QUIZ #2

1. Which of the following statements is most correct?

a. A good goal for a corporate manager is maximization of expected EPS.

b. Corporations and partnerships have an advantage over proprietorships because a sole
proprietor is subject to unlimited liability, but investors in the other types of businesses
are not.
c. Most business in the U.S. is conducted by corporations, corporations’ popularity results
primarily from their favorable tax treatment.
d. A good example of an agency relationship is the one between stockholders and
managers.

2. Corona Hotel’s operating income EBIT is 40 million. The company’s times interest
earned (TIE) ratio is 8.0, its tax rate is 40 percent, and its basic earning power (BEP) ratio
is 10 percent. What is the company’s return on assets (ROA)?
Answer: 5.25%
Solution:
Step 1: Find TA. We are given BEP and EBIT.
BEP = EBIT/TA and TA = EBIT/BEP
Therefore, TA = 40M0.1 = 400M

Step 2: NI/TA = ROA, so now we need to find the net income. Net income is found by
working through the income statement (in millions):
EBIT 40
Interest 5 (from TIE ratio: 8 = EBIT/Int)
EBT P35
Taxes (40%) 14
NI P21

Step 3: ROA = P21/P400 = 0.0525 = 5.25%

3. The Flex Company has the following characteristics:
Sales P1,000
Total assets P1,000
Total debt/Total assets 35.00%
Basic earning power (BEP) ratio 20.00%
Tax rate 40.00%
Interest rate on total debt 4.57%
What is Flex's ROE?
Answer: 16.99%
Solution: Calculate debt, equity and EBIT:
Debt = D/A x TA = 0.35 (P1,000) = P350
Equity = TA – Debt = P1,000 – P350 = P650
EBIT = TA x BEP = P1,000 (0.20) = P200

Calculate Net Income and ROE:

Net Income = (EBIT – I)(1 + T) = [P200 – 0.0457(P350)](0.6) = P110.4
ROE = P110.4/P650 = 16.99%

4. Broom-Broom Motors has P8 billion in assets, and its tax rate is 40 percent. The
company's basic earning power (BEP) ratio is 12 percent, and its return on assets (ROA)
is 3 percent. What is Broom-Broom times interest earned (TIE) ratio?
Answer: 1.71
Solution: TA = P8,000,000,000; T = 40%; EBIT/TA = 12%; ROA = 3%; TIE ?
EBIT/8M = 0.12
EBIT = 960,000,000

NI/8M = 0.03
NI = 240,000,000
Now use the income statement format to determine interest so you can calculate the firm’s
TIE ratio.
5. Quaranthings Packaging Corp. has P9 billion in total assets. The company's basic
earning power (BEP) ratio is 9 percent, and its times interest earned ratio is 3.0.
Quaranthings' depreciation and amortization expense totals P1 billion. It has PO.6 billion
in lease payments and P0.3 billion must go towards principal payments on outstanding
loans and long-term debt. What is Quaranthings' EBITDA coverage ratio?
Answer: 2.06
Solution: TA = P9,000,000,000; EBIT/TA = 9%; TIE = 3; DA = P1,000,000,000; Lease
payments = P600,000,000; Principal payments = P300,000,000; EBITDA coverage = ?

EBIT/9M = 0.09
EBIT = 810M

3 = EBIT/INT
3 = 810M/INT
INT = 270M

EBITDA = EBIT + DA
= 810M + 1B
= 1,810,000,000
 EBITDA coverage ratio: EBITDA + Lease Payments/INT + Princ. Pmts + Lease
= 1,810,000,000+600M/270M+300M+600M
= 2,410,000,000/1,170,000,000 = 2.0598 or 2.06

6. The Dolomite Company has determined that its return on equity is 15 percent.
Management is interested in the various components that went into this calculation. You
are given the following information: total debt/total assets = 0.35 and total assets turnover
= 2.8. What is the profit margin?
Answer: 3.48%
Solution:
Equity Multiplier = 1/(1 – 0.35) = 1.5385

ROE = (Profit Margin)(Asset Utilization)(Equity Multiplier)

