Chap 1: Financial Statements Analysis and Financial Models

A ________ standardizes items on the income statement and balance sheet as a percentage of total
sales and total assets, respectively. E. common-size statement

A banker considering loaning a firm money for ten years would most likely prefer the firm have a
debt ratio of _______ and a times interest earned ratio of _______. E..35; 3.00

A firm has 5,000 shares of stock outstanding, sales of $6,000, an enterprise value of $5 million and
an EBITDA of 1 million. What is the enterprise value multiple? Enterprise value multiple =
enterprise value/EBITDA = $5 million/$1 million = 5. E.5.0

A firm has 5,000 shares of stock outstanding, sales of $6,000, net income of $800, a price-ratio of
10, and a book value per share of $.50. What is the market-to-book ratio? Earnings per share =
$800 5,000 = $.16; Price per share = $.16 10 = $1.60; Market-to-book ratio = $1.60 $.50 = 3.2D.3.2

A firm has a debt-equity ratio of .40. What is the total debt ratio? The debt-equity ratio is .40. Thus,
if total debt is $40, total equity is $100 and total assets are $140. Total debt ratio = $40 $140 =
.29A..29

A firm has a market capitalization of $2 million, market value of interest-bearing debt of $1

million, book value of interest-bearing debt of $500,000 and cash of $100,000. What is the
enterprise value? Enterprise value = $2 million + $1 million - $100,000 = 2.9 million B.$2.9
million

A firm has a return on equity of 15%. The debt-equity ratio is 50%. The total asset turnover is 1.25
and the profit margin is 8%. The total equity is $3,200. What is the amount of the net income?
Using the Du Pont identity: Total assets = (1 + .50) $3,200 = $4,800; Total sales = $4,800 1.25 =
$6,000; Net income = $6,000 .08 = $480 A. $480

A firm has a total debt ratio of .47. This means that that firm has 47 cents in debt for every: D.$.53
in equity

A firm has net working capital of $600, net fixed assets of $2,400, sales of $8,000, and current
liabilities of $800. How many dollars worth of sales are generated from every $1 in total assets?
Total asset turnover = $8,000 [($600 + $800) + $2,400] = 2.11; Every $1 in total assets generates
$2.11 in sales. A. $2.11

A firm has sales of $1,200, net income of $200, net fixed assets of $500, and current assets of
$300. The firm has $200 in inventory. What is the common-size statement value of inventory?
Common-size inventory C.25.0 %
A firm has sales of $1,500, net income of $100, total assets of $1,000, and total equity of $700.
Interest expense is $50. What is the common-size statement value of the interest expense?
Common-size interest = $50 $1,500 = .033 = 3.3% A. 3.3 %
A firm has sales of $4,000, costs of $3,000, interest paid of $100, and depreciation of $400. The
tax rate is 34%. What is the value of the cash coverage ratio? Cash coverage ratio = ($3,600 -
$2,800)/ $100 = 10 E.10

A firm has total debt of $1,200 and a debt-equity ratio of .40. What is the value of the total assets?
Total equity = $1,200 /40 = $3,000; Total assets = $1,200 + $3,000 = $4,200 D.$4,200

A firm's market capitalization is equal to: C. firm’s stock price multiplied by number of shares
outstanding.
A firm's sustainable growth rate in sales directly depends on its: E. All of these

A supplier, who requires payment within ten days, is most concerned with which one of the
following ratios when granting credit? B. cash

A total asset turnover measure of 1.03 means that a firm has $1.03 in: D. sales for every $1 in total
assets.
An increase in which one of the following accounts increases a firm's current ratio without
affecting its quick ratio? C.inventory
BGL Enterprises increases its operating efficiency such that costs decrease while sales remain
constant. As a result, given all else constant, the: A. return on equity will increase
Enterprise value focused on: A. market values of debt and equity.

