Practice Problems Chapter 4 Solutions 2

Beranek Corp has $695,000 of assets (which equal total invested capital), and it uses no debt - it is
financed only with common equity. The new CFO wants to employ enough debt to raise the total debt to
total capital ratio to 40%, using the proceeds from borrowing to buy back common stock at its book
value. How much must the firm borrow to achieve the target debt ratio?
a. $219,620
b. $278,000
c. $344,720
d. $294,680
e. $247,420
ANSWER: b
FEEDBACK:
a.
Total assets = Total invested capital $695,000
Target total debt to total capital ratio 40%
Debt to achieve target ratio = Amount borrowed = Target
$278,000
% × Invested Capital =
b.
c.
d.
e.
. Herring Corporation has operating income of $235,000 and a 40% tax rate. The firm has short-term debt
of $115,000, long-term debt of $321,000, and common equity of $436,000. What is its return on invested
capital?
a. 14.92%
b. 15.50%
c. 16.17%
d. 17.42%
e. 18.27%
ANSWER: c
FEEDBACK:
a.
EBIT $235,000
Tax rate 40%
Short-term debt $115,000
Long-term debt $321,000
Common equity $436,000
ROIC = [EBIT(1 – T)]/(STD + LTD + E) 16%
b.
c.
d.
e.
Precision Aviation had a profit margin of 8.00%, a total assets turnover of 1.5, and an equity multiplier of
1.8. What was the firm's ROE?
a. 22.68%
b. 16.63%
c. 20.95%
d. 23.76%
e. 21.60%
ANSWER: e
FEEDBACK:
a.
Profit margin 8.00%
TATO 1.50
Equity multiplier 1.80
ROE = PM × TATO × Eq. Multiplier = 21.60%
b.
c.
d.
e.
Song Corp's stock price at the end of last year was $28.50 and its earnings per share for the year were
$1.30. What was its P/E ratio?
a. 22.58
b. 18.85
c. 21.48
d. 21.92
e. 20.39
ANSWER: d
RATIONALE:
Stock price $28.50
EPS $1.30
P/E = Stock price / EPS 21.92
Wie Corp's sales last year were $260,000, and its year-end total assets were $355,000. The average firm in
the industry has a total assets turnover ratio (TATO) of 2.4. The firm's new CFO believes the firm has
excess assets that can be sold so as to bring the TATO down to the industry average without affecting
sales. By how much must the assets be reduced to bring the TATO to the industry average, holding sales
constant? Do not round your intermediate calculations.
a. $246,667
b. $197,333
c. $241,733
d. $207,200
e. $222,000
ANSWER: a
FEEDBACK:
a.
Sales $260,000
Actual total assets $355,000
Target TATO = Sales / Total assets = 2.40
Target assets = Sales / Target TATO = $108,333
Asset reduction = Actual assets - Target assets = $246,667
b.
c.
d.
e.
112
Meyer Inc's total invested capital is $670,000, and its total debt outstanding is $185,000. The new CFO wants to establish
a total debt to total capital ratio of 55%. The size of the firm will not change. How much debt must the company add or
subtract to achieve the target debt to capital ratio?
a. $194,510
b. $183,500
c. $170,655
d. $187,170
e. $227,540
ANSWER: b
RATIONALE:
Total invested capital $670,000
Old debt $185,000
Target debt to capital ratio 55%
Target amount of debt = Target debt % × Total invested
$368,500
capital =
Change in amount of debt outstanding = Target debt – Old
$183,500
debt =
Exhibit 4.1
The balance sheet and income statement shown below are for Koski Inc. Note that the firm has no amortization charges, it
does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled
over.
Balance Sheet (Millions of $)

Assets 2016
Cash and securities $2,145
Accounts receivable 8,970
Inventories 12,480
Total current assets $23,595
Net plant and equipment $15,405
Total assets $39,000
Liabilities and Equity
Accounts payable $7,410
Accruals 4,290
Notes payable 5,460
Total current liabilities $17,160
Long-term bonds $7,800