15% = (PM)(2.8)(1.5385)
PM = 3.48%

7. SBA-NBC Company had the following partial balance sheet and complete income
statement information for 2002
Partial Balance Sheet:
Cash P 20
A/R 1,000
Inventories 2,000
Total current assets P 3,020
Net fixed assets 2,980
Total assets P 6,000
Income Statement:
Sales P10,000
Cost of goods sold 9,200
EBIT P800
Interest (10%) 400
EBT P400
Taxes (40%) 160
Net income P 240
The industry average DSO is 30 (assuming a 365-day year). SBA-NBC plans to change
its credit policy to cause its DSO to equal the industry average, and this change is
expected to have no effect on either sales or cost of goods sold. If the cash generated
from reducing receivables is used to retire debt (which was outstanding all last year and
has a 10 percent interest rate), what will SBA-NBC' debt ratio (Total debt/Total assets) be
after the change in DSO is reflected in the balance sheet?
Answer: 65.65%
Solution:
Current DSO = 1k/(10k/365) = 36.5 days
Industry Ave. DSO = 30 days
Reduce receivables by (36.5 – 30) (10k/365) = 178.08
Debt = 400/0.10 = 4k
TD/TA = 4k-178.08/6k-178.08 = 65.65%
8. Amelioration Corporation has the following simplified balance sheet:
Cash P 25,000 Current liabilities P200,000
Inventories 190,000
Accounts receivable 125,000 Long-term debt 300,000
Net fixed assets 360,000 Common equity 200,000
Total assets P700.000 Total claims P700,000
The company has been advised that their credit policy is too generous and that they
should reduce their days sales outstanding to 36 days (assume a 365-day year). The
increase in cash resulting from the decrease in accounts receivable will be used to reduce
the company's long-term debt. The interest rate on long-term debt is 10 percent and the
company's tax rate is 30 percent. The tighter credit policy is expected to reduce the
company's sales to P730,000 and result in EBIT of P70,000. What is the company's
expected ROE after the change in credit policy?
Answer: 15.86%
Solution:
Use the DSO formula to calculate accounts receivable under the new policy as 36 =
AR/(P730,000/365) or AR = P72,000.
Thus, P125,000 - P72,000 = P53,000 is the cash freed up by reducing DSO to 36 days.
Retiring P53,000 of long-term debt leaves P247,000 in long-term debt. Given a 10%
interest rate, interest expense is now P247,000(0.1) = P24,700.
Thus, EBT = EBIT - Interest = P70,000 - P24,700 = P45,300.
Net income is P45,300(1 - 0.3) = P31,710.
Thus, ROE = P31,710/P200,000 = 15.86%.

9. Using Horizontal Analysis, what is the percentage of increase/(decrease) of revenue?

(Hint: place “-“ or the negative sign if it decreases.)

Tiktok Corporation
Income Statement
For the Year Ended December 31, 2016
(All Figures in Philippine Peso)
2015 2016
Revenue 5,600 6,854
Cost of sales (2,452) (3,010)
Gross Profit 3,148 3,844

Administrative Expense 275 315

Selling and Marketing Exp. 520 632
Operating Profit 120 125
2,223 2,772

Tax Paid 450 470

Net Profit 1,7583 2,302
Answer: 22.39%
Solution: HA = (Amount in Comparison Year – Amount in Base Year)/Amount in Base
Year x 100
(6854 – 5600)/5600 x 100 = 22.39%

10. Using Vertical Analysis, what is the percentage of Other Operating Expenses in
2016?

Tiktok Corporation
Income Statement
For the Year Ended December 31, 2016
(All Figures in Philippine Peso)
2015 2016
Revenue 5,600 6,854
Cost of sales (2,452) (3,010)
Gross Profit 3,148 3,844

Administrative Expense 275 315

Selling and Marketing Exp. 520 632
Other Operating Exp. 120 125
 Operating Profit 2,223 2,772

Tax Paid 450 470

Net Profit 1,7583 2,302
Answer: 1.82%
Solution: VA = 125/6,584 = 1.82%

Quiz 3

1. A forecasting model that only uses historical data for the variable being forecast is
called a
a. time-series model
b. causal model.
c. Delphi model.
d. variable model.

2. When comparing several forecasting models to determine which one best fits a
particular set of data, the model that should be selected is the one *
a. with the highest MSE
b. with the MAD closest to 1.
c. with a bias of 0.
d. with the lowest MAD.