Financial planning, when properly executed: D. helps ensure that proper financing is in place to
support the desired level of growth.
Financial ratios that measure a firm's ability to pay its bills over the short run without undue stress
are known as _____ ratios. C. short-term solvency
Frederico's has a profit margin of 6%, a return on assets of 8%, and an equity multiplier of 1.4.
What is the return on equity? Return on equity = 8% 1.4 = 11.2%, using the Du Pont
IdentityC.11.2%

From a cash flow position, which one of the following ratios best measures a firm's ability to pay
the interest on its debts? B. cash coverage ratio

Growth can be reconciled with the goal of maximizing firm value: B. because growth must be an
outcome of decisions that maximize NPV.

If a firm bases its growth projection on the rate of sustainable growth, and shows positive net
income, then the: D. debt-equity ratio will remain constant while retained earnings increase.

If a firm decreases its operating costs, all else constant, then: E. both the return on assets and the
return on equity increase.
If a firm produces a 10% return on assets and also a 10% return on equity, then the firm: A. has no
debt of any kind.

If shareholders want to know how much profit a firm is making on their entire investment in the
firm, the shareholders should look at the: C. return on equity.

In the financial planning model, external funds needed (EFN) is equal to changes in B. assets -
(liabilities + equity).

It is easier to evaluate a firm using its financial statements when the firm: C.uses the same
accounting procedures as other firms in its industry.

Jessica's Boutique has cash of $50, accounts receivable of $60, accounts payable of $400, and
inventory of $100. What is the value of the quick ratio? Quick ratio = ($50 + $60) $400 =
.275C..275

Jupiter Explorers has $6,400 in sales. The profit margin is 4%. There are 6,400 shares of stock
outstanding. The market price per share is $1.20. What is the price-earnings ratio? Earnings per
share = (.04 $6,400) 6,400 = .04; Price-earnings ratio = $1.20 .04 = 30 D.30

Last year, Alfred's Automotive had a price-earnings ratio of 15. This year, the price earnings ratio
is 18. Based on this information, it can be stated with certainty that: E.either the price per share,
the earnings per share, or both changed

Lee Sun's has sales of $3,000, total assets of $3,000, and a profit margin of 5%. The firm has a
total debt ratio of 60%. What is the return on equity? Return on equity = (.05 $3,000) [$3000 (1 -
.6)] = 12,5% B.12.5%

Marcie's Mercantile wants to maintain its current dividend policy, which is a payout ratio of 40%.
The firm does not want to increase its equity financing but is willing to maintain its current debt-
equity ratio. Given these requirements, the maximum rate at which Marcie's can grow is equal to:
D.the sustainable rate of growth.

Mario's Home Systems has sales of $2,800, cost of goods sold of $2,100, inventory of $600, and
accounts receivable of $600. How many days, on average, does it take Mario's to sell its inventory?
Inventory turnover = $2,100/ $600 = 3.5; Days in inventory = 365/ 3,5 = 104,29 days D.104.29
days

On a common-size balance sheet, all _______ accounts are shown as a percentage of _______.D.
liability; total assets

One key reason a long-term financial plan is developed is because: C. there are direct connections
between achievable corporate growth and the financial policy.

One of the primary weaknesses of many financial planning models is that they: C. ignore the goals
and objectives of senior management.
Patti's has net income of $1,800, a price-earnings ratio of 12, and earnings per share of $1.20. How
many shares of stock are outstanding? Number of shares = $1,800 $1.20 = 1,500 C.1,500

Projected future financial statements are called: B.pro forma statements.

Puffy's Pastries generates five cents of net income for every $1 in sales. Thus, Puffy's has a
_______ of 5%. C.profit margin

Ratios that measure a firm's financial leverage are known as ________ ratios. B. long-term
solvency

Ratios that measure how efficiently a firm uses its assets to generate sales are known as _______
ratios. A. asset management

Ratios that measure how efficiently a firm uses its assets to generate sales are known as _______
ratios. A. asset management

Ratios that measure how efficiently a firm's management uses its assets and equity to generate
bottom line net income are known as _______ ratios. D.profitability

Relationships determined from a firm's financial information and used for comparison purposes
are known as: A. financial ratios.

