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Questions and Answers of Finance

Why would the inventory turnover ratio be more important for someone analyzing a grocery store chain than an insurance company?
Over the past year, M. D. Ryngaert & Co. had an increase in its current ratio and a decline in its total assets turnover ratio. However, the company’s sales, cash and equivalents, DSO, and fixed
Profit margins and turnover ratios vary from one industry to another. What differences would you expect to find between the turnover ratios, profit margins, and DuPont equations for a grocery chain
How does inflation distort ratio analysis comparisons for one company over time (trend analysis) and for different companies that are being compared? Are only balance sheet items or both balance
If a firm’s ROE is low and management wants to improve it, explain how using more debt might help.
Give some examples that illustrate how (a) Seasonal factors and (b) Different growth rates might distort a comparative ratio analysis. How might these problems be alleviated?
Why is it sometimes misleading to compare a company’s financial ratios with those of other firms that operate in the same industry? Discuss.
Suppose you were comparing a discount merchandiser with a high-end merchandiser. Suppose further that both companies had identical ROEs. If you applied the DuPont equation to both firms, would you
Indicate the effects of the transactions listed in the following table on total current assets, current ratio, and net income. Use (+) to indicate an increase, (-) to indicate a decrease, and (0) to
Baker Brothers has a DSO of 40 days, and its annual sales are $7,300,000. What is its accounts receivable balance? Assume that it uses a 365-day year.
Bartley Barstools has an equity multiplier of 2.4, and its assets are financed with some combination of long-term debt and common equity. What is its debt ratio?
Doublewide Dealers has an ROA of 10%, a 2% profit margin, and an ROE of 15%. What is its total assets turnover? What is its equity multiplier?
Jaster Jets has $10 billion in total assets. Its balance sheet shows $1 billion in current liabilities, $3 billion in long-term debt, and $6 billion in common equity. It has 800 million shares of
A company has an EPS of $2.00, a cash flow per share of $3.00, and a price/cash flow ratio of 8.0#. What is its P/E ratio?
A firm has a profit margin of 2% and an equity multiplier of 2.0. Its sales are $100 million, and it has total assets of $50 million. What is its ROE?
Ebersoll Mining has $6 million in sales, its ROE is 12%, and its total assets turnover is 3.2×. The company is 50% equity financed. What is its net income?
Duval Manufacturing recently reported the following information:Net income $600,000ROA 8%Interest expense $225,000Duval’s tax rate is 35%. What is its basic earning power (BEP)?
You are given the following information: Stockholders’ equity = $3.75 billion, price/earnings ratio = 3.5, common shares outstanding = 50 million, and market/book ratio = 1.9. Calculate the price
Assume the following relationships for the Brauer Corp.:Sales/total assets 1.5×Return on assets (ROA) 3%Return on equity (ROE) 5%Calculate Brauer’s profit margin and debt ratio.
Graser Trucking has $12 billion in assets, and its tax rate is 40%. Its basic earning power (BEP) ratio is 15%, and its return on assets (ROA) is 5%. What is its times-interest-earned (TIE) ratio?
The H.R. Pickett Corp. has $500,000 of debt outstanding, and it pays an annual interest rate of 10%. Its annual sales are $2 million, its average tax rate is 30%, and its net profit margin is 5%.
Midwest Packaging’s ROE last year was only 3%; but its management has developed a new operating plan that calls for a total debt ratio of 60%, which will result in annual interest charges of
Lloyd Inc. has sales of $200,000, a net income of $15,000, and the following balance sheet: The new owner thinks that inventories are excessive and can be lowered to the point where the current
Central City Construction (CCC) needs $1 million of assets to get started, and it expects to have a basic earning power ratio of 20%. CCC will own no securities, so all of its income will be
Which of the following statements is most correct?a. If a firm’s expected basic earning power (BEP) is constant for all of its assets and exceeds the interest rate on its debt, adding assets and
AEI Incorporated has $5 billion in assets, and its tax rate is 40%. Its basic earning power (BEP) ratio is 10%, and its return on assets (ROA) is 5%. What is AEI’s times-interest-earned (TIE) ratio?
The Petry Company has $1,312,500 in current assets and $525,000 in current liabilities. Its initial inventory level is $375,000, and it will raise funds as additional notes payable and use them to
Harrelson Inc. currently has $750,000 in accounts receivable, and its days sales outstanding (DSO) is 55 days. It wants to reduce its DSO to 35 days by pressuring more of its customers to pay their
Fontaine Inc. recently reported net income of $2 million. It has 500,000 shares of common stock, which currently trades at $40 a share. Fontaine continues to expand and anticipates that 1 year from
Complete the balance sheet and sales information using the following financial data: Debt ratio: 50% Current ratio: 1.8( Total assets turnover: 1.5( Days sales outstanding: 36.5 daysa Gross profit
Data for Barry Computer Co. and its industry averages follow. a. Calculate the indicated ratios for Barry. b. Construct the DuPont equation for both Barry and the industry. c. Outline Barry's
A firm has been experiencing low profitability in recent years. Perform an analysis of the firm’s financial position using the DuPont equation. The firm has no lease payments but has a $2 million
Why are ratios useful? What are the five major categories of ratios?