3. A naïve forecast for monthly sales is equivalent to *

a. a one-month moving average model.
b. an exponential smoothing model with alpha = 0.
c. a seasonal model in which the seasonal index is 1.
d. none of the above.
4. Data collected on the yearly demand for 50-pound bags of fertilizer at Wallace
Garden Supply are shown in the following table. Using the 3-year moving average
forecast, what is the forecast on Year 12? *

YEAR DEMANDS FOR FERTELIZER

(1,000 OF BAGS)
1 4
2 6
3 4
4 5
5 10
6 8
7 7
8 9
9 12
10 14
11 15
Answer: 14
Solution:

5. Data collected on the yearly demand for 50-pound bags of fertilizer at Wallace Garden
Supply are shown in the following table. Using the 3-year weighted moving average
forecast, what is the forecast on Year 12? Previous Months- 50%; Two months prior-
30%; and Three months prior-20% *

YEAR DEMANDS FOR FERTELIZER

(1,000 OF BAGS)
 1 4
2 6
3 4
4 5
5 10
6 8
7 7
8 9
9 12
10 14
11 15
Answer: 14 bags
Solution: wala ko kabalo

6. Data collected on the yearly demand for 50-pound bags of fertilizer at Wallace
Garden Supply are shown in the following table. Using the exponential smoothing
forecast, what is the forecast on Year 12? Note: Alpha/smoothing constant is 0.30 and
the first-year forecast is 5,000 bags.

YEAR DEMANDS FOR FERTELIZER

(1,000 OF BAGS)
1 4
2 6
3 4
4 5
5 10
6 8
7 7
8 9
9 12
10 14
11 15
Answer: 12 bags
Solution: Sorry, wala ko kabalo pero cute ko hehe

7. A time-series forecasting model in which the forecast for the next period is the actual
value for the current period.

Answer: Naïve Model

8. Demand for patient surgery at Washington General Hospital has increased steadily in
the past few years, as seen in the following table: The director of medical services
predicted six years ago that demand in year 1 would be 42 surgeries. Using exponential
smoothing, what is your forecast on year 6?

YEAR OUTPATIENT SURGERIES PERFORMED

1 45
2 50
3 52
4 56
5 58
6 -
Answer: 49.8 or 50

Solution:
9. The demand for luxury sedans is seasonal, and the indices for quarters 1, 2, 3, and 4
are 0.80, 1.00, 1.30, and 0.90, respectively. Using the trend equation, forecast the
demand for the second quarter of next year.

Answer: 37

Solution:

10. The demand for luxury sedans is seasonal, and the indices for quarters 1, 2, 3, and 4
are 0.80, 1.00, 1.30, and 0.90, respectively. Using the trend equation, forecast the
demand for the third quarter of next year.
Answer: 52

Solution:

Long Quiz
1. Which of the following statements is CORRECT?
a. One disadvantage of operating as a corporation rather than as a partnership is that
corporate shareholders are exposed to more personal liability than are partners.
b. Relative to proprietorships, corporations generally face fewer regulations, and they also
find it easier to raise capital.
c. There is no good reason to expect a firm's stockholders and bondholders to react
differently to the types of assets in which it invests.
d. Stockholders should generally be happier than bondholders to have managers invest
in risky projects with high potential returns as opposed to safe projects with lower
expected returns.
e. Stockholders in general would be better off if managers never disclosed favorable
events and therefore caused the price of the firm's stock to sell at a price below its intrinsic
value.
2. Which of the following statements is CORRECT? *
a. Hostile takeovers are most likely to occur when a firm's stock is selling below its intrinsic
value as a result of poor management.
b. The efficiency of the U.S. economy would probably be increased if hostile takeovers
were absolutely forbidden.
c. The managers of established, stable companies sometimes attempt to get their state
legislatures to remove rules that make it more difficult for raiders to succeed with hostile
takeovers.
d. In general, it is more in bondholders' interests than stockholders' interests for a firm to
shift its investment focus away from safe, stable investments and into risky investments,
especially those that primarily involve research and development.
e. Stockholders in general would be better off if managers never disclosed favorable
events and therefore caused the price of the firm's stock to sell at a price below its intrinsic
value.

3. Which of the following statements is CORRECT?

a. Well-designed bond covenants are useful for reducing potential conflicts between
stockholders and managers.
b. The bid price in a hostile takeover is generally above the price before the takeover
attempt is announced, because otherwise there would be no incentive for the
stockholders to sell to the hostile bidder and the takeover attempt would probably fail.
c. Stockholders in general would be better off if managers never disclosed favorable
events and therefore caused the price of the firm's stock to sell at a price below its intrinsic
value.
d. Takeovers are most likely to be attempted if the target firm's stock price is above its
intrinsic value.
e. The efficiency of the U.S. economy would probably be increased if hostile takeovers
were absolutely forbidden.

4. Which of the following actions would be most likely to reduce potential conflicts between
stockholders and bondholders?
a. Including restrictive covenants in the company's bond indenture (which is the contract
between the company and its bondholders).
b. Compensating managers with more stock options and less cash income.
c. The passage of laws that make it harder for hostile takeovers to succeed.
d. A government regulation that banned the use of convertible bonds.
e. The firm begins to use only long-term debt, e.g., debt that matures in 30 years or more,
rather than debt that matures in less than one year.

