity = 36,000 Choice (a) 9. Since 2008, the net income of Coil-Ridge Insurance has been increasing while the number of stocks has remained unchanged. Based on this information, it can be concluded that since 2008: a. Earnings per share have been increasing. b. Earnings per share have been decreasing. c. Earnings per share have remained unchanged. d. Cannot be determined. Answer: Choice (a) 10. All else constant, a decreased number of stocks outstanding would cause _____ in earnings per share, thereby _____ the price earnings ratio, resulting in _____ rate of return on the company’s stock. a. A decrease; increasing; an increased. b. An increase; decreasing; an increased. c. No change; not effecting; an unchanged. d. An effect that may or may not be observed; possibly affecting; either an increased or decreased. Answer: Choice (b) 11. After evaluating the liquidity position of a company, the quick ratio was found to be significantly lower than the current ratio. The cause of the substantial difference between the two ratios is that: a. The company’s current assets are mainly comprised of accounts receivable. b. The company keeps a high amount of cash. c. The company’s current liabilities are too high. d. The company’s current assets are mainly comprised of inventory. Answer: Choice (d) 12. When inventory turnover increases, it is a sign of _____ performance since it reflects on the _____ time it will take for the company to convert _____ into _____. a. Poor; longer; inventory; cash. b. Poor; shorter; cash; inventory. c. Improved; longer; inventory; sales. d. Improved; shorter; inventory; sales. Answer: Choice (d) 13. A higher times interest earned ratio means that _____, and reflects on _____ risk. a. EBIT increased; lower. b. EBIT decreased; higher. c. Either EBIT increased or interest expenses decreased or both; lower. d. Either EBIT decreased or interest expenses increased or both; lower. Answer: Choice (c)