Rosita's Resources paid $250 in interest and $130 in dividends last year. The times interest earned
ratio is 3.8 and the depreciation expense is $80. What is the value of the cash coverage ratio? EBIT
= 3.8 $250 = $950; Cash coverage ratio = ($950 + $80)/ $250 = 4.04 C.4.12

Rosita's Restaurant has sales of $5,000, total debt of $1,300, total equity of $2,400, and a profit
margin of 6%. What is the return on assets? Return on assets = (.06 $5000) ($1,300 + $2,400) =
8,11% A. 8.11%

Samuelson's has a debt-equity ratio of 40%, sales of $8,000, net income of $600, and total debt of
$2,400. What is the return on equity? Return on equity = $600 ($2,400 .40) = .10 = 10% D.10.00%

Sustainable growth can be determined by the: B. profit margin, the payout ratio, the debt-to-equity
ratio, and the asset requirement or asset turnover ratio.

Syed's Industries has accounts receivable of $700, inventory of $1,200, sales of $4,200, and cost
of goods sold of $3,500. How long does it take Syed's to both sell its inventory and then collect
the payment on the sale? Inventory turnover = $3,500/$1,200 = 2.91; Days in inventory = 365 2.91
= 125.42; Accounts receivable turnover = $4,200/ $700 = 6; Days' sales in receivables = 365/ 6 =
60.83; Total days in inventory and receivables = 125.42 + 60.83 = 189.81 days = 190 days
(rounded) D.186 days

The _______ breaks down return on equity into three component parts. A. Du Pont identity
The cash ratio is measured as: E. cash on hand divided by current liabilities.
The current ratio is measured as: B. current assets divided by current liabilities.

The debt-equity ratio is measured as total: C. debt divided by total equity.

The equity multiplier ratio is measured as total: E. assets divided by total equity.

The External Funds Needed (EFN) equation does not measure the: C. rate of return to shareholders
given the change in sales.

The financial ratio days' sales in inventory is measured as: E.365 days divided by the inventory
turnover

The financial ratio days' sales in receivables is measured as: D.365 days divided by the receivables
turnover.

The financial ratio measured as earnings before interest and taxes, divided by interest expense is
the: C. times interest earned ratio.

The financial ratio measured as earnings before interest and taxes, plus depreciation, divided by
interest expense, is the: A. cash coverage ratio.

The financial ratio measured as net income divided by sales is known as the firm's: A. profit
margin.

The financial ratio measured as net income divided by total assets is known as the firm's: B.return
on assets.

The financial ratio measured as net income divided by total equity is known as the firm's: C. return
on equity.

The financial ratio measured as the price per share of stock divided by earnings per share is known
as the: D. price-earnings ratio.

The financial ratio measured as total assets minus total equity, divided by total assets, is the: A.total
debt ratio.

The higher the inventory turnover measure, the: A. faster a firm sells its inventory.

The inventory turnover ratio is measured as: C. cost of goods sold divided by inventory.

The long-term debt ratio is probably of most interest to a firm's: D. mortgage holder.

The main objective of long-term financial planning models is to: A. determine the asset
requirements given the investment activities of the firm. B. plan for contingencies or uncertain
events. C.determine the external financing needs.

The market-to-book ratio is measured as: E. market value of equity per share divided by book
value of equity per share.
The only difference between Joe's and Moe's is that Joe's has old, fully depreciated equipment.
Moe's just purchased all new equipment which will be depreciated over eight years. Assuming all
else equal: D. Moe’s will have a lower profit margin.

The percentage of sales method: E. Both separates accounts that vary with sales and those that do
not vary with sales; and allows the analyst to calculate how much financing the firm will need to
support the predicted sales level.

The quick ratio is measured as: D. current assets minus inventory, divided by current liabilities.
The receivables turnover ratio is measured as: B. sales divided by accounts receivable.

The sustainable growth rate will be equivalent to the internal growth rate when: A. a firm has no
debt.