5. Which of the following actions would be most likely to reduce potential conflicts of
interest between stockholders and bondholders?
a. Compensating managers with stock options.
b. Financing risky projects with additional debt.
c. The threat of hostile takeovers.
d. The use of covenants in bond agreements that limit the firm's use of additional debt
and constrain managers' actions.
e. Abolishing the Security and Exchange Commission.

6. Which of the following actions would be likely to encourage a firm's managers to make
decisions that are in the best interests of shareholders?
a. The percentage of executive compensation that comes in the form of cash is increased
and the percentage coming from long-term stock options is reduced.
b. The state legislature passes a law that makes it more difficult to successfully complete
a hostile takeover.
c. The percentage of the firm's stock that is held by institutional investors such as mutual
funds, pension funds, and hedge funds rather than by small individual investors rises from
10% to 80%.
d. The firm's founder, who is also president and chairman of the board, sells 90% of her
shares.
e. The firm's board of directors gives the firm's managers greater freedom to take
whatever actions they think best without obtaining board approval.

7. Which of the following actions would be most likely to reduce potential conflicts of
interest between stockholders and managers?
a. Pay managers large cash salaries and give them no stock options.
b. Change the corporation's formal documents to make it easier for outside investors to
acquire a controlling interest in the firm through a hostile takeover.
c. Beef up the restrictive covenants in the firm's debt agreements.
d. Eliminate a requirement that members of the board of directors must hold a high
percentage of their personal wealth in the firm's stock.
e. For a firm that compensates managers with stock options, reduce the time before
options are vested, i.e., the time before options can be exercised and the shares that are
received can be sold.

8. Which of the following could explain why a business might choose to operate as a
corporation rather than as a proprietorship or a partnership?
a. Corporations generally face fewer regulations.
b. Less of a corporation's income is generally subject to federal taxes.
c. Corporate shareholders are exposed to unlimited liability, but this factor is offset by the
tax advantages of incorporation.
d. Corporate investors are exposed to unlimited liability.
e. Corporations generally find it easier to raise large amounts of capital.

9. Suppose all firms follow similar financing policies, face similar risks, have equal access
to capital, and operate in competitive product and capital markets. However, firms face
different operating conditions because, for example, the grocery store industry is different
from the airline industry. Under these conditions, firms with high profit margins will tend
to have high asset turnover ratios, and firms with low profit margins will tend to have low
turnover ratios.
True
False

10. Which of the following would, generally, indicate an improvement in a company's

financial position, holding other things constant?
a. The TIE declines.
b. The DSO increases.
c. The quick ratio increases.
d. The current ratio declines.
e. The total assets turnover decreases.

11. A firm wants to strengthen its financial position. Which of the following actions would
increase its current ratio?
a. Reduce the company's days' sales outstanding to the industry average and use the
resulting cash savings to purchase plant and equipment.
b. Use cash to repurchase some of the company's own stock.
c. Borrow using short-term debt and use the proceeds to repay debt that has a maturity
of more than one year.
d. Issue new stock, then use some of the proceeds to purchase additional inventory and
hold the remainder as cash.
e. Use cash to increase inventory holdings.

12. Which of the following statements is CORRECT?

a. A reduction in inventories would have no effect on the current ratio.
b. An increase in inventories would have no effect on the current ratio.
c. If a firm increases its sales while holding its inventories constant, then, other things
held constant, its inventory turnover ratio will increase.
d. A reduction in the inventory turnover ratio will generally lead to an increase in the ROE.
e. If a firm increases its sales while holding its inventories constant, then, other things
held constant, its fixed assets turnover ratio will decline.

13. Companies E and P each reported the same earnings per share (EPS), but Company
E's stock trades at a higher price. Which of the following statements is CORRECT?
a. Company E probably has fewer growth opportunities.
b. Company E is probably judged by investors to be riskier.
c. Company E must have a higher market-to-book ratio.
d. Company E must pay a lower dividend.
e. Company E trades at a higher P/E ratio.
14. Ellen Company recently issued new common stock and used the proceeds to pay off
some of its short-term notes payable. This action had no effect on the company's total
assets or operating income. Which of the following effects would occur as a result of this
action?
a. The company's current ratio increased.
b. The company's times interest earned ratio decreased.
c. The company's basic earning power ratio increased.
d. The company's equity multiplier increased.
e. The company's total debt to total capital ratio increased.

