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TRUE OR FALSE

  1. For Company T during 2017, the change in accounts receivablewas positive, the change in inventories was positive, and there wasno change in accounts payable. Therefore the change in workingcapital was a cash outflow.
  1. In ROC the debt and equity values from the balance sheet aretaken from the same year as the income statement.
  1. ROA can be estimated by multiplying the operating profit marginby the asset turnover ratio.

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Jarrod Robel
Jarrod RobelLv2
28 Sep 2019

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(1) Because a firm that uses debt can be as profitable as a firmthat does not, some financial ratios are calculated with NOPAT (NetOperating Profit After Tax) rather than with net income.

(2) Free Cash Flow to the Firm measures the cash available toequity investors, after all debt payments (including interest andprincipal), have been made.

(3) For Company T during 2017, the change in accounts receivablewas positive, the change in inventories was positive, and there wasno change in accounts payable. Therefore the change in workingcapital was a cash inflow. Is this last statement true orfalse?

(4) The Price-to-earnings ratio (PE ratio) is useful as anindicator of liquidity because it relates the earnings of a companyto its stock price.

(5) In consolidated accounts, when the parent company pays morefor the shares of a subsidiary than book value, the difference ispositive goodwill

(5) Because a firm that uses debt can be as profitable as a firmthat does not, some financial ratios are calculated t with NOPAT(Net Operating Profit After Tax) rather than with net income. [7marks]

[1] True or False? (42 points)

(6) In ROC (return on capital) calculations, if the operatingearnings corresponds to profits obtained during 2017, thenthe debt and equity values must be at end of 2017. [7marks]

(7) ROA (return on assets) ca n be estimated by multiplying theoperating profit margin by the asset turnover ratio. [7 marks]

Use the following information to answer the following questions.

ABC, Inc. Income Statement (in thousands)

December 31, 2014

Sales $200,000

Cost of goods sold 140,000

Gross profit on sales 60,000

Operating expenses 56,000

Operating income (EBIT) 4,000

Interest expense 1,000

Earnings before tax 3,000

Income tax 1,050

Net income available to common stockholders $1,950

Number of shares outstanding 1, 500

Market price per share $22

ABC, Inc. Balance Sheet (in thousands)

December 31, 2014

Assets

Cash $2,000

Accounts receivable 17,800

Inventories 8,700

Total current assets 28,500

Gross fixed assets 70,000

Accumulated depreciation 26,500

Net fixed assets 43,500

Total assets $72,000

Liabilities and Equity

Accounts payable $18,000

Accruals 13,350

Total current liabilities 31,350

Long-term debt 8,250

Total liabilities 39,600

Common stock (par value and paid in capital) 2,000

Retained earnings 30,400

Total stockholders' equity 32,400

Total liabilities and equity $72,000

Industry Key Ratios

Industry Average Ratios

Current ratio 1.1

Quick ratio 0.60

Days Sales Outstanding (DSO) 25 days

Fixed assets turnover 5.8

Total asset turnover 2.95

Liabilities-to-assets ratio 65%

Times-interest-earned 3.2

Net profit margin 1.3%

Return on equity 7.32%

Price/earnings ratio 20.38

Market/book ratio 3.19

Calculate current ratio and acid test ratio for the firm.

Calculate DSO, fixed assets turnover, and total asset turnover for the firm.

Calculate liabilities-to-assets ratio and times-interest-earned ratio for the firm.

Calculate net profit margin and return on equity for the firm.

Evaluate the performance of the firm in the following areas:

Liquidity management

Asset management

Debt management

Profitability management

When you explain the firm

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