The sustainable growth rate: B.is normally higher than the internal growth rate.

The three parts of the Du Pont identity can be generally described as: I. operating efficiency, asset
use efficiency and firm profitability. II. financial leverage, operating efficiency and asset use
efficiency. III. the equity multiplier, the profit margin and the total asset turnover. IV. the debt-
equity ratio, the capital intensity ratio and the profit margin. B.II and III only

The total asset turnover ratio is measured as: B. sales divided by total assets.
To calculate sustainable growth rate without using return on equity, the analyst needs the: A. profit
margin; B. payout ratio; C. debt-to-equity ratio; D. total asset turnover.

Turner's Inc. has a price-earnings ratio of 16. Alfred's Co. has a price-earnings ratio of 19. Thus,
you can state with certainty that one share of stock in Alfred's: B.has a higher market price per
dollar of earnings than does one share of Turner's.

Vinnie's Motors has a market-to-book ratio of 3. The book value per share is $4.00. Holding
market-to-book constant, a $1 increase in the book value per share will: D.tend to cause the market
price per share to rise.

When examining the EBITDA ratio, lower numbers are: A. considered good.

Which of the following are liquidity ratios? I. cash coverage ratio II. current ratio III. quick ratioIV.
inventory turnover A. II and III only

Which of the following represent problems encountered when comparing the financial statements
of one firm with those of another firm? I. Either one, or both, of the firms may be conglomerates
and thus have unrelated lines of business. II. The operations of the two firms may vary
geographically. III. The firms may use differing accounting methods for inventory purposes. IV.
The two firms may be seasonal in nature and have different fiscal year ends. E.I, II, III, and IV
Which of the following will increase sustainable growth? C.Increase profit margin
Which one of the following sets of ratios applies most directly to shareholders? D.Market-to-book
ratio and price-earnings ratio

Which one of the following statements is correct concerning ratio analysis? A.A single ratio is
often computed differently by different individuals.

Which one of the following statements is correct if a firm has a receivables turnover measure of
10? D.The firm has an average collection period of 365 days.

Which one of the following statements is correct? B. Financial statements are frequently the basis
used for performance evaluations.

Which two of the following are most apt to cause a firm to have a higher price-earnings ratio? I.
slow industry outlook II. high prospect of firm growth III. very low current earnings IV. investors
with a low opinion of the firm B.II and III only

Which two of the following represent the most effective methods of directly evaluating the
financial performance of a firm? I. comparing the current financial ratios to those of the same firm
from prior time periods II. comparing a firm's financial ratios to those of other firms in the firm's
peer group who have similar operations III. comparing the financial statements of the firm to the
financial statements of similar firms operating in other countries IV. comparing the financial ratios
of the firm to the average ratios of all firms located in the same geographic area A. I and II only

What is the quick ratio for 2011?

A. .82

B..95

C.1.36
D.2.18
E.2.28

What is the days' sales in receivables in 2011?

A. 31.8 days

B.33.7 days

C.38.4 days
D.41.9 days

E.47.4 days

What is the equity multiplier for 2011?

A. 1.6
B.1.8

C.2.0

D.2.3

E.2.5

What is the cash coverage ratio for 2011?

A. 11.6
B.12.8

C.13.7

D.17.3

E.18.8

What is the return on equity for 2011?

A. 5.7%

B.6.8%

C.13.0%

D.15.3%
E.16.0%

Windswept, Inc. has 90 million shares of stock outstanding. Its price-earnings ratio for 2011 is 12.
What is the market price per share of stock?
A. $57.12

B.$59.94
C.$62.82

D.$64.13

E.$65.03

In 2011, how many days on average did it take Bayside to sell its inventory?

A. 126.1 days

B.127.9 days
C.153.8 days

D.176.5 days

E.178.9 days
What is the debt-equity ratio for 2011?
A. 22.5%

B.26.2%

C.35.5%

D.45.1%
E.47.7%

What is the times interest earned ratio for 2011?

