PROBLEMS

1. The net sales of Grand Manufacturing Co. in 1990 is total, P580,600. The cost of goods
manufactured is P480,000. The beginning inventories of goods in process and finished
goods are P82,000 and P65,000, respectively. The ending inventories are, goods in process,
P75,000, finished goods, P55,000. The selling expenses is 5%, general and administrative
expenses 2.5% of cost of sales, respectively. The net profit in the year 1990 is
a. P90,000 b. P45,725 c. P53,850 d. P83,000

2. In 19x5, MPX Corporation’s net income was P800,000 and in 19x6 it was P200,000. What
percentage increase in net income must MPX achieve in 19x7 to offset the 19x6 decline in
net income?
a. 60% b. 600% c. 400% d. 300%

3. Barr Co. has total debt of $420,000 and shareholders’ equity of $700,000. Barr is seeking
capital to fund an expansion. Barr is planning to issue an additional $300,000 in common
stock, and is negotiating with a bank to borrow additional funds. The bank is requiring a
debt-to-equity rate of 0.75. What is the maximum additional amount Barr will be able to
borrow?
A. $225,000 B. $330,000 C. $525,000 D. $750,000
4. Perry Technologies Inc. had the following financial information for the past year:
Sales $860,000 Inventory turnover 8x
Quick ratio 1.5 Current ratio 1.75
What were Perry’s current liabilities?
a. $430,000 b. $500,000 c. $107,500 d. $ 61,429

5. A service company's working capital at the beginning of January of the current year was
$70,000. The following transactions occurred during January:
Performed services on account $30,000
Purchased supplies on account 5,000
Consumed supplies 4,000
Purchased office equipment for cash 2,000
Paid short-term bank loan 6,500
Paid salaries 10,000
Accrued salaries 3,500
What is the amount of working capital at the end of January?
A. $90,000 B. $80,500 C. $50,500 D. $47,500

6. The working capital of Regalado Co. is P600,000 and its current ratio is 3 to 1. The amount
of current assets is
a. P900,000 b. P1,200,000 c. P600,000 d. P1,800,000

7. Blasso Co.’s net accounts receivable were $500,000 at December 31, 2000 and $600,000 at
December 31, 2001. Net cash sales for 2001 were $200,000. The accounts receivable
turnover for 2001 was 5.0. What were Blasso’s total net sales for 2001?
a. $2,950,000 b. $3,000,000 c. $3,200,000 d. $5,500,000

8. During 1989, Rand Co. purchased $960,000 of inventory. The cost of goods sold for 1989
was $900,000, and the ending inventory at December 31, 1989 was $180,000. What was the
inventory turnover for 1989?
a. 6.4 b. 6.0 c. 5.3 d. 5.0

9. Last year's asset turnover ratio for Wuerffel Airlines was 2.5. This year, sales increased by
20% and average total assets increased by 10%. What is the new asset turnover ratio?
A. 2.50 B. 2.59 C. 2.73 D. 3.00

10. The following information pertains to AL Corporation as of and for the year-ended
December 31, 19x7.
Liabilities P 60,000
Stockholders’ equity P 500,000
Shares of common stock issued and outstanding 10,000
Net income P 30,000
During 1997, AL officers exercised stock options for 1,000 shares of stock at an option price
of P8 per share. What was the effect of exercising the stock option?
a. No ratios were affected. c. Debt to equity ratio decreased to 12%.
b. Asset turnover increased to 50.4% d. Earnings per share increased by P0.33
11. Alumbat Corporation has $800,000 of debt outstanding, and it pays an interest rate of 10
percent annually on its bank loan. Alumbat’s annual sales are $3,200,000, its average tax rate
is 40 percent, and its net profit margin on sales is 6 percent. If the company does not
maintain a TIE ratio of at least 4 times, its bank will refuse to renew its loan, and bankruptcy
will result. What is Alumbat’s current TIE ratio?
a. 2.4 b. 3.4 c. 3.6 d. 5.0

12. OTW Corporation has current assets totaling P15 million and a current ratio of 2.5 to 1.
What is OTW’s current ratio immediately after it has paid P2million of its accounts payable?
a. 3.75 to 1 b. 2.75 to 1 c. 3.25 to 1 d. 4.75 to 1
13. What would be a company’s “times interest earned ratio” if interest paid on loans amount
to P9,000 and its net income after income tax is P99,000. (Assume a 25% income tax rate on
first P100,000 of income and 35% income tax rate on income in excess of P100,000.)
a. 10 times b. 12 times c. 13 times d. 16.2 times

