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Conducting Finance Based Calculations

1. You are given the following information: Stockholders' equity $3.75 billion, price/ earnings ratio 3.5, common shares outstanding 50 million, and market/ book ratio 1.9. Calculate the price of a share of the company's common stock.

2. Raser Trucking has $12 billion in assets, and its tax rate is 40%. Its basic earning power (BEP) ratio is 15%, and its return on assets (ROA) is 5%. What is its times- interest- earned (TIE) ratio?

3. The H.R. Pickett Corp. has $500,000 of debt outstanding, and it pays an annual interest rate of 10%. Its annual sales are $ 2 million, its average tax rate is 30%, and its net profit margin is 5%. What is its TIE ratio?

4. Lloyd Inc. has sales of $200,000, a net income of $15,000, and the following balance sheet:
Cash $10,000
Accounts payable $30,000
Receivables 50,000
Other current liabilities 20,000
Inventories 150,000
Long- term debt 50,000
Net fixed assets 90,000
Common equity 200,000
Total assets $ 300,000
Total liabilities and equity $ 300,000
The new owner thinks that inventories are excessive and can be lowered to the point where the current ratio is equal to the industry average, 2.5, without affecting sales or net income. If inventories are sold off and not replaced (thus reducing the current ratio to 2.5), if the funds generated are used to reduce common equity (stock can be repurchased at book value), and if no other changes occur, by how much will the ROE change? What will be the firm's new quick ratio?

5. AEI Incorporated has $5 billion in assets, and its tax rate is 40%. Its basic earning power (BEP) ratio is 10%, and its return on assets (ROA) is 5%. What is AEI's times-interest- earned (TIE) ratio?

6. Harrelson Inc. currently has $750,000 in accounts receivable, and its days sales outstanding (DSO) is 55 days. It wants to reduce its DSO to 35 days by pressuring more of its customers to pay their bills on time. If this policy is adopted, the company's average sales will fall by 15%. What will be the level of accounts receivable following the change? Assume a 365 day year.

Solution Preview

1. Shareholder's Equity = 3.75 billion
No. of shares outstanding = 50 million
Book value per share = 3750/50 = $75 per share
Market value / Book Value = 1.9
Market value of stock = 1.9*75=$142.50

2. ROA=Net Income / Total Assets = 5%
Net Income = 5%*12 billion = 0.6 billion
Income before tax (EBT) = Net Income /(1-Tax Rate) = 0.6/(1-40%)=1.0 billion
BEP = EBIT/ Total Assets = 15%
EBIT = 15%*12=1.8 billion
Interest = EBIT-EBT = $1.8 billion - 1.0 billion = 0.8 billion
Times interest earned = EBIT/Interest = 1.8 ...

Solution Summary

The solution examines conducting finance based calculations.