Total liabilities $24,960
Common stock $5,460
Retained earnings 8,580
Total common equity $14,040
Total liabilities and equity $39,000
Income Statement (Millions of $) 2016

Net sales $58,500
Operating costs except depreciation 54,698
Depreciation 1,024
Earnings before interest and taxes (EBIT) $2,779
Less interest 829
Earnings before taxes (EBT) $1,950
Taxes 683
Net income $1,268
Other data:
Shares outstanding (millions) 500.00
Common dividends (millions of $) $443.63
Int rate on notes payable & L-T bonds 6.25%
Federal plus state income tax rate 35%
Year-end stock price $30.42
115. Refer to Exhibit 4.1. What is the firm's current ratio? Do not round your intermediate calculations.
a. 1.46
b. 1.65
c. 1.58
d. 1.38
e. 1.72
ANSWER: d
FEEDBACK:
a. Current ratio = Current assets/Current liabilities
= 1.38
b.
c.
d.
e.
POINTS: 1
DIFFICULTY: EASY
REFERENCES: 4-2 Liquidity Ratios
QUESTION TYPE: Multiple Choice
HAS VARIABLES: True
PREFACE NAME: Balance sheet
LEARNING OBJECTIVES: FOFM.BRIG.17.04.02 - Liquidity Ratios
NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.17.03 - BUSPROG: Analytic
STATE STANDARDS: United States - OH - DISC.FOFM.BRIG.17.05 - DISC: Financial analysis
and cash flows
LOCAL STANDARDS: United States - OH - Default City - N/A - Since we still do not have the
Cengage Business School Outcomes, you do not need to include anything for
this category.
TOPICS: Current ratio
KEYWORDS: Bloom's: Analysis
OTHER: Multiple Choice: Multiple Parts
DATE CREATED: 6/23/2015 3:24 PM
DATE MODIFIED: 6/23/2015 3:24 PM
116. Refer to Exhibit 4.1. What is the firm's quick ratio? Do not round your intermediate calculations.
a. 0.58
b. 0.65
c. 0.56
d. 0.81
e. 0.73
ANSWER: b
FEEDBACK:
a. Quick ratio = (CA - Inventory)/CL = 0.65
b.
c.
d.
e.
POINTS: 1
DIFFICULTY: EASY
REFERENCES: 4-2 Liquidity Ratios
HAS VARIABLES: True
LEARNING OBJECTIVES: FOFM.BRIG.17.04.02 - Liquidity Ratios
and cash flows
this category.
TOPICS: Quick ratio
117. Refer to Exhibit 4.1. What is the firm's days sales outstanding? Assume a 365-day year for this
calculation. Do not round your intermediate calculations.
a. 47.57
b. 68.84
c. 69.96
d. 50.93
e. 55.97
ANSWER: e
FEEDBACK:
a. DSO = Accounts receivable/(Sales/365) = 55.97
b.
c.
d.
e.
POINTS: 1
DIFFICULTY: MODERATE
REFERENCES: 4-3 Asset Management Ratios
HAS VARIABLES: True
LEARNING OBJECTIVES: FOFM.BRIG.17.04.03 - Asset Management Ratios
and cash flows
this category.
TOPICS: DSO
118. Refer to Exhibit 4.1. What is the firm's total assets turnover? Do not round your intermediate
calculations.
a. 1.77
b. 1.29
c. 1.50
d. 1.43
e. 1.19
ANSWER: c
FEEDBACK:
a. Total assets turnover ratio = TATO = Sales/Total assets = 1.50
b.
c.
d.
e.
POINTS: 1
DIFFICULTY: EASY
HAS VARIABLES: True
and cash flows
this category.
TOPICS: Total assets turnover
119. Refer to Exhibit 4.1. What is the firm's inventory turnover ratio? Do not round your intermediate