Calculate D’Leon’s 2009 current and quick ratios based on the projected balance sheet and income statement data. What can you say about the company’s liquidity positions in 2007, 2008, and as
Calculate the 2009 inventory turnover, days sales outstanding (DSO), fixed assets turnover, and total assets turnover. How does D’Leon’s utilization of assets stack up against other firms in its
Calculate the 2009 debt and times-interest-earned ratios. How does D’Leon compare with the industry with respect to financial leverage? What can you conclude from these ratios?
Calculate the 2009 operating margin, profit margin, basic earning power (BEP), return on assets (ROA), and return on equity (ROE). What can you say about these ratios?
Calculate the 2009 price/earnings ratio and market/book ratio. Do these ratios indicate that investors are expected to have a high or low opinion of the company?
Use the DuPont equation to provide a summary and overview of D’Leon’s financial condition as projected for 2009. What are the firm’s major strengths and weaknesses?
Use the following simplified 2009 balance sheet to show, in general terms, how an improvement in the DSO would tend to affect the stock price.?For example, if the company could improve its
Does it appear that inventories could be adjusted? If so, how should that adjustment affect D’Leon’s profitability and stock price?
In 2008, the company paid its suppliers much later than the due dates; also it was not maintaining financial ratios at levels called for in its bank loan agreements. Therefore, suppliers could cut
In hindsight, what should D’Leon have done back in 2007?
What are some potential problems and limitations of financial ratio analysis? Discuss.
What are some qualitative factors analysts should consider when evaluating a company’s likely future financial performance? Discuss.
What is an opportunity cost? How is this concept used in TVM analysis, and where is it shown on a time line? Is a single number used in all situations? Explain.
Explain whether the following statement is true or false: $100 a year for 10 years is an annuity; but $100 in Year 1, $200 in Year 2, and $400 in Years 3 through 10 does not constitute an annuity.
If a firm’s earnings per share grew from $1 to $2 over a 10-year period, the total growth would be 100%, but the annual growth rate would be less than 10%. True or false? Explain.
Banks and other lenders are required to disclose a rate called the APR. What is this rate? Why did Congress require that it be disclosed? Is it the same as the effective annual rate? If you were
What is a loan amortization schedule, and what are some ways these schedules are used?
If you deposit $10,000 in a bank account that pays 10% interest annually, how much will be in your account after 5 years? Discuss.
What is the present value of a security that will pay $5,000 in 20 years if securities of equal risk pay 7% annually? Discuss.
Your parents will retire in 18 years. They currently have $250,000, and they think they will need $1,000,000 at retirement. What annual interest rate must they earn to reach their goal, assuming they
If you deposit money today in an account that pays 6.5% annual interest, how long will it take to double your money? Discuss.
You have $42,180.53 in a brokerage account, and you plan to deposit an additional $5,000 at the end of every future year until your account totals $250,000. You expect to earn 12% annually on the
What’s the future value of a 7%, 5-year ordinary annuity that pays $300 each year? If this was an annuity due, what would its future value be?
An investment will pay $100 at the end of each of the next 3 years, $200 at the end of Year 4, $300 at the end of Year 5, and $500 at the end of Year 6. If other investments of equal risk earn 8%
You want to buy a car, and a local bank will lend you $20,000. The loan will be fully amortized over 5 years (60 months), and the nominal interest rate will be 12% with interest paid monthly. What
Find the following values using the equations and then a financial calculator. Compounding/discounting occurs annually.a. An initial $500 compounded for 1 year at 6%b. An initial $500 compounded for
Find the following values. Compounding/discounting occurs annually.a. An initial $500 compounded for 10 years at 6%b. An initial $500 compounded for 10 years at 12%c. The present value of $500 due in
Shalit Corporation’s 2008 sales were $12 million. Its 2003 sales were $6 million.a. At what rate have sales been growing?b. Suppose someone made this statement: “Sales doubled in 5 years. This
Find the interest rates earned on each of the following:a. You borrow $700 and promise to pay back $749 at the end of 1 year.b. You lend $700 and the borrower promises to pay you $749 at the end of 1
How long will it take $200 to double if it earns the following rates? Compounding occurs once a year.a. 7%b. 10%c. 18%d. 100%
Find the future values of these ordinary annuities. Compounding occurs once a year.a. $400 per year for 10 years at 10%b. $200 per year for 5 years at 5%c. $400 per year for 5 years at 0%d. Rework
Find the present values of these ordinary annuities. Discounting occurs once a year.a. $400 per year for 10 years at 10%b. $200 per year for 5 years at 5%c. $400 per year for 5 years at 0%d. Rework
What is the present value of a $100 perpetuity if the interest rate is 7%? If interest rates doubled to 14%, what would its present value be?
