51.Justin Company has total assets, liabilities, and shareholders’ equity of $38,000, $17,000, and $21,000, respectively, at the beginning of 2015. At the end of 2015, total assets, liabilities, and shareholders’ equity were reported at $32,000, $13,000, and $19,000, respectively.How much additional debt can Justin Company incur and still have its debt/equity ratio remain less than or equal to 1.00?
a.$7,000
b.$25,000
c.$12,000
d.$24,000
Solution:
A.Debt/equity ratio = Average total liabilities / Average total shareholders’ equity
= (($17,000 + $13,000)/2) / (($21,000 + $19,000)/2) = .75
Average total liabilities can increase up to $20,000 and still maintain a debt/equity ratio of 1.0. In order to make the numerator equal to $20,000, the ending debt could increase up to $23,000:
Average total liabilities = ($17,000 + $23,000)/2 = $20,000
Since total debt at the end of 2015is $13,000, the increase in debt could be up to $7,000 ($20,000 less $13,000).
52. Sheena Company has current assets, current liabilities, and long-term liabilities of $20,000, $13,000, and $17,000, respectively. Within these amounts, $3,000 is accounts payable, and $3,500 is accounts receivable. If $2,000 of cash were used to pay off the accounts payable, what effect would this have on the current ratio?
a. The current ratio would increase by approximately 0.10.
b. The current ratio would decrease by approximately 0.10.
c. The current ratio would decrease by approximately 0.03.
d. There would be no change in the current ratio.
Solution:
Current ratio before payment of payables = $20,000/$13,000 = 1.54
Current ratio after payment of payables = ($20,000 – $2,000)/($13,000 – $2,000) = 1.64
53.Buffalo Company has current assets, current liabilities, and long-term liabilities of $10,500, $3,000, and $4,000, respectively at the end of 2015. How much cash can Buffalo use to acquire equipment and retain a current ratio of at least 2.0?
a. $1,000
b. $4,500
c. $4,000
d. $6,000
Solution:
Current ratio before acquisition of equipment = $10,500/$3,000 = 3.5
Current ratio after acquisition of equipment = ($10,500 – $X)/$3,000 = 2.0
So X = $4,500
If $4,500 of cash is used, then current assets = $6,000 and the current ratio = 2.0.
54.Rudy Company has total assets, liabilities, and shareholders’ equity of $28,000, $21,000, and $7,000, respectively. Assume no material change occurred during the year to totals on the balance sheet. What amount of long-term debt must Rudy exchange for new shares of common stock issued in order to decrease its debt/equity ratio to 1.0?
a. $17,500
b. $7,000
c. $14,000
d. $21,000
Solution:
Actual debt/equity ratio = Average liabilities / Average shareholders’ equity
= $21,000/$7,000 = 3.00
Rudy’ debt/equity ratio is currently 3.00. In paying off new debt by issuing new stock, for every dollar added to common stock, Rudy must deduct $1 from its liabilities:
= ($21,000 – X)/($7,000 + X) = 1.00
= $7,000
Rudy can exchange stock for debt up to $7,000 and still keep a debt/equity ratio of 100%, or 1.0.
55.Samson Company has common stock of $120,000 and retained earnings of $140,000 at yearend. During the year, 20,000 shares of stock were outstanding. Net income was reported as $80,000. What is the company’s earnings per share?
a. $4.00
b. $1.07
c. $0.73
d. $10.25
Solution:
Earnings per share = Net income / Average number of common shares outstanding
= $80,000/20,000 = $ 4.00 per common share
56.Grey Company has a current ratio of 0.35 and return on equity of 0.04 Which of the following statements is the best regarding Grey’s profitability and solvency?
a.Grey is very profitable, but not very solvent.
b.Grey is very profitable and very solvent.
c.Grey is not very profitable, but very solvent.
d.Grey is not very profitable and not very solvent.
Solution:
Solvency:Not very solvent—For every dollar of current liabilities, the company has only 35 cents of liquid assets available. It will likely not be able to pay its current debts when they become due.
Profitability:Not very profitable— Net income is only 4 percent of the amount of average shareholders’ equity.
57.Pasky Company has the following financial data on January 1, 2015 and January 1, 2014.
1/1/15
1/1/14
Cash
$35,000
$71,000
Accounts receivable
69,000
33,000
Marketable securities
9,000
30,000
Inventory
87,000
105,000
Net plant and equipment
120,000
96,000
Current liabilities
$42,000
$71,000
Long-term debt
147,000
90,000
Shareholders’ equity
131,000
174,000
In terms of the quick and current ratio, which of the following statements is true?
a.Pasky’s short-term solvency position has improved.
b.Pasky’s short-term solvency position has declined.
c.Pasky’s short-term solvency position has remained the same
d.Pasky’s quick ratio is increasing, but its current ratio is decreasing.