15. A firm's new president wants to strengthen the company's financial position. Which of
the following actions would make it financially stronger?
a. Increase accounts receivable while holding sales constant.
b. Increase EBIT while holding sales and assets constant.
c. Increase accounts payable while holding sales constant.
d. Increase notes payable while holding sales constant.
e. Increase inventories while holding sales constant.

16. If the CEO of a large, diversified, firm were filling out a fitness report on a division
manager (i.e., "grading" the manager), which of the following situations would be likely to
cause the manager to receive a better grade? In all cases, assume that other things are
held constant.
a. The division's basic earning power ratio is above the average of other firms in its
industry.
b. The division's total assets turnover ratio is below the average for other firms in its
industry.
c. The division's total debt to total capital ratio is above the average for other firms in the
industry.
d. The division's inventory turnover is 6×, whereas the average for its competitors is 8×.
e. The division's DSO (days' sales outstanding) is 40 days, whereas the average for its
competitors is 30 days.
17. Which of the following would indicate an improvement in a company's financial
position, holding other things constant?
a. The inventory and total assets turnover ratios both decline.
b. The total debt to total capital ratio increases.
c. The profit margin declines.
d. The times-interest-earned ratio declines.
e. The current and quick ratios both increase.

18. Ramon Company's current ratio is 2.0. Considered alone, which of the following
actions would lower the current ratio?
a. Borrow using short-term notes payable and use the proceeds to reduce accruals.
b. Borrow using short-term notes payable and use the proceeds to reduce long-term debt.
c. Use cash to reduce accruals.
d. Use cash to reduce short-term notes payable.
e. Use cash to reduce accounts payable.

19. You observe that a firm's ROE is above the industry average, but both its profit margin
and equity multiplier are below the industry average. Which of the following statements is
CORRECT?
a. Its total assets turnover must be above the industry average.
b. Its return on assets must equal the industry average.
c. Its TIE ratio must be below the industry average.
d. Its total assets turnover must be below the industry average.
e. Its total assets turnover must equal the industry average.

20. Tiger Company is considering issuing new common stock and using the proceeds to
reduce its outstanding debt. The stock issue would have no effect on total assets, the
interest rate Taggart pays, EBIT, or the tax rate. Which of the following is likely to occur
if the company goes ahead with the stock issue?
a. The ROA will decline.
b. Taxable income will decline.
c. The tax bill will increase.
d. Net income will decrease.
e. The times-interest-earned ratio will decrease.

21. Acorn Industries' current ratio is 0.5. Considered alone, which of the following actions
would increase the company's current ratio?
a) Borrow using short-term notes payable and use the cash to increase inventories.
b) Use cash to reduce accruals.
c) Use cash to reduce accounts payable.
d) Use cash to reduce short-term notes payable.
e) Use cash to reduce long-term bonds outstanding.

22. Which of the following is NOT a key element in strategic planning as it is described in
the text?
a) The mission statement.
b) The statement of the corporation's scope.
c) The statement of cash flows.
d) The statement of corporate objectives.
e) The operating plan.

23. The capital intensity ratio is generally defined as follows:

a) Sales divided by total assets, i.e., the total assets turnover ratio.
b) The percentage of liabilities that increase spontaneously as a percentage of sales.
c) The ratio of sales to current assets.
d) The ratio of current assets to sales.
e) The amount of assets required per dollar of sales, or A0*/S0.

24. Which of the following is NOT one of the steps taken in the financial planning process?
a) Assumptions are made about future levels of sales, costs, and interest rates for
use in the forecast.
b) The entire financial plan is reexamined, assumptions are reviewed, and the
management team considers how additional changes in operations might improve
results.
c) Projected ratios are calculated and analyzed.
d) Develop a set of projected financial statements.
 e) Consult with key competitors about the optimal set of prices to charge, i.e., the
prices that will maximize profits for our firm and its competitors.

25. Spontaneously generated funds are generally defined as follows:

a) Assets required per dollar of sales.
b) A forecasting approach in which the forecasted percentage of sales for each item
is held constant.
c) Funds that a firm must raise externally through borrowing or by selling new
common or preferred stock.
d) Funds that arise out of normal business operations from its suppliers, employees,
and the government, and they include spontaneous increases in accounts payable
and accruals.
e) The amount of cash raised in a given year minus the amount of cash needed to
finance the additional capital expenditures and working capital needed to support
the firm's growth.