You borrow $85,000; the annual loan payments are $8,273.59 for 30 years. What interest rate are you being charged?
a. Find the present values of the following cash flow streams at 8% compounded annually. b. What are the PVs of the streams at 0% compoundedannually?
Your client is 40 years old; and she wants to begin saving for retirement, with the first payment to come one year from now. She can save $5,000 per year; and you advise her to invest it in the stock
A rookie quarterback is negotiating his first NFL contract. His opportunity cost is 10%. He has been offered three possible 4-year contracts. Payments are guaranteed, and they would be made at the
Crissie just won the lottery, and she must choose between three award options. She can elect to receive a lump sum today of $61 million, to receive 10 end-of-year payments of $9.5 million, or to
Jan sold her house on December 31 and took a $10,000 mortgage as part of the payment. The 10-year mortgage has a 10% nominal interest rate, but it calls for semiannual payments beginning next June
Find the amount to which $500 will grow under each of these conditions:a. 12% compounded annually for 5 yearsb. 12% compounded semiannually for 5 yearsc. 12% compounded quarterly for 5 yearsd. 12%
Find the present value of $500 due in the future under each of these conditions:a. 12% nominal rate, semiannual compounding, discounted back 5 yearsb. 12% nominal rate, quarterly compounding,
Find the future values of the following ordinary annuities:a. FV of $400 paid each 6 months for 5 years at a nominal rate of 12% compounded semiannuallyb. FV of $200 paid each 3 months for 5 years at
You have saved $4,000 for a down payment on a new car. The largest monthly payment you can afford is $350. The loan will have a 12% APR based on end-of-month payments. What is the most expensive car
Bank A pays 4% interest compounded annually on deposits, while Bank B pays 3.5% compounded daily.a. Based on the EAR (or EFF%), which bank should you use?b. Could your choice of banks be influenced
As a jewelry store manager, you want to offer credit, with interest on outstanding balances paid monthly. To carry receivables, you must borrow funds from your bank at a nominal 6%, monthly
Your firm sells for cash only; but it is thinking of offering credit, allowing customers 90 days to pay. Customers understand the time value of money, so they would all wait and pay on the 90th day.
Erika and Kitty, who are twins, just received $30,000 each for their 25th birthday. They both have aspirations to become millionaires. Each plans to make a $5,000 annual contribution to her “early
Starting next year, you will need $10,000 annually for 4 years to complete your education. (One year from today you will withdraw the first $10,000.) Your uncle deposits an amount today in a bank
Six years from today you need $10,000. You plan to deposit $1,500 annually, with the first payment to be made a year from today, in an account that pays an 8% effective annual rate. Your last
You want to buy a house within 3 years, and you are currently saving for the down payment. You plan to save $5,000 at the end of the first year, and you anticipate that your annual savings will
a. Set up an amortization schedule for a $25,000 loan to be repaid in equal installments at the end of each of the next 3 years. The interest rate is 10% compounded annually.b. What percentage of the
You want to buy a house that costs $100,000. You have $10,000 for a down payment, but your credit is such that mortgage companies will not lend you the required $90,000. However, the realtor
a. You plan to make five deposits of $1,000 each, one every 6 months, with the first payment being made in 6 months. You will then make no more deposits. If the bank pays 4% nominal interest,
Simon recently received a credit card with an 18% nominal interest rate. With the card, he purchased a new stereo for $350. The minimum payment on the card is only $10 per month.a. If Simon makes the
It is now December 31, 2008 (t = 0), and a jury just found in favor of a woman who sued the city for injuries sustained in a January 2007 accident. She requested recovery of lost wages plus $100,000
Your father is 50 years old and will retire in 10 years. He expects to live for 25 years after he retires, until he is 85. He wants a fixed retirement income that has the same purchasing power at the
A father is now planning a savings program to put his daughter through college. She is 13, she plans to enroll at the university in 5 years, and she should graduate in 4 years. Currently, the annual
Answer the following questions:a. Assuming a rate of 10% annually, find the FV of $1,000 after 5 years.b. What is the investment’s FV at rates of 0%, 5%, and 20% after 0, 1, 2, 3, 4, and 5 years?c.
Draw time lines for (1) a $100 lump sum cash flow at the end of Year 2, (2) an ordinary annuity of $100 per year for 3 years, and (3) an uneven cash flow stream of -$50, $100, $75, and $50 at the end
What’s the future value of $100 after 3 years if it earns 10%, annual compounding?
What’s the present value of $100 to be received in 3 years if the interest rate is 10%, annual compounding?
What annual interest rate would cause $100 to grow to $125.97 in 3 years?
If a company’s sales are growing at a rate of 20% annually, how long will it take sales to double?
A farmer can spend $60/acre to plant pine trees on some marginal land. The expected real rate of return is 4%, and the expected inflation rate is 6%. What is the expected value of the timber after 20
What's the difference between an ordinary annuity and an annuity due? What type of annuity is shown here? How would you change it to the other type ofannuity?
What is the future value of a 3-year, $100 ordinary annuity if the annual interest rate is 10%?
What is its present value?

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