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Debt Ratio, Capital and Sales, Total Assets

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1. Kansas Office Supply had $24,000,000 in sales last year. The company's net income was $400,000, its total assets turnover was 6.0, and the company's ROE was 15 percent. The company is financed entirely with debt and common equity. What is the company's debt ratio?
a. 0.20 b .0.30 c .0.33 d.0.60 e.0.66

2. Given the following information, calculate the market price per share of WAM Inc.
Net income = $200,000
Earnings per share = $2.00
Stockholders' equity = $2,000,000
Market/Book ratio = 0.20
a. $20.00 b. $ 8.00 c. $ 4.00 d. $ 2.00 e. $ 1.00

3. Austin & Company has a debt ratio of 0.5, a total assets turnover ratio of 0.25, and a profit margin of 10 percent. The Board of Directors is unhappy with the current return on equity (ROE), and they think it could be doubled. This could be accomplished (1) by increasing the profit margin to 12 percent and (2) by increasing debt utilization. Total assets turnover will not change. What new debt ratio, along with the new 12 percent profit margin, would be required to double the ROE?
a. 55% b. 60% c. 65% d. 70% e. 75%

4. Brown & Sons recently reported sales of $100 million, and net income equal to $5 million. The company has $70 million in total assets. Over the next year, the company is forecasting a 20 percent increase in sales. Since the company is at full capacity, its assets must increase in proportion to sales. The company also estimates that if sales increase 20 percent, spontaneous liabilities will increase by $2 million. If the company's sales increase, its profit margin will remain at its current level. The company's dividend payout ratio is 40 percent. Based on the AFN formula, how much additional capital must the company raise in order to support the 20 percent increase in sales?
a. $ 2,000,000 b. $ 6,000,000 c. $ 8,400,000 d. $ 9,600,000 e. $14,000,000

5. A firm has the following balance sheet:

Cash $ 20 Accounts payable $ 20
Accounts receivable 20 Notes payable 40
Inventory 20 Long-term debt 80
Fixed assets 180 Common stock 80
Retained earnings 20
Total liabilities
Total assets $240 and equity $240

Sales for the year just ended were $400, and fixed assets were used at 80 percent of capacity, but its current assets were at optimal levels. Sales are expected to grow by 5 percent next year, the profit margin is 5 percent, and the dividend payout ratio is 60 percent. How much additional funds (AFN) will be needed?
a. $4.6 b. -$6.4 (Surplus) c. $2.4 d. -$4.6 (Surplus) e. $0.8

6. Apex Roofing Inc. has the following balance sheet (in millions of dollars):

Current assets $3.0 Accounts payable $1.2
Net fixed assets 4.0 Notes payable 0.8
Accrued wages and taxes 0.3
Total current liabilities $2.3
Long-term debt 1.2
Common equity 1.5
Retained earnings 2.0

Total liabilities
Total assets $7.0 and equity $7.0

Last year's sales were $10 million, and Apex estimates it will need to raise $2 million in new debt and equity next year. You have identified the following facts: (1) it pays out 30 percent of earnings as dividends; (2) a profit margin of 4 percent is projected; (3) fixed assets were used to full capacity; and (4) assets and spontaneous liabilities as shown on last year's balance sheet are expected to grow proportionally with sales. If the above assumptions hold, what sales growth rate is the firm anticipating? (Hint: You can use the AFN formula to help answer this problem.)

a. 187%
b. 51%
c. 97%
d. 44%
e. 26%

7. Using the AFN formula approach, calculate the total assets of Harmon Photo Company given the following information: Sales this year = $3,000; sales increase projected for next year = 20 percent; net income this year = $250; dividend payout ratio = 40 percent; projected excess funds available next year = $100; accounts payable = $600; notes payable = $100; and accrued wages and taxes = $200. Except for the accounts noted, there were no other current liabilities. Assume that the firm's profit margin remains constant and that the company is operating at full capacity.

a. $3,000
b. $2,200
c. $2,000
d. $1,200
e. $1,000

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Solution Summary

The Solution addresses seven general finance questions.

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