Solution:
(in thousands)
1/01/15
1/01/14
Current ratio = Current assets / Current liabilities =
= ($35+ $69 + $9 + $87)/$42 =
4.76
= ($71 + $33 + $30 + $105)/$71 =
3.41
Quick ratio = Quick assets / Current liabilities =
= ($35 + $69 + $9)/$42 =
2.69
= ($71 + $33 + $30)/$71 =
1.89
Pasky’s short-term solvency position has improved significantly. Its current ratio has increased from 3.41 to 4.76, and the quick ratio has increased from 1.89 to 2.69.
58.Walker Company has the following assets on January 1, 2015 and January 1, 2014.
1/1/15
1/1/14
Cash
$450,001
$366,000
Accounts receivable
302,000
333,000
Marketable securities
36,000
30,000
Inventory
87,000
105,000
Net plant and equipment
120,000
96,000
If Walker’s quick ratio is 3.00 for 2015, what is the amount of its current liabilities?
a.$325,000
b. $263,000
c. $285,000
d. There is not enough information to answer this question.
Solution:
Quick ratio = ($451 + $302 + $36) / x = 3.0
X = $263,000
59.Norton Company has the following assets on January 1, 2015 and January 1, 2014.
1/1/15
1/1/14
Cash
$430,000
$370,000
Accounts receivables
?
333,000
Marketable securities
36,000
130,000
Inventory
220,000
?
Net plant and equipment
120,000
129,000
If Norton’s current ratio is 2.20 for 2014 and its current liabilities are $600,000, what is the amount of its inventory?
a. $197,000
b. $487,000
c. $238,636
d. There is not enough information to answer this question.
Solution:
$600,000 x 2.20 = $1,320,000
$1,320,000 – $370,000 – $333,000 – $130,000 = $487,000
60.Norton Company has the following assets on January 1, 2015 and January 1, 2014.
1/1/15
1/1/14
Cash
$430,000
$370,000
Accounts receivables
?
333,000
Marketable securities
186,000
130,000
Inventory
220,000
?
Net plant and equipment
120,000
129,000
If Norton’s quick ratio is 2.50 for 2015 and its current liabilities are $500,000, what is the amount of its accounts receivables?
a. $324,000
b. $204,000
c. $634,000
d. There is not enough information to answer this question.
Solution:
$500,000 x 2.50 = $1,250,000
$1,250,000 – $430,000 – $186,000 = $634,000
61.The following ratios were computed from the financial statement of Darren Technologies:
2016
2015
2014
Return on equity
0.30
0.27
0.23
Return on assets
0.17
0.20
0.22
Common equity leverage
0.87
0.90
0.92
Capital structure leverage
2.22
1.60
1.24
Profit margin
0.11
0.10
0.09
Asset turnover
1.69
2.27
2.87
Which of the following statements is true?
a. There has been a steady decline in ROE from 2014through 2016.
b. The increase in ROA is due primarily to the changes in asset turnover.
c. The changes in ROA could be due to increasing sales.
d.The change in ROA could be due to a large increase in the asset base of the company.
62.Assume that the following financial ratios were computed from the 2015 financial statements of Florida Industries:
Return on sales (profit margin)
0.30
Return on assets
0.16
Common equity leverage
0.87
Capital structure leverage
2.22
Asset turnover
1.69
What was the return on equity for Florida in 2015?
a. 4%
b. 31%
c. 51%
d.11%
Solution:
ROE =ROAX Common Equity LeverageX Capital Structure Leverage
ROE = 0.16 X 0.87 X 2.22 = 0.31
63.Assume that the following financial ratios were computed from the 2015 financial statements of Florida Industries:
Return on sales (profit margin)
0.29
Return on assets
0.17
Common equity leverage
0.87
Capital structure leverage
2.22
Asset turnover
1.69
If Floridaholds its other ratios constant in 2016, but increases its capital structure leverage ratio to 3.20, what will be the 2016 return on equity?
a. 15%
b. 51%
c. 86%
d.47%
Solution:
ROE =ROAX Common Equity LeverageX Capital Structure Leverage
ROE = 0.17 X 0.87 X 3.20 = 0.47
64.Assume that the following financial ratios were computed from the 2015 financial statements of Florida Industries:
Return on sales (profit margin)
0.30
Return on assets
0.17
Common equity leverage
0.87
Capital structure leverage
2.22
Asset turnover
1.69
If Floridaholds its other ratios constant in 2016, but increases its profit margin to 38%, what will be the 2016 return on assets?
a. 5%
b. 78%
c. 64%
d.51%
Solution:
ROA=Profit Margin*Asset Turnover
ROA =.38 x 1.69= 64%
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