Chapter 3 Analysis of Financial Statement

Chapter 3
Analysis of Financial Statements

SOLUTIONS TO END-OF-CHAPTER PROBLEMS

3-1 DSO = 40 days; S = $7,300,000; AR = ?

DSO = 40 = 40 = AR/$20,000 AR = $800,000.

3-2 A/E = 2.4; D/A = ?

3-3 ROA = 10%; PM = 2%; ROE = 15%; S/TA = ?; TA/E = ?
ROA = NI/A; PM = NI/S; ROE = NI/E.

ROA = PM  S/TA NI/A = NI/S  S/TA 10% = 2%  S/TA S/TA = 5.

ROE = PM  S/TA  TA/E
NI/E = NI/S  S/TA  TA/E 15% = 2%  5  TA/E 15% = 10%  TA/E
TA/E = 1.5.

3-4 TA = $10,000,000,000; CL = $1,000,000,000; LT debt = $3,000,000,000; CE = $6,000,000,000; Shares outstanding = 800,000,000; P0 = $32; M/B = ?

Book value = = $7.50.

M/B = = 4.2667.

3-5 TA = $12,000,000,000; T = 40%; EBIT/TA = 15%; ROA = 5%; TIE = ?

= 0.15 EBIT = $1,800,000,000.

= 0.05 NI = $600,000,000.

Now use the income statement format to determine interest so you can calculate the firm’s TIE ratio.

EBIT $1,800,000,000 See above.
INT 800,000,000
EBT $1,000,000,000 EBT = $600,000,000/0.6
Taxes (40%) 400,000,000
NI $ 600,000,000 See above.

TIE = EBIT/INT = $1,800,000,000/$800,000,000 = 2.25.

3-6 We are given ROA = 3% and Sales/Total assets = 1.5.

From Du Pont equation: ROA = Profit margin  Total assets turnover 3% = Profit margin(1.5) Profit margin = 3%/1.5 = 2%.

We can also calculate the company’s debt ratio in a similar manner, given the facts of the problem. We are given ROA(NI/A) and ROE(NI/E); if we use the reciprocal of ROE we have the following equation:

Alternatively,

ROE = ROA  EM 5% = 3%  EM EM = 5%/3% = 5/3 = TA/E.

Take reciprocal:

E/TA = 3/5 = 60%;

therefore, D/A = 1 - 0.60 = 0.40 = 40%.

Thus, the firm’s profit margin = 2% and its debt ratio = 40%.

3-7 Present current ratio = = 2.5.

Minimum current ratio = = 2.0.

$1,312,500 + NP = $1,050,000 + 2NP NP =