14. The average stockholders equity for ABC Company for 2000 was P2,000,000. Included in
this figure is P200,000 par value of 8% preferred stock, which remained unchanged during
the year. The return on common shareholders’ equity was 12.5% during the 2000. How
much was the net income of the company in 2000?
a. P234,000 b. P241,000 c. P250,000 d. P225,000

15. Planners have determined that sales will increase by 25% next year, and that the profit
margin will remain at 15% of sales. Which of the following statements is correct?
A. Profit will grow by 25%.
B. The profit margin will grow by 15%.
C. Profit will grow proportionately faster than sales.
D. Ten percent of the increase in sales will become net income.

16. 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

17. Associated Co. paid out one-half of its 1994 earnings by dividends. Its earnings increased by
20% and the amounts of its dividends increased by 15% in 1995. Associated’s dividend
payout ratio for 1995 was
a. 51.5% b. 52.3% c. 75.0% d. 47.9%

18. Earnings per share amount to P10 and the price earnings ratio is 5. If the dividend yield is
8%,
a. Market price of the stock must be P40.
b. Market value of the stock cannot be determined.
c. The amount of dividend cannot be determined.
d. The dividend is P4 per share.
19. Victoria Enterprises has $1.6 million of accounts receivable on its balance sheet. The company’s DSO is 40 (based on a 360-day year), its
current assets are $2.5 million, and its current ratio is 1.5 The company plans to reduce its DSO from 40 to the industry average of 30 without causing a decline
.
in sales. The resulting decrease in accounts receivable will free up cash that will be used to reduce current liabilities. If the company succeeds in its plan, what
will Victoria’s new current ratio be?

a. 1.50 b. 1.97 c. 0.72 d. 1.66

20. Ehrenburg Co. had net income of $5.3 million and earnings per share of common stock of
$2.50. Included in the net income was $500,000 of bond interest expense related to its long-
term debt. The income tax rate was 50%. Dividends on preferred stock were $300,000. The
dividend payout ratio on common stock was 40%. What were the dividends on common
stock?
a. $1,800,000 b. $1,900,000 c. $2,000,000 d. $2,120,000

21. Taft Technologies has the following relationships:

Annual sales $1,200,000 Inventory turnover ratio 4.8
Current liabilities $ 375,000 Current ratio 1.2
Days sales outstanding (DSO) 40 (360-day year)
The company’s current assets consist of cash, inventories, and accounts receivable. How
much cash does Taft have on its balance sheet?
a. -$ 8,333 b. $ 66,667 c. $125,000 d. $200,000
22. JC Goods, Inc. has a total assets turnover of 0.30 and a profit margin of 10%. The president
is unhappy with the current return on assets, and he thinks it could be doubled. This could be
accomplished (1) by increasing the profit margin to 15% and (2) by increasing total assets
turnover. What new asset turnover ratio, along with the 15% profit margin, is required to
double the ret7urn on assets?
a. 35% b. 45% c. 40% d. 50%

23. Rainier Inc. has $2 million in current assets

, its current ratio is 1.6, and its quick ratio is 1.2. The company plans to raise funds as additional notes payable and
to use these funds to increase inventory. By how much can Rainier’s short-term debt (notes payable) increase without pushing its quick ratio below 0.8?

a. $625,000 b. $556,000 c. $333,000 d. $278,000

24. Shepherd Enterprises has an ROE of 15 percent, a debt ratio of 40 percent, and a profit
margin of 5 percent. The company’s total assets equal $800 million. What are the company’s
sales? (Assume that the company has no preferred stock.)
a. $1,440,000,000 b. $2,400,000,000 c. $ 360,000,000 d. $ 960,000,000

25. A fire has destroyed many of the financial records of R. Son & Co. You are assigned to put
together a financial report. You have found the return on equity to be 12% and the debt ratio
was 0.40. What was the return on assets?
a. 5.35% b. 8.40% c. 6.60% d. 7.20%