calculations.
a. 4.69
b. 5.30
c. 5.58
d. 5.77
e. 5.53
ANSWER: a
FEEDBACK:
a. Inventory turnover ratio = Sales/Inventory
= 4.69
b.
c.
d.
e.
POINTS: 1
DIFFICULTY: EASY
HAS VARIABLES: True
and cash flows
this category.
TOPICS: Inventory turnover
120. Refer to Exhibit 4.1. What is the firm's TIE? Do not round your intermediate calculations.
a. 3.99
b. 3.19
c. 3.76
d. 3.35
e. 3.82
ANSWER: d
FEEDBACK:
a. TIE = EBIT/Interest charges = 3.35
b.
c.
d.
e.
POINTS: 1
DIFFICULTY: EASY
REFERENCES: 4-4 Debt Management Ratios
HAS VARIABLES: True
LEARNING OBJECTIVES: FOFM.BRIG.17.04.04 - Debt Management Ratios
and cash flows
this category.
TOPICS: Times interest earned
121. Refer to Exhibit 4.1. What is the firm's total debt to total capital ratio? Do not round your
intermediate calculations.
a. 61.44%
b. 65.28%
c. 49.92%
d. 48.00%
e. 64.00%
ANSWER: d
FEEDBACK:
a. Debt to capital ratio = Total debt/Total invested capital = 48.0%
b.
c.
d.
e.
POINTS: 1
DIFFICULTY: EASY
REFERENCES: 4-4 Debt Management Ratios
HAS VARIABLES: True
LEARNING OBJECTIVES: FOFM.BRIG.17.04.04 - Debt Management Ratios
and cash flows
this category.
TOPICS: Debt to capital ratio
122. Refer to Exhibit 4.1. What is the firm's ROA? Do not round your intermediate calculations.
a. 3.25%
b. 2.80%
c. 3.38%
d. 4.03%
e. 3.97%
ANSWER: a
FEEDBACK:
a. ROA = Net income/Total assets = 3.25%
b.
c.
d.
e.
POINTS: 1
DIFFICULTY: EASY
REFERENCES: 4-5 Profitability Ratios
HAS VARIABLES: True
LEARNING OBJECTIVES: FOFM.BRIG.17.04.05 - Profitability Ratios
and cash flows
this category.
TOPICS: Return on assets
123. Refer to Exhibit 4.1. What is the firm's ROE? Do not round your intermediate calculations.
a. 7.49%
b. 9.03%
c. 7.76%
d. 10.02%
e. 7.58%
ANSWER: b
FEEDBACK:
a. ROE = Net income/Common equity = 9.03%
b.
c.
d.
e.
POINTS: 1
DIFFICULTY: EASY
HAS VARIABLES: True
and cash flows
this category.
TOPICS: Return on equity
124. Refer to Exhibit 4.1. What is the firm's BEP? Do not round your intermediate calculations.
a. 5.77%
b. 6.70%
c. 7.13%
d. 6.48%
e. 5.63%
ANSWER: c
FEEDBACK:
a. BEP = EBIT/Total assets = 7.13%
b.
c.
d.
e.
POINTS: 1
DIFFICULTY: EASY
HAS VARIABLES: True
and cash flows
this category.
TOPICS: Basic earning power
125. Refer to Exhibit 4.1. What is the firm's profit margin? Do not round your intermediate calculations.
a. 2.41%
b. 1.99%
c. 1.76%
d. 2.17%
e. 2.56%
ANSWER: d
FEEDBACK:
a. Profit margin = Net income/Sales = 2.17%
b.
c.
d.
e.
POINTS: 1
DIFFICULTY: EASY
HAS VARIABLES: True
and cash flows
this category.
TOPICS: Profit margin
126. Refer to Exhibit 4.1. What is the firm's return on invested capital?
a. 4.63%
b. 4.17%
c. 4.35%
d. 5.05%
e. 4.12%
ANSWER: a
FEEDBACK:
a. Return on invested capital = [EBIT(1 – T)] / Total invested
capital = 4.63%
b.
c.
d.
e.
POINTS: 1
HAS VARIABLES: True
and cash flows
TOPICS: Return on invested capital