A. 30

B.36

C.40

D.50

E.54

What is the equity multiplier for 2011?

A. 1.21

B.1.36

C.1.44

D.1.82

E.1.91

What is the return on equity for 2011?

A. 16.2%
B.20.9%

C.21.7%

D.22.1%

E.23.3%

1. Building a Balance Sheet Bing, Inc., has current assets of $5,400, net fixed assets of $28,100,
current liabilities of $4,100, and long-term debt of $10,600. What is the value of the shareholders’
equity account for this firm? How much is net working capital?

2. Building an Income Statement Gia, Inc., has sales of $497,000, costs of $276,000,
depreciation expense of $43,000, interest expense of $24,000, and a tax rate of 21 percent. What
is the net income for the firm? Suppose the company paid out $30,000 in cash dividends. What is
the addition to retained earnings?

3. Market Values and Book Values Klingon Widgets, Inc., purchased new cloaking machinery
three years ago for $6 million. The machinery can be sold to the Romulans today for $5.4 million.
Klingon’s current balance sheet shows net fixed assets of $3.5 million, current liabilities of
$945,000, and net working capital of $275,000. If the current assets and current liabilities were
liquidated today, the company would receive a total of $1.25 million cash. What is the book value
of Klingon’s total assets today? What is the sum of the market value of NWC and the market value
of fixed assets?

4. Calculating Taxes Timmy Tappan is single and had $189,000 in taxable income. Using the
rates from Table 2.3 in the chapter, calculate his income taxes. What is the average tax rate? What
is the marginal tax rate?
5. Calculating OCF Graff, Inc., has sales of $49,800, costs of $23,700, depreciation expense of
$2,300, and interest expense of $1,800. If the tax rate is 22 percent, what is the operating cash
flow, or OCF?

6. Calculating Net Capital Spending Wallace Driving School’s 2020 balance sheet showed net
fixed assets of $2.3 million, and the 2021 balance sheet showed net fixed assets of $3.1 million.
The company’s 2021 income statement showed a depreciation expense of $327,000. What was net
capital spending for 2021?

7. Building a Balance Sheet The following table presents the long-term liabilities and
stockholders’ equity of Information Control Corp. from one year ago:

Long-term debt $: 48,000,000

Preferred stock: 3,100,000

Common stock ($1 par value): 11,500,000

Accumulated retained earnings: 108,000,000

Capital surplus: 51,000,000

During the past year, the company issued 4.6 million shares of new stock at a total price of $61
million, and issued $34 million in new long-term debt. The company generated $7.9 million in net
income and paid $1.9 million in dividends. Construct the current balance sheet reflecting the
changes that occurred at the company during the year.

8. Cash Flow to Creditors The 2020 balance sheet of Osaka’s Tennis Shop, Inc., showed long-
term debt of $2.25 million, and the 2021 balance sheet showed long-term debt of $2.66 million.
The 2021 income statement showed an interest expense of $305,000. What was the firm’s cash
flow to creditors during 2021?
9. Cash Flow to Stockholders The 2020 balance sheet of Osaka’s Tennis Shop, Inc., showed
$780,000 in the common stock account and $4.78 million in the additional paid-in surplus account.
The 2021 balance sheet showed $965,000 and $5.04 million in the same two accounts, respectively.
If the company paid out $654,000 in cash dividends during 2021, what was the cash flow to
stockholders for the year?

10. Calculating Cash Flows Given the information for Osaka’s Tennis Shop, Inc., in Problems
9 and 10, suppose you also know that the firm’s net capital spending for 2021 was $1.5 million
and that the firm reduced its net working capital investment by $55,000. What was the firm’s 2021
operating cash flow, or OCF?

11. Cash Flows Ritter Corporation’s accountants prepared the following financial statements for
year-end 2021:

a. Explain the change in cash during 2021.

b. Determine the change in net working capital in 2021.

c. Determine the cash flow generated by the firm’s assets during 2021.

