AFM101 Study Guide - Final Guide: Interest Expense
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QUESTION 1
Determine the cost of sales for a firm with the following financial ratios and data:
Current ratio = 3.0; Quick ratio = 2.0; Current liabilities $1,000,000; Inventory turnover 6 times
| a. | $6,000,000 | |
| b. | $3,000,000 | |
| c. | $2,000,000 | |
| d. | $1,000,000 |
8.3 points
QUESTION 2
What would be the times interest earned of a company, if its total interest charges are $20,000, sales are $220,000, and its net profit margin is 6 percent? Assume a tax rate of 40 percent.
| a. | 2.65 | |
| b. | 2.1 | |
| c. | 1.1 | |
| d. | 1.2 |
8.3 points
QUESTION 3
A firm's current ratio is 1.5 and its quick ratio is 1.0. If its current liabilities are $10,000, what are its inventories?
| a. | $20,000 | |
| b. | $ 5,000 | |
| c. | $10,000 | |
| d. | $15,000 |
8.3 points
QUESTION 4
If a firm wishes to retain the same return on equity when its net profit margin and total asset turnover has declined, it must
| a. | increase its equity multiplier | |
| b. | increase sales and increase assets | |
| c. | decrease its equity multiplier | |
| d. | reduce sales and increase assets |
8.3 points
QUESTION 5
The sales-to-inventory ratio:
| a. | is technically inferior to other commonly used ratios. | |
| b. | is superior to the inventory turnover ratio. | |
| c. | as a determination of financial performance, is good comparison tool. | |
| d. | was developed by the Dupont Corporation and is satisfactory when used to make comparisons between the firm and the industry as a whole. |
8.5 points
QUESTION 6
Primary sources of comparative financial data include
| a. | Dun and Bradstreet | |
| b. | Richard Moore, Inc. | |
| c. | Framingham Financial Library | |
| d. | New York Times |
8.3 points
QUESTION 7
____ indicate the ability of the firm to meet its short-term financial obligations
| a. | Leverage ratios | |
| b. | Profitability ratios | |
| c. | Activity ratios | |
| d. | Liquidity ratios |
8.3 points
QUESTION 8
If a firm’s common size income statement shows that the earnings after tax percentage is too low, the firm may have spent too much money:
| a. | on total assets as a percentage of long-term liabilities. | |
| b. | on cost of goods sold as a percentage of sales. | |
| c. | on taxes paid as a percentage of stockholders’ equity. | |
| d. | on expenses as a percentage of current assets. |
8.3 points
QUESTION 9
The ____ ratio indicates the percentage of a firm's earnings that are distributed as dividends.
| a. | payout | |
| b. | earnings | |
| c. | return on earnings | |
| d. | dividend yield |
8.3 points
QUESTION 10
The work of the external independent auditor includes a letter that states that the financial information represents fairly the financial position of the company and that these statements were:
| a. | based on the company's accounting information system (AIS) | |
| b. | constructed in conformity with generally accepted accounting principles | |
| c. | developed using management's choice of accounting enhancement techniques | |
| d. | an accurate picture of the company's market position |
8.3 points
QUESTION 11
The greater the amount of financial leverage used by a firm, the greater its ____, all other things being equal.
| a. | liquidity | |
| b. | profitability | |
| c. | size | |
| d. | risk |
8.3 points
QUESTION 12
The type of ratio that indicates the firm’s ability to provide adequate returns in the form of dividends and share price appreciation is:
| a. | Profitability ratios | |
| b. | Asset management ratios | |
| c. | Financial leverage management ratios | |
| d. | Liquidity ratios |
8.5 points
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I know it's a lot but they are all small questions related to the same case so I didn't know how to split it into multiple questions. I would really appreciate the help, as I need a way to compare my answers.
Dallas & Associates Financial Statement Preparation & Analysis
You have been hired as a senior financial analyst for Dallas and Associates and you are in charge of preparing the financial statements and presenting an annual analysis at the board meeting.
Overview of Dallas & Associate’s Balance Sheet
The assets of Dallas & Associates in 2017 have both current assets and net plant and equipment. It has total assets of $ 7.5 million and net plan and equipment equals $5 million. Dallas & Associate’s only finances with $2.5 million long-term debt, $500,000 notes payable and total common equity of $3.5 million. The firm does have $400,000 accounts payable and $600,000 accruals on its balance sheet. Now assume the firm’s current assets consist entirely of cash and cash equivalence, account receivables and inventories. If it has 1.5 million cash and cash equivalents and $400,000 account receivables.
Dallas & Associates Income Statement in 2017 (dollars are in millions)
| Sales | 15 |
| Operating costs excluding depreciation and amortization | 5 |
| EBITDA | 10 |
| Depreciation & Amortization | 0.6 |
| EBIT | 9.4 |
| Interest | 0.4 |
| EBT | 9 |
| Taxes (40%) | 3.6 |
| Net Income Cash Dividends | 5.4 2.0 |
Use the above information to answer the following questions. Make sure to include the calculation steps/ formula.