127. Refer to Exhibit 4.1. What is the firm's operating margin? Do not round your intermediate
calculations.
a. 4.23%
b. 4.32%
c. 5.80%
d. 3.80%
e. 4.75%
ANSWER: e
FEEDBACK:
a. Operating margin = EBIT/Sales = 4.75%
b.
c.
d.
e.
POINTS: 1
DIFFICULTY: EASY
HAS VARIABLES: True
and cash flows
this category.
TOPICS: Operating margin
128. Refer to Exhibit 4.1. What is the firm's dividends per share? Do not round your intermediate
calculations.
a. $0.99
b. $0.89
c. $0.98
d. $0.91
e. $0.78
ANSWER: b
FEEDBACK:
a. DPS = Common dividends paid/Shares outstanding = $0.89
b.
c.
d.
e.
POINTS: 1
DIFFICULTY: EASY
REFERENCES: 4-6 Market Value Ratios
HAS VARIABLES: True
LEARNING OBJECTIVES: FOFM.BRIG.17.04.06 - Market Value Ratios
and cash flows
this category.
TOPICS: DPS
129. Refer to Exhibit 4.1. What is the firm's EPS? Do not round your intermediate calculations.
a. $3.09
b. $2.69
c. $2.54
d. $1.93
e. $2.41
ANSWER: c
FEEDBACK:
a. EPS = Net income/Common shares outstanding =
$2.54
b.
c.
d.
e.
POINTS: 1
DIFFICULTY: EASY
HAS VARIABLES: True
and cash flows
this category.
TOPICS: EPS
130. Refer to Exhibit 4.1. What is the firm's P/E ratio? Do not round your intermediate calculations.
a. 12.0
b. 12.6
c. 13.2
d. 13.9
e. 14.6
ANSWER: a
FEEDBACK:
a. P/E ratio = Price per share/Earnings per share = 12.0
We actually fixed the P/E ratio at 12 in order to get a stock price.
Either the price or the P/E ratio must be fixed or the model
becomes very complicated and a stock pricing equation is
required.
b.
c.
d.
e.
POINTS: 1
DIFFICULTY: EASY
HAS VARIABLES: False
and cash flows
this category.
TOPICS: P/E ratio
131. Refer to Exhibit 4.1. What is the firm's book value per share? Do not round your intermediate
calculations.
a. $24.43
b. $28.64
c. $32.85
d. $28.08
e. $27.24
ANSWER: d
FEEDBACK:
a. BVPS = Common equity/Shares outstanding = $28.08
b.
c.
d.
e.
POINTS: 1
HAS VARIABLES: True
and cash flows
this category.
TOPICS: Book value per share
132. Refer to Exhibit 4.1. What is the firm's market-to-book ratio? Do not round your intermediate
calculations.
a. 1.01
b. 1.35
c. 1.09
d. 1.18
e. 1.08
ANSWER: e
FEEDBACK:
a. Market/book ratio (M/B) = Price per share/BVPS = 1.08
b.
c.
d.
e.
POINTS: 1
DIFFICULTY: EASY
133. Refer to Exhibit 4.1. What is the firm's equity multiplier? Do not round your intermediate
calculations.
a. 2.78
b. 2.08
c. 2.64
d. 3.03
e. 3.47
ANSWER: a
FEEDBACK:
a. Equity multiplier = Total assets/Common equity = 2.78
b.
c.
d.
e.

Practice Problems Chapter 4 Solutions 2

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Practice Problems Chapter 4 Solutions 2

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Beranek Corp has $695,000 of assets (which equal total invested capital), and it uses no debt - it is

Balance Sheet (Millions of $)

Long-term bonds $7,800

Income Statement (Millions of $) 2016

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