13. Building an Income Statement During the year, the Senbet Discount Tire Company had
gross sales of $895,000. The firm’s cost of goods sold and selling expenses were $461,000 and
$215,000, respectively. The company also had notes payable of $685,000. These notes carried an
interest rate of 4 percent. Depreciation was $108,000. The tax rate was 21 percent.

a. What was the company’s net income?

b. What was the company’s operating cash flow?

14. Calculating Total Cash Flows Nightwish Corp. shows the following information on its
2021 income statement: Sales = $336,000; Costs = $194,700; Other expenses = $9,800;
Depreciation expense = $20,600; Interest expense = $14,200; Taxes = $21,275; Dividends =
$21,450. In addition, you’re told that the firm issued $7,100 in new equity during 2021 and
redeemed $5,400 in outstanding long-term debt.
a. What is the 2021 operating cash flow?

b. What is the 2021 cash flow to creditors?

c. What is the 2021 cash flow to stockholders?

d. If net fixed assets increased by $53,200 during the year, what was the addition to net working
capital (NWC)?

15. Using Income Statements Given the following information for Troiano Pizza Co., calculate
the depreciation expense: Sales = $76,800; Costs = $36,900; Addition to retained earnings =
$6,800; Dividends paid = $2,370; Interest expense = $5,300; Tax rate = 22 percent.
16. Residual Claims Polska, Inc., is obligated to pay its creditors $10,300 very soon.

a. What is the market value of the shareholders’ equity if assets have a market value of

$11,600?

b. What if assets equal $9,400?

17. Net Income and OCF During 2021, Raines Umbrella Corp. had sales of $865,000. Cost of
goods sold, administrative and selling expenses, and depreciation expenses were $535,000,
$125,000, and $170,000, respectively. In addition, the company had an interest expense of $90,000
and a tax rate of 25 percent. (Ignore any tax loss carryforward provisions and assume interest
expense is fully deductible.)
a. What is the company’s net income for 2021?
b. What is its operating cash flow?

c. Explain your results in parts (a) and (b).

18. Accounting Values versus Cash Flows In Problem 17, suppose Raines Umbrella Corp.

paid out $128,000 in cash dividends. Is this possible? If spending on net fixed assets and net
working capital was zero, and if no new stock was issued during the year, what do you know about
the firm’s long-term debt account?

19. Calculating Cash Flows Martinez Industries had the following operating results for 2021:
Sales = $38,072; Cost of goods sold = $27,168; Depreciation expense = $6,759; Interest expense
= $3,050; Dividends paid = $2,170. At the beginning of the year, net fixed assets were $22,790,
current assets were $8,025, and current liabilities were $4,511. At the end of the year, net fixed
assets were $28,053, current assets were $9,904, and current liabilities were $5,261. The tax rate
for 2021 was 22 percent.

a. What is net income for 2021?

b. What is the operating cash flow for 2021?

c. What is the cash flow from assets for 2021? Is this possible? Explain.

d. If no new debt was issued during the year, what is the cash flow to creditors? What is the cash
flow to stockholders? Explain and interpret the positive and negative signs of your answers in parts
(a) through (d).

Enterprise Value Multiples Consider the following 2022 data for Atlantic Company, Inc., and
Pacific Depot, Inc. (in billions except for price per share): Determine the profit margin, ROE,
market capitalization, enterprise value, PE multiple, and EV multiple for both Atlantic Company
and Pacific Depot.

1. DuPont Identity If Rogers, Inc., has an equity multiplier of 1.43, total asset turnover

of 1.87, and a profit margin of 6.05 percent, what is its ROE?

2. Equity Multiplier and Return on Equity Kodi Company has a debt-equity ratio of .63.
Return on assets is 8.4 percent, and total equity is $645,000. What is the equity multiplier? Return
on equity? Net income?

3. Using the DuPont Identity Y3K, Inc., has sales of $5,987, total assets of $2,532, and a debt-
equity ratio of .57. If its return on equity is 11 percent, what is its net income?