26. The following were reflected from the records of War Freak Company:
Earnings before interest and taxes P1,250,000
Interest expense 250,000
Preferred dividends 200,000
Payout ratio 40%
Shares outstanding throughout 2003
Preferred 20,000
Common 35,000
Income tax ratio 40%
Price earnings ratio 5 times
The dividend yield ratio is:
A. 0.50 B. 0.40 C. 0.12 D. 0.08

27. Selzer Inc. sells all its merchandise on credit. It has a profit margin of 4 percent, days sales
outstanding equal to 60 days, receivables of $150,000, total assets of $3 million, and a debt
ratio of 0.64. What is the firm’s return on equity (ROE)? Assume a 360-day year.
a. 7.1% b. 33.3% c. 8.1% d. 3.3%

28. Deb & Co. has a debt ratio of 0.50, a total assets turnover of 0.25, and a profit margin of
10%. The president is unhappy with the current return on equity, and he thinks it could be
doubled. This could be accomplished (1) by increasing the profit margin to 14% and (2)
increasing debt utilization. Total assets turnover will not change. What new debt ratio, along
with the 14% profit margin, is required to double the return on equity?
a. 0.75 b. 0.70 c. 0.65 d. 0.55
29. Last year, Quayle Energy had sales of $200 million and its inventory turnover ratio was 5.0.
The company’s current assets totaled $100 million and its current ratio was 1.2. What was
the company’s quick ratio?
a. 1.20 b. 1.39 c. 0.72 d. 0.55

30. Oliver Incorporated has a current ratio equal to 1.6 and a quick ratio equal to 1.2. The
company has $2 million in sales and its current liabilities are $1 million. What is the
company’s inventory turnover ratio?
a. 5.0 b. 5.2 c. 5.5 d. 6.0
31. Vance Motors has current assets of $1.2 million. The company’s current ratio is 1.2, its
quick ratio is 0.7, and its inventory turnover ratio is 4. The company would like to increase
its inventory turnover ratio to the industry average, which is 5, without reducing its sales.
Any reductions in inventory will be used to reduce the company’s current liabilities. What
will be the company’s current ratio, assuming that it is successful in improving its inventory
turnover ratio to 5?
a. 1.33 b. 1.67 c. 1.22 d. 0.75

32. The following ratios and data were computed from the 1997 financial statements of Star Co.:
Current ratio 1.5
Working capital P20,000
Debt/equity ratio .8
Return on equity .2
If net income for 1997 is P40,000, the balance sheet at the end of 1997 total assets of
a. P340,000 b. P360,000 c. P300,000 d. P400,000

33. An enterprise has total asset turnover of 3.5 times and a total debt to total assets ratio of 70%.
If the enterprise has total debt of $1,000,000, it has a sales level of
A. $5,000,000.00 B. $2,450,000.00 C. $408,163.26 D. $200,000.00

34. Selected information from the accounting records of the Blackwood Co. is as follows:
Net A/R at December 31, 2000 $ 900,000
Net A/R at December 31, 2001 $1,000,000
Accounts receivable turnover 5 to 1
Inventories at December 31, 2000 $1,100,000
Inventories at December 31, 2001 $1,200,000
Inventory turnover 4 to 1
What was the gross margin for 2001?
a. $150,000 b. $200,000 c. $300,000 d. $400,000

35. The Meryl Corporation’s common stock is currently selling at $100 per share, which
represents a P/E ratio of 10. If the firm has 100 shares of common stock outstanding, a return
on equity of 20 percent, and a debt ratio of 60 percent, what is its return on total assets
(ROA)?
a. 8.0% b. 10.0% c. 12.0% d. 16.7%

36. A firm has total assets of $1,000,000 and a debt ratio of 30 percent. Currently, it has sales of
$2,500,000, total fixed costs of $1,000,000, and EBIT of $50,000. If the firm’s before-tax
cost of debt is 10 percent and the firm’s tax rate is 40 percent, what is the firm’s ROE?
a. 1.7% b. 2.5% c. 6.0% d. 8.3%

37. 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?
a. $55 b. $60 c. $70 d. $75

