Chapter 4 Evaluating a Firm's Financial Performance

113) All of the following will improve a firm's liquidity position EXCEPT

A) increase accounts receivable turnover.

B) increase inventory turnover.

C) increase the average collection period.

D) increase long-term debt and invest the money in marketable securities.

114) A company borrows $10,000 and puts the money into its checking account. This transaction will increase the company's current ratio if prior to the transaction the company's current ratio was

A) equal to one.

B) greater than one.

C) less than one.

D) greater than or less than one, but not equal to one.

115) Blanton Corporation increased its financial leverage during 2010 by taking out a loan and using the proceeds to buy back common stock. At the end of 2010, the corporation reported higher earnings per share and higher return on equity. However, its stock price declined. Discuss why this may happen.

Please refer to Table 4-6 for the following question.

Table 4-6

Financial Data for Springfield Power Co. as of December 31, 2010:

Inventory	$300,000
Long-term debt	500,000
Interest expense	25,000
Accumulated depreciation	450,000
Cash	280,000
Net sales (all credit)	1,800,000
Common stock	900,000
Accounts receivable	325,000
Operating expense (incl. depr. exp. and taxes)	625,000
Notes payable-current	200,000
Cost of goods sold	1,100,000
Plant and equipment	1,400,000
Accounts payable	180,000
Marketable securities	80,000
Accrued wages	45,000
Retained earnings	190,000

116) From the information presented in Table 4-6, calculate the following ratios for the Springfield Power Co.

i. current ratio

ii. acid test ratio

iii. average collection period

iv. inventory turnover

v. gross profit margin

vi. operating profit margin

vii. net profit margin

viii. total asset turnover

Please refer to Table 4-7 for the following question.

Table 4-7

Hokie Corporation Comparative Balance Sheet

For the Years Ending December 31, 2009 and 2010

(Millions of Dollars)

Assets	2009		2010
Current Assets:
Cash	$2		$10
Accounts receivable	16		12
Inventory	22		26
Total current assets	$40		$48
Gross fixed assets:	$120		$124
Less accumulated depreciation	(60)		(64)
Net fixed assets	60		60
Total assets	$100		$108
Liabilities and owners' equity:
Current liabilities:
Accounts payable	$16		$18
Notes payable	10		10
Total current liabilities	$26		$28
Long-term debt	20		18
Owners' equity:
Common stock	40		40
Retained earnings	14		22
Total liabilities and owners' equity	$100		$108

Hokie had net income of $28 million for 2010 and paid total cash dividends of $20 million to their common stockholders.

117) Calculate the following 2010 financial ratios of Aggie Corporation using the information given in Table 4-7:

i. current ratio

ii. acid test ratio

iii. debt ratio

iv. return on total assets

v. return on common equity

118) Beverly Corp. had total sales of $1,200,000 in 2010 (80 percent of its sales are credit). The company's gross profit margin is 25 percent, its ending inventory is $150,000, and its accounts receivable balance is $90,000. What additional amount of cash could the firm have generated if it had increased its inventory turnover ratio to 9.0 and reduced its average collection period to 28.21875 days?

119) Complete the following balance sheet using the information given. Round account balances to the nearest dollar.

Balance Sheet			Income Statement
Cash			Sales (All Credit)	$20,000
Accounts receivable			Cost of goods sold	10,000
Inventory			Operating expenses	6,000
Net fixed assets			Interest expense	100
Total assets			Taxes	1,365
			Net income	$2,535
Accounts payable
Short-term notes payable	$1,425		Ratios:
Long-term debt			Profit Margin =	12.675%
Common stock	$5,000		Return on Equity =	15%
Retained earnings			Quick Ratio =	1.2
Total Liabilities and equity			Return on Total Assets =	10%
			Fixed Asset Turnover =	1.6
			Current Ratio =	2
			Days Sales Outstanding =	45

120) Complete the following balance sheet using the information given. Round account balances to the nearest dollar.

Balance Sheet			Income Statement
Cash			Sales (All Credit)	$16,000
Accounts receivable			Cost of goods sold	11,000
Inventory			Operating expenses	1,000
Net fixed assets			Interest expense	200
Total assets	$20,000		Taxes	1,000
			Net income	$2,800
Accounts payable
Short-term notes payable	$1,000		Ratios:
Long-term debt			Operating Profit Margin =	25%
Common stock	$1,500		Return on Equity =	20%
Retained earnings			Quick Ratio =	31.9375
Total Liabilities and equity			Fixed Asset Turnover =	2
			Current Ratio =	5
			Days Sales Outstanding =	2

121) a. Using the financial statements for GMT Enterprises for 2010 (given below), calculate the return on equity, the debt ratio, and the times interest earned ratio.

b. Suppose the industry average debt ratio is 50%. Give one reason why the debt ratio for GMT Enterprises may be considered favorable, and give one reason why the debt ratio for GMT Enterprises may be considered unfavorable.

GMT Enterprises

2010 Financial Statements

Income Statement ($)
Sales	10,000
Operating expenses	8,200
EBIT	1,800
Interest expense	100
EBT	1,700
Taxes (40%)	680
Net income	1,020
Balance Sheet ($)
Current assets	1,500
Fixed assets	4,000
Total assets	5,500
Accounts payable	900
Accruals	600
Long-term debt	400
Common stock	2,100
Retained earnings	1,500
Total liabilities & equity	5,500

Balance Sheet (000)
Cash	$500
Accounts receivable	1,500
Inventories	500
Current assets	2,500
Net fixed assets	5,000
Total Assets	7,500
Accounts payable	1,200
Bank note	300
Total current liabilities	1,500
long-term debt	4,000
Common stock	300
Retained earnings	1,700
Total liabilities and owners' equity	$7,500
Income Statement (000)
Net sales	$8,500
Cost of goods sold	(3,400)
Gross profit	5,100
Operating expenses	(2,900)
Net operating income	2,200
Interest expense	(580)
Earnings before taxes	1,620
Income tax (34%)	(551)
Net income	$1,069

a. Compute the following ratios: Current ratio, Acid test ratio, Debt ratio, Total asset turnover, Operating profit margin, Return on total investments, Times interest earned, Inventory turnover.

b. All other things equal, compute the dollar amount of sales needed to achieve an 18% return on total assets for the coming year.

c. Given Johnson's inventory turnover ratio, find a way of computing the current level of inventory given this ratio and assuming the current level of inventories is unknown. Set up but do not solve.