4. EFN The most recent financial statements for Mixton, Inc., are shown here:
Assets and costs are proportional to sales; debt and equity are not. A dividend of $1,400 was paid,
and the company wishes to maintain a constant payout ratio. Next year’s sales are projected to be
$23,345. What external financing is needed?

5. Sales and Growth The most recent financial statements for Anderson Co. are shown here:

Assets and costs are proportional to sales. Long-term debt and equity are not. The company
maintains a constant 40 percent dividend payout ratio and a constant debt equity ratio. What is the
maximum increase in sales that can be sustained assuming no new equity is issued?

6. Sustainable Growth If the Premier Corp. has an ROE of 14.1 percent and a payout

ratio of 25 percent, what is its sustainable growth rate?

7. Sustainable Growth Assuming the following ratios are constant, what is the sustainable

growth rate?

Total asset turnover = 3.20

Profit margin = 5.2%

Equity multiplier = .95

Payout ratio = 35%

8. Calculating EFN The most recent financial statements for Hu, Inc., are shown here

(assuming no income taxes):

Assets and costs are proportional to sales; debt and equity are not. No dividends are paid. Next
year’s sales are projected to be $11,092. What is the external financing needed?

9. External Funds Needed Dahlia Colby, CFO of Charming Florist Ltd., has created the firm’s
pro forma balance sheet for the next fiscal year. Sales are projected to grow by 16 percent to $320
million. Current assets, fixed assets, and accounts payable are 20 percent, 70 percent, and 15
percent of sales, respectively. Charming Florist pays out 30 percent of its net income in dividends.
The company currently has $105 million of long-term debt and $45 million in common stock par
value. The profit margin is 9 percent.

a. Construct the current balance sheet for the firm using the projected sales figure.

b. Based on Ms. Colby’s sales growth forecast, how much does Charming Florist need in external
funds for the upcoming fiscal year?

c. Construct the firm’s pro forma balance sheet for the next fiscal year and confirm

the external funds needed that you calculated in part (b).

10. Sustainable Growth Rate The Iron River Company has an ROE of 11.05 percent and

a payout ratio of 25 percent.

a. What is the company’s sustainable growth rate?

b. Can the company’s actual growth rate be different from its sustainable growth rate? Why or why
not?
c. How can the company increase its sustainable growth rate?

11. Return on Equity Firm A and Firm B have debt-total asset ratios of 60 percent and 35
percent, respectively, and returns on total assets of 4.5 percent and 8 percent, respectively. Which
firm has a greater return on equity?
12. Ratios and Foreign Companies Prince Albert Canning PLC had a net loss of £26,382 on
sales of £315,650. What was the company’s profit margin? Does the fact that these figures are
quoted in a foreign currency make any difference? Why? In dollars, sales were $385,815. What
was the net loss in dollars?

13. External Funds Needed The Optical Scam Company has forecast a sales growth rate of 15
percent for next year. The current financial statements are shown here a. Using the equation from
the chapter, calculate the external funds needed for next year.
b. Construct the firm’s pro forma balance sheet for next year and confirm the external funds needed
that you calculated in part (a).

c. Calculate the sustainable growth rate for the company.

d. Can the company eliminate the need for external funds by changing its dividend policy? What
other options are available to the company to meet its growth objectives?

14. Days’ Sales in Receivables A company has net income of $213,700, a profit margin of 7.1
percent, and an accounts receivable balance of $126,385. Assuming 65 percent of sales are on
credit, what is the company’s days’ sales in receivables?

15. Ratios and Fixed Assets The Mikado Company has a ratio of long-term debt to longterm
debt plus equity of .35 and a current ratio of 1.45. Current liabilities are $1,140, sales are $8,370,
profit margin is 8.3 percent, and ROE is 16.5 percent. What is the amount of the firm’s net fixed
assets?

16. Calculating the Cash Coverage Ratio Whipporwill, Inc.’s, net income for the most recent
year was $19,382. The tax rate was 21 percent. The firm paid $3,681 in total interest expense and
deducted $4,738 in depreciation expense. What was the cash coverage ratio for the year?