38. Southeast Packaging’s ROE last year was only 5 percent, but its management has developed
a new operating plan designed to improve things. The new plan calls for a total debt ratio of
60 percent, which will result in interest charges of $8,000 per year. Management projects an
EBIT of $26,000 on sales of $240,000, and it expects to have a total assets turnover ratio of
2.0. Under these conditions, the average tax rate will be 40 percent. If the changes are made,
what return on equity will Southeast earn?
a. 9.00% b. 11.25% c. 17.50% d. 22.50%
39. Lone Star Plastics has the following data:
Assets: $100,000 Interest rate: 8.0%
Debt ratio: 40.0% Total assets turnover: 3.0
Profit margin: 6.0% Tax rate: 40%
What is Lone Star’s EBIT?
b. $12,000 c. $18,000 d. $30,000 d. $33,200

40. A firm has a debt/equity ratio of 50 percent. Currently, it has interest expense of $500,000
on $5,000,000 of total debt outstanding. Its tax rate is 40 percent. If the firm’s ROA is 6
percent, by how many percentage points is the firm’s ROE greater than its ROA?
a. 0.0% b. 3.0% c. 5.2% d. 7.4%

41. Watson Corporation computed the following items from its financial records for the year just
ended:
Price-earnings ratio 12
Payout ratio .6
Asset turnover .9
The dividend yield on Watson's common stock is
A. 5.0% B. 7.2% C. 7.5% D. 10.8%

42. Lombardi Trucking Company has the following data:

Assets: $10,000 Interest rate: 10.0%
Debt ratio: 60.0% Total assets turnover: 2.0
Profit margin: 3.0% Tax rate: 40%
What is Lombardi’s TIE ratio?
a. 0.95 b. 1.75 c. 2.10 d. 2.67

43. Miller and Rogers Partnership has $3 million in total assets, $1.65 million in equity, and a
$500,000 capital budget. To maintain the same debt-equity ratio, how much debt should be
incurred?
A. $50,000 B. $225,000 C. $275,000 D. $450,000

44. Standard Company's bonds have a provision which stipulates that the ratio of senior debt to
total assets will never rise above 45%. The company is at the limit of that ratio and it wishes
to issue still another $25 million in senior debt. How much additional equity capital must it
raise to comply with this restrictive provision?
A. $11.25 million. B. $20.45 million. C. $30.56 million. D. $55.56 million.

45. India Oats pays dividends of $0.62 per quarter, and has annual earnings per share of $2.80.
What is India Oats's dividend yield and dividend payout ratio for 2000, respectively, if its
recent market price is $30.00 and its average market price was $28.00?
A. 8.27% and 88.6%. C. 8.86% and 88.6%.
B. 8.27% and 22.1%. D. 8.86% and 22.1%. Gleim

46. Assume Meyer Corporation is 100 percent equity financed. Calculate the return on equity,
given the following information:
 (1) Earnings before taxes = $1,500
(2) Sales = $5,000
(3) Dividend payout ratio = 60%
(4) Total assets turnover = 2.0
(5) Tax rate = 30%
a. 25% b. 30% c. 35% d. 42%

47. Beatnik Company has a current ratio of 2.5 and a quick ratio of 2.0. If the firm experienced
$2 million in sales and sustains an inventory turnover of 8.0, what are the firm's current
assets?
A. $1,000,000 B. $500,000 C. $1,500,000 D. $1,250,000
48. Hanson Corporation's present year ROE remained at last year's 14% level, while the profit
margin was reduced from 8% to 4% and the leverage ratio increased from 1.2 to 1.5. The
effects on asset turnover were to
A. Remain constant. C. Decease from 14.58 to 2.33.
B. Increase from 1.46 to 2.33. D. Increase from 4.76 to 9.60.

49. Landry Retailers has annual sales of $365 million. The company’s days sales outstanding
(calculated on a 365-day basis) is 50, which is well above the industry average of 35. The
company has $200 million in current assets, $150 million in current liabilities, and $75
million in inventories. The company’s goal is to reduce its DSO to the industry average
without reducing sales. Cash freed up would be used to repurchase common stock. What will
be the current ratio if the company accomplishes its goal?
a. 1.23 b. 1.33 c. 1.43 d. 0.73

50. 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

51. Last year, Thomas Lumber Co. had a profit margin of 10 percent, total assets turnover of 0.5, and a debt ratio of 20 percent. (The company finances its assets
with debt and common equity; it does not use preferred stock.) This year, the company’s CFO wants to double ROE. She expects the total assets turnover will
remain at 0.5, while the profit margin and debt ratio will increase enough to double ROE. Assume that the profit margin is increased to 15 percent, what debt
ratio will the company need in order to double its ROE?