26. The percentage analysis of increases and decreases in individual items in

comparative financial statements is called:
a) vertical analysis
b) profitability analysis
c) solvency analysis
d) horizontal analysis

27. Which of the following generally is the most useful in analyzing companies of different
sizes?
a) comparative statements
b) price-level accounting
c) common-sized financial statements
d) profitability index

28. The percent of property, plant and equipment to total assets is an example of:
a) vertical analysis
b) profitability analysis
c) solvency analysis
d) horizontal analysis
29. The primary operating goal of a publicly-owned firm interested in serving its
stockholders should be to
a) Maximize its expected total corporate income.
b) Maximize its expected EPS.
c) Minimize the chances of losses.
d) Maximize the stock price per share over the long run, which is the stock's intrinsic
value.
e) Maximize the stock price on a specific target date.

30. John Corp's sales last year were $280,000, and its net income was $23,000. What
was its profit margin?
a) 7.41%
b) 7.80%
c) 8.21%
d) 8.63%
e) 9.06%
Solution: Sales = 280k NI = 23k
Profit Margin = NI/Sales = 23k/280k = 8.21%

31. Hero Corp's total assets at the end of last year were $405,000 and its EBIT was
52,500. What was its basic earning power (BEP) ratio?
a) 11.70%
b) 12.31%
c) 12.96%
d) 13.61%
e) 14.29%
Solution:
BEP = EBIT/Assets = 52,500/405k = 12.96%

32. Dale is thinking about starting a new business. The company would require $375,000
of assets, and it would be financed entirely with common stock. She will go forward only
if she thinks the firm can provide a 13.5% return on the invested capital, which means
that the firm must have an ROE of 13.5%. How much net income must be expected to
warrant starting the business?
a) $41,234
b) $43,405
 c) $45,689
d) $48,094
e) $50,625
Solution: Assets = Equity 375k
Target ROE 13.5%
Required net income = Target ROE x Equity = 50,625

33. Annalise Corporation has operating income of $225,000 and a 40% tax rate. The firm
has short-term debt of $120,000, long-term debt of $330,000, and common equity of
$450,000. What is its return on invested capital?
a) 13.75%
b) 14.33%
c) 15.00%
d) 16.25%
e) 17.10%
Solution:

34. Michaela Corp's stock price at the end of last year was $23.50 and its earnings per
share for the year were $1.30. What was its P/E ratio?
a) 17.17
b) 18.08
c) 18.98
d) 19.93
 e) 20.93
Solution: Stock price 23.50
EPS 1.30
P/E = Stock Price/EPS 18.08

35. Connor Corp's stock price at the end of last year was $33.50, and its book value per
share was $25.00. What was its market/book ratio?
a) 1.34
b) 1.41
c) 1.48
d) 1.55
e) 1.63
Solution: Stock Price 33.50
Book Value Per Share 25.00
M/B ratio = Stock price/Book value per share = 1.34

36. Lila Inc's total invested capital is $625,000, 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) $158,750
b) $166,688
c) $175,022
d) $183,773
e) $192,962
Solution: Total Invested capital 625k
Old Debt 185k
Target debt to capital ratio 55%
Target amount of debt = Target debt% x Total invested capital = 343,750
Change in amount of debt outstanding = Target debt – Old debt = 185,750
37. Sam Inc's latest net income was $1,250,000, and it had 225,000 shares outstanding.
The company wants to pay out 45% of its income. What dividend per share should it
declare?
a) $2.14
b) $2.26
c) $2.38
d) $2.50
e) $2.63
Solution:
Net income $1,250,000
Shares outstanding 225,000
Payout ratio 45%
EPS = NI/shares outstanding = $5.56
DPS = EPS × Payout % = $2.50

38. Bonnie Corp's sales last year were $425,000, and its year-end receivables were
$52,500. The firm sells on terms that call for customers to pay 30 days after the purchase,
but some delay payment beyond Day 30. On average, how many days late do customers
pay? Base your answer on this equation: DSO − Allowed credit period = Average days
late, and use a 365-day year when calculating the DSO.
a) 12.94
b) 13.62
c) 14.33
d) 15.09
e) 15.84
Solution:
Sales $425,000
Sales/day = Sales/365 = $1,164.38
Receivables $52,500
Company DSO = Receivables/Sales per day = 45.09
Credit period 30
DSO − Credit period = Days late 15.09
39. Hank Corp. has $375,000 of assets, and it uses only common equity capital (zero
debt). Its sales for the last year were $595,000, and its net income was $25,000.
Stockholders recently voted in a new management team that has promised to lower costs
and get the return on equity up to 15.0%. What profit margin would the firm need in order
to achieve the 15% ROE, holding everything else constant?
a) 9.45%
b) 9.93%
c) 10.42%
d) 10.94%
e) 11.49%
Solution:
Total assets = Equity because zero debt $375,000
Sales $595,000
Net income $25,000
Target ROE 15.00%
Net income req’d to achieve target ROE = Target ROE × Equity = $56,250
Profit margin needed to achieve target ROE = NI/Sales = 9.45%

