The debt ratio and the market price the stock per share

MANAGEMENT ADVISORY SERVICES

FINANCIAL STATEMENT ANALYSIS

A. They can help. identify the reasons for success and failure in business, but decision making requires information beyond the ratios.

B. They remove the uncertainty of the business environment.

B. Determine which companies in the same industry are at approximately the same stage of development.

C. Compare the mix of assets, liabilities, capital, revenue, and expenses within a company over time or between companies within a given industry without respect to relative size.

D. The distribution of assets in which funds are invested.

5. If a transaction causes total liabilities to decrease but does not affect the owners’ equity, what change if any, will occur in total assets?
A. Assets wilt he increased.

C. An absolute value of P100,000 and no value for a percentage change D. No change in any terms because there was no investment in the previous year.

7. In a set of comparative financial statements, you observed a gradual decline in the net of gross ratio, i.e., between net sales and gross sales. This indicates that:
A. There is a stiffening in the grant of discounts to the customers.
B. The discount period is being lengthened.

A. All eight ratios.

5. Return on assets
6. Inventory turnover
7. Receivables turnover
8. Price-earnings ratio

C. Debt ratio.

D. Accounts receivable turnover.

11. North Bank is analyzing Belle Corp.'s financial statements for a possible extension of credit. Belle's quick ratio is significantly better than the industry average. Which of the following factors should North consider as possible limitation of using this ratio when evaluating Belle's creditworthiness?

A. Fluctuating market prices of short-term investments may adversely affect the ratio.

B. Debt ratio.

C. Quick (acid test) ratio.

D. Net profit margin, total assets turnover, and equity multiplier.

15. Which of the following actions will increase a company's quick ratio?

C. Current ratio.

D. Quick ratio.

19. In comparing the current ratios of two companies, why is it invalid to assume that the company with the higher current ratio is the better company?

A. The current ratio includes assets other than cash.

Which of the following transactions would improve Mabuhay's current ratio? A. Refinancing a P60,000 long-term mortgage with a short-term note.

B. Collecting P20,000 of short-term accounts receivable.

C. Pays a large account payable which had been a current liability.

D. Borrow cash on a six-month note.

D. sale of short-term marketable securities for cash that results in a profit.

24. A company's current, ratio is 2.2 to 1 and the quick ratio is 1.0 to 1 at the beginning of the year. At the end of the year, the company has a current ratio of 2.5 to 1 and a quick ratio of 0.8 to 0.1 Which of the following could help explain the divergence in the ratios from the beginning to the end of the year?

D. The current ratio.

26. The market value of a firm's outstanding common everything else equal, if A. Investors have a lower required return on equity.
B. Investors expect lower dividend growth.

B. Accounts receivable turnover increased.

C. Total asset turnover increased.

29. If, just prior to the period of rising prices, a company changed its inventory measurement from FIFO to LIFO, the effect in the next period would be to

31. Assume that a company's debt ratio is currently 50%. It plans to purchase fixed assets either by using borrowed fundsfor the purchase or by entering into an operating lease.

The company's debt ratio as measured by the balance sheet will A. Increase whether the assets are purchased or leased.

B. Total assets turnover is above the industry average.

C. Total assets turnover is below the industry average.

C. CMG stops paying dividends on its cumulative preferred stock; the price-earnings ratio of common stock is low.

D. Equity ratio is low; return on assets exceeds the cost of borrowing.

35. Which of the following statements is correct?

36. A company issued long-term bonds and used the proceeds to re arch repurchase 40% of the outstanding shares of its stock. This financial transaction will likely cause the A. Total assets turnover ratio to increase.

B. Current ratio to-decrease.

C. The peso amount of capital stock is increased.

D. Working capital and current ratio are increased.

PROBLEMS

1. The net sales of Grand Manufacturing Co. in 1990 is total, P580,600. The cost of goods manufactured is P480,000. The beginning inventories of goods in process and finished goods are P82,000 and P65,000, respectively. The ending inventories are, goods in process, P75,000, finished goods, P55,000. The selling expenses is 5%, general and administrative expenses 2.5% of cost of sales, respectively. The net profit in the year 1990 is
A. P90,000
B. P45,725
C. P53,850
D. P83,000

4. Perry Technologies Inc. had the following financial information for the past year:

5. A service company's working capital at the beginning of January of the current year was P70,000. The following transactions occurred during January:

A. P2,900,000
B. P3,000,000
C. P3,200,000
D. P5,500,000

8. During 1989, Rand Co. purchased P960,000 Of inventory. The cost of-goods sold for 1989 was P900,000 and the ending inventory at December 31, 1989 was P180,000. What was the inventory turnover for 1989?

10. The following information pertain to AL Corporation as of and for the year-ended December 31, 19x7
Liabilities P 60,000
Stockholder’s equity P 500,000
Share of common stock issued P 10,000
Net Income P 30,000

During 1997, AL officer exercised stock option for 1,000 shares of stock as an option

12. OTW corporation has current asset totaling P15 million and a current ratio of 2.5 to 1. What OTW's current ratio immediately after it has paid P2million of its accounts payable?