Questions:
a. Prepare the balance sheet.
| Total Assets | Liabilities & Shareholder’s Equity |
b. What is the amount of total liabilities and equity that appears on the firm’s balance?
c. What is the amount of current assets?
d. What is the balance of current liabilities?
e. What is the amount of company’s inventory?
f. What is the amount of total liabilities?
g. What is the amount of total debt?
h. What is the amount of total capital?
i. What is the amount of net working capital?
j. What is the amount of net operating working capital?
k. If by the end of 2017, the retained earnings of John and Jon is $2.5 million, what is the amount of paid-in capital?
l. If John & Jon decides to purchase $500,000 market securities by using its cash, how does this action would affect its current asset position?
m. As the Income of Statement shows in 2017 John & Jon actually gave out $2 million cash dividends, what is the amount of retained earnings?
n. What is the amount of operating income?
o. What are the operating margin and the profit margin?
p. What is the average length of time that John & Jon must wait after making a sale before it receives cash?
q. What is the ratio we generally use to estimate a firm’s ability to meet its annual interest payments? And calculate that ratio for John and Jon.
r. What are the fixed assets turnover ratio and the total asset turnover ratio?
s. What is the ratio of total debt to total capital?
t. What is the ratio of return on common equity?
u. Assume between 2016 and 2017, net operating working capital has increased by $500,000, calculate John & Jon’s free cash flow. (Hint: use this formula. FCF = [EBIT (1-T) +Depreciation & Amortization] – [Capital Expenditures + Change on Net Operating Working Capital])
v. Now after you present your analysis on the meeting, the CEO would like to see higher sales and a forecasted net income of $10.8 million. Assume that operating costs (excluding depreciation and amortization) are still one third of sales and that depreciation and amortization and interest expenses will increase by 10%. The tax rate which is 40%, will remain the same. What level of sales would generate $10.8 million in net income?
THANK YOU!
I need Answers to Question from P - V!
I know it's a lot but they are all small questions related to the same case so I didn't know how to split it into multiple questions. I would really appreciate the help, as I need a way to compare my answers.
Dallas & Associates Financial Statement Preparation & Analysis
You have been hired as a senior financial analyst for Dallas and Associates and you are in charge of preparing the financial statements and presenting an annual analysis at the board meeting.
Overview of Dallas & Associate’s Balance Sheet
The assets of Dallas & Associates in 2017 have both current assets and net plant and equipment. It has total assets of $ 7.5 million and net plan and equipment equals $5 million. Dallas & Associate’s only finances with $2.5 million long-term debt, $500,000 notes payable and total common equity of $3.5 million. The firm does have $400,000 accounts payable and $600,000 accruals on its balance sheet. Now assume the firm’s current assets consist entirely of cash and cash equivalence, account receivables and inventories. If it has 1.5 million cash and cash equivalents and $400,000 account receivables.
Dallas & Associates Income Statement in 2017 (dollars are in millions)
| Sales | 15 |
| Operating costs excluding depreciation and amortization | 5 |
| EBITDA | 10 |
| Depreciation & Amortization | 0.6 |
| EBIT | 9.4 |
| Interest | 0.4 |
| EBT | 9 |
| Taxes (40%) | 3.6 |
| Net Income Cash Dividends | 5.4 2.0 |
Use the above information to answer the following questions. Make sure to include the calculation steps/ formula.
Questions:
a. Prepare the balance sheet.
| Total Assets | Liabilities & Shareholder’s Equity |
b. What is the amount of total liabilities and equity that appears on the firm’s balance?
c. What is the amount of current assets?
d. What is the balance of current liabilities?
e. What is the amount of company’s inventory?
f. What is the amount of total liabilities?
g. What is the amount of total debt?
h. What is the amount of total capital?
i. What is the amount of net working capital?
j. What is the amount of net operating working capital?
k. If by the end of 2017, the retained earnings of John and Jon is $2.5 million, what is the amount of paid-in capital?
l. If John & Jon decides to purchase $500,000 market securities by using its cash, how does this action would affect its current asset position?
m. As the Income of Statement shows in 2017 Dallas associates actually gave out $2 million cash dividends, what is the amount of retained earnings?
n. What is the amount of operating income?
o. What are the operating margin and the profit margin?
p. What is the average length of time that Dallas associates must wait after making a sale before it receives cash?
q. What is the ratio we generally use to estimate a firm’s ability to meet its annual interest payments? And calculate that ratio for Dallas associates.
r. What are the fixed assets turnover ratio and the total asset turnover ratio?
s. What is the ratio of total debt to total capital?
t. What is the ratio of return on common equity?
u. Assume between 2016 and 2017, net operating working capital has increased by $500,000, calculate Dallas & Associates free cash flow. (Hint: use this formula. FCF = [EBIT (1-T) +Depreciation & Amortization] – [Capital Expenditures + Change on Net Operating Working Capital])
v. Now after you present your analysis on the meeting, the CEO would like to see higher sales and a forecasted net income of $10.8 million. Assume that operating costs (excluding depreciation and amortization) are still one third of sales and that depreciation and amortization and interest expenses will increase by 10%. The tax rate which is 40%, will remain the same. What level of sales would generate $10.8 million in net income?
THANK YOU!