40. Last year Wes Corp had $155,000 of assets (which equals total invested capital),
$305,000 of sales, $20,000 of net income, and a debt-to-total-capital ratio of 37.5%. The
new CFO believes a new computer program will enable it to reduce costs and thus raise
net income to $33,000. The firm finances using only debt and common equity. Assets,
total invested capital, sales, and the debt to capital ratio would not be affected. By how
much would the cost reduction improve the ROE?
a) 11.51%
b) 12.11%
c) 12.75%
d) 13.42%
e) 14.09%
Solution:
41. Last year Frank Inc. had sales of $325,000 and a net income of $19,000, and its year-
end assets were $250,000. The firm's total-debt-to-total-capital ratio was 45.0%. The firm
finances using only debt and common equity and its total assets equal total invested
capital. Based on the DuPont equation, what was the ROE?
a) 13.82%
b) 14.51%
c) 15.23%
d) 16.00%
e) 16.80%
Solution:
42. Last year Rebecca Corp. had $250 million of sales, and it had $75 million of fixed
assets that were being operated at 80% of capacity. In millions, how large could sales
have been if the company had operated at full capacity?
a) $312.5
b) $328.1
c) $344.5
d) $361.8
e) $379.8
Solution: Given that, Rebecca Company’s sales last year = 250M
Fixed assets = 75M
Previous Operating Capacity of Fixed Assets = 80%
Sales at full capacity:
= Previous Sales/Previous Capacity
= 250M/80%
= 312.5

43. Nate Corporation's CFO uses this equation, which was developed by regressing
inventories on sales over the past 5 years, to forecast inventory requirements: Inventories
= $22.0 + 0.125(Sales). The company expects sales of $400 million during the current
year, and it expects sales to grow by 30% next year. What is the inventory forecast for
next year? All dollars are in millions.
a) $74.6
b) $78.5
c) $82.7
d) $87.0
e) $91.4
Solution:
Current Year’s Sales 400
Growth Rate 30%
Projected Sales 520.0

Required Inventories = 22.0 + 0.125 x Projected sales

= 22.0 + 0.125 x 520.0
 Required Inventories = 87.0
44. Last year Liza Inc. had $350 million of sales, and it had $270 million of fixed assets
that were used at 65% of capacity. In millions, by how much could Wei Guan's sales
increase before it is required to increase its fixed assets?
a) $170.09
b) $179.04
c) $188.46
d) $197.88
e) $207.78
Solution:
For computing the increase in sales, first we have to determine the full capacity of sales
value which is shown below:
= Sales ÷ capacity percentage given
= $350 million ÷ 65%
= $538,461,538.5 million
So, the increase in sales would be
= Full capacity sales - given sales
= $538,461,538.5 million - $350 million
= $188.46 million

45. Last year Lily Inc. had $850 million of sales, and it had $425 million of fixed assets
that were used at only 60% of capacity. What is the maximum sales growth rate the
company could achieve before it had to increase its fixed assets?
a) 54.30%
b) 57.16%
c) 60.17%
d) 63.33%
e) 66.67%
Solution:
Per equation 12-3: Full capacity sales = Actual sales / Percentage of capacity at which
fixed assets were operated = 850/.6 = 1416.6667
Since FV = PV ( 1 + i ) ^ n and D1 = D0 ( 1 + g ) we see the pattern in TVM calculations.
Therefore, 1416.67 = 850 ( 1 + g ) such that g = 0.6667.
46. Last year Janine Technologies had $250 million of sales and $100 million of fixed
assets, so its Fixed Assets/Sales ratio was 40%. However, its fixed assets were used at
only 75% of capacity. Now the company is developing its financial forecast for the coming
year. As part of that process, the company wants to set its target Fixed Assets/Sales ratio
at the level it would have had had it been operating at full capacity. What target Fixed
Assets/Sales ratio should the company set?
a) 28.5%
b) 30.0%
c) 31.5%
d) 33.1%
e) 34.7%
Solution:
Full capacity sales = Actual sales / Percentage of capacity at which fixed assets were
operated = 250M / .75 = 333.3333.