a. 0.30 b. 0.33 c. 0.40 d. 0.45

52. The Intelinet Corporation and Comp Inc. have assets of $100,000 each and a return on
common equity of 17%. Intelinet has twice the debt of Comp Inc., while Comp has half the
sales of Intelinet. If Intelinet has net income of $10,000 and a total assets turnover ratio of
3.5, what is Comp Inc.'s profit margin?
A. 3.31% B. 7.71% C. 10.00% D. 13.50%

53. Selected data from the year-end financial statements of World Cup Corp. are presented
below. The difference between average and ending inventories is immaterial.
Current ratio 2.0
Quick ratio 1.5
Current liabilities P600,000
Inventory turnover (based on cost of sales) 8 times
Gross profit margin 40%
World’s net sales for the year were
a. P2.4 million b. P4.0 million c. P1.2 million d. P6.0 million

54. Roland & Company has a new mana1gement team that has developed an operating plan to
improve upon last year’s ROE. The new plan would place the debt ratio at 55 percent, which
will result in interest charges of $7,000 per year. EBIT is projected to be $25,000 on sales of
$270,000, it expects to have a total assets turnover ratio of 3.0, and the average tax rate will
 be 40 percent. What does Roland & Company expect its return on equity to be following the
changes?
a.17.65% b. 21.82% c. 26.67% d. 44.44%

55. White Knight Enterprises is experiencing a growth rate of 9% with a return on assets of 12%.
If the debt ratio is 36% and the market price of the stock is $38 per share, what is the return
on equity?
A. 7.68% B. 9.0% C. 12.0% D. 18.75%

56. Manufacturer’s Inc. estimates that its interest charges for this year will be $700 and its net
income will be $3,000. Assuming its average tax rate is 30 percent, what is the company’s
estimated times interest earned ratio?
a. 2.40 b. 4.25 c. 5.33 d. 7.12

Questions 57 through 59 are based on the following information.

The condensed balance sheet as of December 31, 1982 of San Matias Company is given below.
Figures shown by a question mark (?) may be computed from the additional information given:
ASSETS LIAB. & STOCKHOLDERS’ EQUITY
Cash P 60,000 Accounts payable P ?
Trade receivable-net ? Current notes payable 40,000
Inventory ? Long-term payable ?
Fixed assets-net 252,000 Common stock 140,000
Retained earnings ?
Total Assets P 480,000 Total L & SHE P 480,000
Additional information:
Current ratio (as of Dec. 31, 1982) 1.9 to 1
Ratio of total liabilities to total stockholders’ equity 1.4
Inventory turnover based on sales and ending inventory 15 times
Inventory turnover based on cost of goods sold and ending inventory 10 times
Gross margin for 1982 P500,000

57. The balance of accounts payable of San Matias as of December 31, 1982 is
a. P40,000 b. P80,000 c. P95,000 d. P280,000

58. The balance of retained earnings of San Matias as of December 31, 1982 is
a. P60,000 b. P140,000 c. P200,000 d. P360,000

59. The balance of inventory of San Matias as of December 31, 1982 is

a. P68,000 b. P100,000 c. P168,000 d. P228,000

Questions 60 thru 63 are based on the following information.

You are requested to reconstruct the accounts of Angela Trading for analysis. The following
data were made available to you:
Gross margin for 19x8 P472,500
Ending balance of merchandise inventory P300,000
Total stockholders’ equity as of December 31, 19x8 P750,000
 Gross margin ratio 35%
Debt to equity ratio 0.8:1
Times interest earned 10
Quick ratio 1.3:1
Ratio of operating expenses to sales 18%
Long-term liabilities consisted of bonds payable with interest rate of 20%
Based on the above information,

60. What was the operating income for 19x8?

a. P472,500 b. P243,500 c. P205,550 d. P229,500

61. How much was the bonds payable?

a. P400,000 b. P200,750 c. P114,750 d. P370,500

62. Total current liabilities would amount to

a. P600,000 b. P714,750 c. P485,250 d. P550,00

63. Total current assets would amount to

a. P630,825 b. P780,000 c. P580,000 d. P930,825
Answer Key