Collins Company
Collins Company
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20.Collins Company had the following partial balance sheet and complete income statement information for 2002:
Partial Balance Sheet:
| Cash | $ 20 |
| A/R | 1,000 |
| Inventories | 2,000 |
| Total current assets | $3,020 |
| Net fixed assets | 2,980 |
| Total assets | $6,000 |
Income Statement:
| Sales | $10,000 |
| Cost of goods sold | 9,200 |
| EBIT | $ 800 |
| Interest (10%) | 400 |
| EBT | $ 400 |
| Taxes (40%) | 160 |
| Net income | $ 240 |
The industry average DSO is 30 (assuming a 365-day year). Collins plans to change its credit policy so as to cause its DSO to equal the industry average, and this change is expected to have no effect on either sales or cost of goods sold. If the cash generated from reducing receivables is used to retire debt (which was outstanding all last year and has a 10 percent interest rate), what will Collins’ debt ratio (Total debt/Total assets) be after the change in DSO is reflected in the balance sheet?
21.Companies A and B have the same profit margin and debt ratio. However, Company A has a higher return on assets and a higher return on equity than Company B. Which of the following can explain these observed ratios?
22.Company A and Company B have the same tax rate, total assets, and basic earning power. Both companies have positive net incomes. Company A has a higher debt ratio, and therefore, higher interest expense than Company B. Which of the following statements is true?
23.Company A and Company B have the same total assets, return on assets (ROA), and profit margin. However, Company A has a higher debt ratio and interest expense than Company B. Which of the following statements is most correct?
24.Company A and Company B have the same total assets, tax rate, and net income. Company A, however, has a lower profit margin than Company B. Company A also has a higher debt ratio and, therefore, higher interest expense than Company B. Which of the following statements is most correct?
25.Company A has sales of $1,000, assets of $500, a debt ratio of 30 percent, and an ROE of 15 percent. Company B has the same sales, assets, and net income as Company A, but its ROE is 30 percent. What is B’s debt ratio? (Hint: Begin by looking at the Du Pont equation.)
26.Company A’s ROE is 20 percent, while Company B’s ROE is 15 percent. Which of the following statements is most correct?
27.company has just been taken over by new management that believes it can raise earnings before taxes (EBT) from $600 to $1,000, merely by cutting overtime pay and reducing cost of goods sold. Prior to the change, the following data applied:
| Total assets | $8,000 |
| Debt ratio | 45% |
| Tax rate | 35% |
| BEP ratio | 13.3125% |
| EBT | $600 |
| Sales | $15,000 |
These data have been constant for several years, and all income is paid out as dividends. Sales, the tax rate, and the balance sheet will remain constant. What is the company’s cost of debt? (Hint: Work only with old data.)
28.Company J and Company K each recently reported the same earnings per share (EPS). Company J’s stock, however, trades at a higher price. Which of the following statements is most correct?
29.Company X has a higher ROE than Company Y, but Company Y has a higher ROA than Company X. Company X also has a higher total assets turnover ratio than Company Y; however, the two companies have the same total assets. Which of the following statements is most correct?
30.Culver Inc. has earnings after interest but before taxes of $300. The company’s times interest earned ratio is 7.00. Calculate the company’s interest charges.
D
31.Daggy Corporation has the following simplified balance sheet:
| Cash | $ 25,000 | Current liabilities | $200,000 | |
| Inventories | 190,000 | |||
| Accounts receivable | 125,000 | Long-term debt | 300,000 | |
| Net fixed assets | 360,000 | Common equity | 200,000 | |
| Total assets | $700,000 | Total claims | $700,000 |
The company has been advised that their credit policy is too generous and that they should reduce their days sales outstanding to 36 days (assume a 365-day year). The increase in cash resulting from the decrease in accounts receivable will be used to reduce the company’s long-term debt. The interest rate on long-term debt is 10 percent and the company’s tax rate is 30 percent. The tighter credit policy is expected to reduce the company’s sales to $730,000 and result in EBIT of $70,000. What is the company’s expected ROE after the change in credit policy?
32.Dean Brothers Inc. recently reported net income of $1,500,000. The company has 300,000 shares of common stock, and it currently trades at $60 a share. The company continues to expand and anticipates that one year from now its net income will be $2,500,000. Over the next year the company also anticipates issuing an additional 100,000 shares of stock, so that one year from now the company will have 400,000 shares of common stock. Assuming the company’s price/earnings ratio remains at its current level, what will be the company’s stock price one year from now?
33.Devon Inc. has a higher ROE than Berwyn Inc. (17 percent compared to 14 percent), but it has a lower EVA than Berwyn. Which of the following factors could explain the relative performance of these two companies?
34.Division A has a higher ROE than Division B, yet Division B creates more value for shareholders and has a higher EVA than Division A. Both divisions, however, have positive ROEs and EVAs. What could explain these performance measures?
Dokic, Inc.
Dokic, Inc. reported the following balance sheets for year-end 2001 and 2002 (dollars in millions):
| 2002 | 2001 | |
| Cash | $ 650 | $ 500 |
| Accounts receivable | 450 | 700 |
| Inventories | 850 | 600 |
| Total current assets | $1,950 | $1,800 |
| Net fixed assets | 2,450 | 2,200 |
| Total assets | $4,400 | $4,000 |
| Accounts payable | $ 680 | $ 300 |
| Notes payable | 200 | 600 |
| Wages payable | 220 | 200 |
| Total current liabilities | $1,100 | $1,100 |
| Long-term bonds | 1,000 | 1,000 |
| Common stock | 1,500 | 1,200 |
| Retained earnings | 800 | 700 |
| Total common equity | $2,300 | $1,900 |
| Total liabilities and equity | $4,400 | $4,000 |
35.Refer to Dokic, Inc. The total dividends paid to the company’s common stockholders during 2002 was $50 million. What was the company’s net income during the year 2002?
36.Refer to Dokic, Inc. When reviewing the company’s performance for 2002, its CFO observed that the company’s inventory turnover ratio was below the industry average inventory turnover ratio of 6.0. In addition, the company’s DSO (days sales outstanding, calculated on a 365-day basis) was less than the industry average of 50 (that is, DSO < 50). On the basis of this information, what is the most likely estimate of the company’s sales (in millions of dollars) for 2002?
37.Refer to Dokic, Inc. Which of the following statements is most correct?
38.Drysdale Financial Company and Commerce Financial Company have the same total assets, the same total assets turnover, and the same return on equity. However, Drysdale has a higher return on assets than Commerce. Which of the following can explain these ratios?
F
Fama’s French Bakery
Fama’s French Bakery has a return on assets (ROA) of 10 percent and a return on equity (ROE) of 14 percent. Fama’s total assets equal total debt plus common equity (that is, there is no preferred stock). Furthermore, we know that the firm’s total assets turnover is 5.
1. Refer to Fama’s French Bakery. What is Fama’s debt ratio?