A. 3.75 to 1
B. 2.75 to 1
C. 3.25 to 1
D. 4.75 to 1

A. Profit will grow by 25%
B. The profit margin will grow by 15%
C. Profit will grow proportionately faster than sales
D. Ten percent of the increase in sales will become net income

16. Given the following information, calculate the market price per share of WAM Inc. Net Income = P200,000 Earnings per share = P2.00 Stockholders’ equity = P2,000,000 Market/Book ratio = 0.20

A. 1.50 C. 0.72 B. 1.97 D. 1.66

20. Ehrenburg Co. had net income of P5.3 million and earnings per share of common stock of P2.50. Included in the net income was P500,000 of bond interest expense related to its

A. P 8,333 C. P 125,000 B. P 66,667 D. P200,000

22. JC Goods, Inc. has a total assets turnover of 0.30 and a profit margin of 10%. The president is unhappy with the current return on assets, and he thinks it could be doubled. This could be accomplished (1) by increasing the profit margin to 15% and (2) by increasing total assets turnover. What new asset turnover ratio, along with the 15% profit margin, is required to double the return on assets?

25. A fire has destroyed many of the financial records of R. Son & Co. You are assigned to put together a financial report. You have found the return on equity to be 12% and the debt ratio was 0.40. What was the return on assets?

A. 5.35% C. 6.60%
B. 8.40% D. 7.20%

A. 0.75 C. 0.65 B. 0.70 D. 0.55

29. Last year, Quayle Energy had sales of P200 million and its inventory turnover ratio was 5.0. The company’s current assets totaled P100 million and its current ratio was 2.1. What was the company’s quick ratio?

A. 1.33 C. 1.22 B. 1.67 D. 0.75

32. The following ratios and data were computed from the 1997 financial statements of Star Co.:
Current ratio 1.5 Working capital P20,000 Debt/Equity ratio .8 Return on equity .2 If net income for 1997 is P40,000, the balance sheet at the end of 1997 total assets of A. P340,000 C. P300,000
B. P360,000 D. P400,000

A. 8.0% C. 12.0% B. 10.0% D. 16.7%

36. A firm has total assets of P1,000,000 and a debt ratio of 30 percent. Currently, it has sales of P2,500,000, total fixed costs of P1,000,000, and EBIT of P50,000. If the firm’s before-tax cost of debt is 10 percent and the firm’s tax rate is 40 percent, what is the firm’s ROE?

38. Southeast Packaging’s ROE last year was only 5%, but its management has developed a new operating plan designed to improve things. The new plan calls for a total debt ratio of 60%, which will result in interest charges of P8,000 per year. Management projects an EBIT of P26,000 on sales of P240,000, and it expects to have a total asset turnover ratio of 2.0. Under these conditions, the average tax rate will be 40%. If the changes are made, what return on equity will Southeast earn?

A. 9.00% C. 17.50% B. 11.25% D. 22.50%

A. 0.0% C. 5.2% B. 3.0% D. 7.4%

41. Watson Corporation computed the following items from its financial records for the year just ended:
Price-earnings ratio 12
Payout ratio .6
Asset turnover .9

A. 0.95 C. 2.10 B. 1.75 D. 2.67

43. Miller and Rogers Partnership has P3 million in total assets, P1.65 million in equity, and a P500,000 capital budget. To maintain the same debt-equity ratio, how much debt should be incurred?

A. 8.27% and 88.6% C. 8.86% and 88.6% B. 8.27% and 22.1% D. 8.86% and 22.1%

46. Assume Meyer Corporation is 100% equity financed. Calculate the return on equity, given the following information:
(1) Earnings before taxes = P1,500
(2) Sales = P5,000
(3) Dividends payout ratio = 60%
(4) Total asset turnover = 2.0
(5) Tax rate = 30%

The effects on asset turnover were to
A. Remain constant
B. Increase from 1.46 to 2.33
C. Decrease from 14.58 to 2.33
D. Increase from 4.76 to 9.60

49. Landry Retailers has annual sales of P365 million. The company’s days sales outstanding (calculated on a 365-day basis) is 50, which is well above the industry average of 35. The company has P200 million in current assets, P150 million in current liabilities, and P75 million inventories. The company’s goal is to reduce its DSO to the industry average without reducing sales. Cash freed up would be used to repurchase common stock. What will be the current ratio if the company accomplishes its goal?

A. 0.30 C. 0.40 B. 0.33 D. 0.45

52. The Intelinet Corporation and Comp Inc. have assets of P100,000 each and a return on common equity of 17%. Intelinet has twice the debt of Comp Inc., while Comp has half the sales of the Intelinet. If Intelinet has net income of P10,000 and a total assets turnover ratio of 3.5,, what is Comp Inc.’s profit margin?

54. Roland & Company has a new management team that has developed an operating plan to improve upon last year’s ROE. The new plan would place the debt ratio at 55%, which will result in interest charges of P7,000 per year. EBIT is projected to be P25,000 on sales of P270,000, it expects to have a total asset turnover ratio of 3.0, and the average tax rate will be 40%. What does Roland & Company expect its return on equity to be following the changes?

A. 17.65% C. 26.67% B. 21.82% D. 44.44%

Questions 57 through 59 are based on the following information

The condensed balance sheet as of December 31, 1982 of San Matias Company is given below. Figures shown by a question mark (?) may be computed from the additional information given:

Ratio of total liabilities to total stockholder’s equity 1.4 Inventory turnover based on sales and ending inventory 15 times Inventory turnover based on cost of goods sold and ending inventory 10 times Gross margin for 1982 P500,000

57. The balance of accounts payable of San Matias as of December 31, 1982 is A. P40,000 C. P95,000
B. P80,000 D. P280,000

Based on the above information
60. What was the operating income for 19x8?

A. P472,500 C. P205,550 B. P243,500 D. P229,500