FIN 322 Study Guide - Final Guide: Current Liability, Current Asset, Debt Management Plan

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jadecockroach949

31 Jul 2019

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Current ratio indicates the extent to which current liabilities are covered by those assets expected to be converted to cash in the near future: if current liabilities rise faster than current asset, cr goes down. Low cr = current liabilities are outpacing current assets. High cr = typically a signal the firm is strong; could indicate too much cash/inventory relative to sales. Quick (aka acid test) ratio measures the firm"s ability to pay off short-term obligations without relying on the sale of inventories. Days sales outstanding (dso) tells us how long the firm has to wait after making a sell to collect cash. Fixed assets turnover ratio measures how effectively the firm uses its plant and equipment. Total assets turnover tells us whether the firm is generating enough sales given its total assets. Profitability ratios show the combined effects of liquidity, asset management, and debt on operating results.

Related Questions

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

skymallard37

1- which one of the following is not included in net workingcapital?

A) account receivable , B) retained earnings, C) cash and cashequivalent , D) prepaid expenses, E) Account payable.

2- Depreciation does which one of the following for a profitablefirm?

A) has no effect on net income, B) decrease net working capital,C) decrease net income, D) increase net income, E) increasetaxes

3- a firm has a current ratio 0.9, given this you know forcertain that the firm.

A) has more current liabilities than it does current assets, B)has positive net working capital, C) has negative net workingcapital D) pays cash for its inventory, E) has more cash thaninventory.

4- all else equal, an increase in which one of the followingwill increase owner's equity?

A) increase in accounts payable, B) decrease in net fixedassets, C) decrease in accounts receivable , D) increase ininventory, E) decrease in net working capital

5- a firm with inventory of $130, total current assets of $511and current liabilities of $412 has a quick ratio (acidtest) of?

6- During the latest year, xyz corporation has total sales of$200,000, net income of $10000 and its year-end total assets were$250,000, the firm's total debt to total assets ratiowas 30%

what is firm's total assets turnover?

7- During the latest year, xyz corporation has total sales of$200,000 net income $20,000, its year-end total assets were230,000, the firm's total debt to total assets ratio was30%,

what is firm's return on assets (ROA)

8- Company x has profits margin of 5%, total assets turnover of1.8 and total debt to total assets ratio of 30%,, what is thecompany's ROE?

greysquirrel390

All one question, the first part i have the answer to but the second part i dont understand...

1)Quigley Inc. is considering two financial plans for the coming year. Management expects sales to be $300,000, operating costs to be $265,000, assets (capital) to be $200,000, and its tax rate to be 35%. Under Plan A it would use 25% debt and 75% common equity. The interest rate on the debt would be 8.8%, but under a contract with existing bondholders the TIE ratio would have to be maintained at or above 4.0. Under Plan B, the maximum debt that met the TIE constraint would be employed. Assuming that sales, operating costs, assets, the interest rate, and the tax rate would all remain constant, by how much would the ROE change in response to the change in the capital structure? a. 3.71% b. 4.08% c. 4.48% d. 4.93% e. 5.18%

Then it goes on to say, which is the problem i really need help on conceptually...

2)Which of the following statements is CORRECT?

a. Even though Firm A's current ratio exceeds that of Firm B, Firm B's quick ratio might exceed that of A. However, if A's quick ratio exceeds B's, then we can be certain that A's current ratio is also larger than B's.

b. Suppose a firm wants to maintain a specific TIE ratio. It knows the amount of its debt, the interest rate on that debt, the applicable tax rate, and its operating costs. With this information, the firm can calculate the amount of sales required to achieve its target TIE ratio.

c. Since the ROA measures the firm's effective utilization of assets without considering how these assets are financed, two firms with the same EBIT must have the same ROA.

d. 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.

e. Klein Cosmetics has a profit margin of 5.0%, a total assets turnover ratio of 1.5 times, a zero debt ratio and therefore an equity multiplier of 1.0, and an ROE of 7.5%. The CFO recommends that the firm borrow money, use it to buy back stock, and raise the debt ratio to 50% and the equity multiplier to 2.0. She thinks that operations would not be affected, but interest on the new debt would lower the profit margin to 4.5%. This would probably not be a good move, as it would decrease the ROE from 7.5% to 6.5%.

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FIN 322 Study Guide - Final Guide: Current Liability, Current Asset, Debt Management Plan

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