Per equation 12-4 on page 529, we have the Target Fixed Assets/Sales as follows: =
Actual fixed assets / Full capacity Sales = 100M / 333M = 0.3003

47. During 2014, Sarah Bakery paid out $33,525 of common dividends. It ended the year
with $197,500 of retained earnings versus the prior year's retained earnings of $159,600.
How much net income did the firm earn during the year?
a) $71,425
b) $74,996
c) $78,746
d) $82,683
e) $86,818

48. Fordo has 2 million shares of common stock outstanding that sell for $17 a share. If
the company has $40 million of common equity on its balance sheet, what is the
company's Market Value Added (MVA)?
a) −$5,415,000
b) −$5,700,000
c) −$6,000,000
d) −$6,300,000
e) −$6,615,000
49.

a) −$171,000
b) −$180,000
c) −$189,000
d) −$198,450
e) −$208,373

50. Last year Missy Industries had $450 million of sales and $225 million of fixed assets,
so its Fixed Assets/Sales ratio was 50%. However, its fixed assets were used at only 65%
of capacity. If the company had been able to sell off enough of its fixed assets at book
value so that it was operating at full capacity, with sales held constant at $450 million,
how much cash (in millions) would it have generated?
a) $74.81
b) $78.75
c) $82.69
d) $86.82
e) $91.16

51. Dodo Industries has P2.5 million in sales and P0.8 million in fixed assets. Currently,
the company’s fixed assets are operating at 75 percent of capacity.What level of sales
could Indo Industries have obtained if it had been operating at full capacity?
a) P2,800,000
b) P3,333,333
c) P3,000,000
d) P3,125,575

52. What is the maximum dividend payout ratio consistent with not requiring external
funds for a firm with an ROE of 15%, a debt-equity ratio of 50%, and an annual sales
growth objective of 9%?
a) Approximately 1%
b) Approximately 10%
 c) Approximately 12%
d) Approximately 20%

53. Cagayan Company had sales of P30,000, increase in accounts payable of P5,000,
decrease in accounts receivable of P1,000, increase in inventories of P4,000, and
depreciation expense of P4,000. What was the cash collected from customers?
a) P31,000
b) P34,000
c) P35,000
d) P25,000

54. Net sales are P6,000,000, beginning total assets are P2,800,000, and the asset
turnover is 3.0. What is the ending total asset balance?
a) P2,000,000.
b) P2,800,000.
c) P1,200,000.
d) P1,600,000

55. What is the market price of a share of stock for a firm with 100,000 shares outstanding,
a book value of equity of P3,000,000, and a market/book ratio of 3.5?
a) P8.57
b) P85.70
c) P30.00
d) P105.00

56. Avenue Co. has a price earnings ratio of 10, earnings per share of P2.20, and a pay
out ratio of 75%. The dividend yield is?
a) 25.0%
b) 7.5%
c) 22.0%
d) 10.0%
57.
a) 5.77 times
b) 3.67 times
c) 3.85 times
d) 3.57 times

58.
a) 0.48
b) 0.93
c) 0.49
d) 0.96

59. In regression analysis, which of the following correlation coefficients represents the
strongest relationship between the independent and dependent variables?
a) 1.03
b) –.02
c) –.89
d) .75

60. Jia Co. is budgeting sales of 53,000 units of product Nous for October 2012. The
manufacture of one unit of Nous requires four kilos of chemical Loire. During October
2012, Mien plans to reduce the inventory of Loire by 50,000 kilos and increase the finished
goods inventory of Nous by 6,000 units. There is no Nous work in process inventory. How
many kilos of Loire is Mien budgeting to purchase in October 2012?
a) 138,000
b) 162,000
c) 186,000
d) 238,000
61. A 2012 cash budget is being prepared for the purchase of Toyi, a merchandise item.
Budgeted data are Cost of goods sold for 2012 $300,000 Accounts payable 1/1/12 20,000
Inventory—1/1/12 30,000 12/31/12 42,000 Purchases will be made in twelve equal
monthly amounts and paid for in the following month. What is the 2012 budgeted cash
payment for purchases of Toyi?
a) $295,000
b) $300,000
c) $306,000
d) $312,000

62. Hindsight Company budgeted sales on account of $120,000 for July, $211,000 for
August, and $198,000 for September. Collection experience indicates that 60% of the
budgeted sales will be collected the month after the sale, 36% the second month, and 4%
will be uncollectible. The cash from accounts receivable that should be budgeted for
September would be
a) $169,800
b) $194,760
c) $197,880
d) $198,600

63. Brooke Co.’s total costs of operating five sales offices last year were $500,000, of
which $70,000 represented fixed costs. Cook has determined that total costs are
significantly influenced by the number of sales offices operated. Last year’s costs and
number of sales offices can be used as the bases for predicting annual costs. What would
be the budgeted costs for the coming year if Cook were to operate seven sales offices?
a) $700,000
b) $672,000
c) $614,000
d) $586,000