College of Accounting Education

3F, Business & Engineering Building

Matina, Davao City
Phone No.: (082)305-0645 Local 137

MAS 8: FINANCIAL STATEMENT ANALYSIS

ANSWERS

PROBLEM 1

(a) To calculate net sales, divide the net income by the percentage of net income to net sales.

2009 2008
Net Sales ₱200,000 ÷ 8% = ₱2,500,000 ₱180,000 ÷ 9% = ₱2,000,000

(b) Using the net sales information from (a) and the gross profits given, it is possible to calculate the cost of goods
sold.

2009 2008
Net sales ₱2,500,000 ₱2,000,000
Less: Gross profit 750,000 800,000
Cost of goods sold ₱1,750,000 ₱1,200,000

% of net sales 70% 60%

(c) 2009 2008

Gross profit ₱750,000 ₱800,000
Less: Income before income taxes 280,000 230,000
Operating expenses ₱470,000 ₱570,000

% of net sales 18.8% 28.5%

PROBLEM 2

(a) Current = 2.3:1 (₱230,000  ₱100,000)

(b) Acid-test = 1.45:1 (₱145,000  ₱100,000)
(c) Receivables turnover = 9 times [₱810,000  (₱100,000 + ₱80,000)  2]
(d) Inventory turnover = 8.2 times [₱615,000  (₱85,000 + ₱65,000)  2]

PROBLEM 3
₱750,000
1. Inventory turnover for 2009 is 5 times. ———————————— = 5 times.
(₱140,000 + ₱160,000) ÷ 2

₱160,000 + ₱60,000 + ₱40,000

2. Times interest earned in 2009 is 6.5 times. —————————————— = 6.5 times.
₱40,000

₱140,000 + ₱340,000
3. The debt to total assets ratio for 2009 is 40%. —————————— = 40%.
₱1,200,000

₱1,520,000
4. Receivables turnover for 2009 is 8 times. ———————————— = 8 times.
(₱180,000 + ₱200,000) ÷ 2

₱160,000
5. Return on assets for 2009 is 16%. ————————————— = 16%.
(₱1,200,000 + ₱800,000) ÷ 2

PROBLEM 4
₱150,000
1. Current ratio 3:1. ———— = 3
₱50,000

₱36,000
2. Return on common stockholders' equity 14.9%. ———————————— = .149

Page 1 of 15
 (₱262,000 + ₱220,000) ÷ 2

₱36,000
3. Price-earnings ratio 17.5 times. EPS = ———— = ₱1.20;
30,000

₱21
——— = 17.5 times
₱1.20

₱100,000
4. Acid-test ratio 2:1. ———— = 2:1
₱50,000

₱360,000
5. Receivables turnover 9 times. ——————————— = 9
(₱50,000 + ₱30,000) ÷ 2

₱36,000 + ₱15,000 + ₱12,000

6. Times interest earned 5.25 times. ————————————— = 5.25
₱12,000

₱36,000
7. Profit margin 10%. ———— = .10
₱360,000
8. Days in inventory 110.6 days.
₱198,000
Inventory turnover = ——————————— = 3.3;
(₱50,000 + ₱70,000) ÷ 2

365 days
———— = 110.6
3.3

₱9,000
9. Payout ratio 25%. ———— = .25
₱36,000

₱36,000
10. Return on assets 8%. ———————————— = .08
(₱400,000 + ₱500,000) ÷ 2

PROBLEM 5
PRATT COMPANY
Comparative Balance Sheet
December 31,
———————————————————————————————————————————
Assets 2009 2008
Cash............................................................................................... ₱ 25,000 ₱ 35,000
Marketable securities.................................................................... 15,000 15,000
Accounts receivable (net).............................................................. 40,000 (6) 60,000
Inventory....................................................................................... 70,000 (8) 50,000
Property, plant, and equipment (net)........................................... 200,000 150,000
Total assets............................................................................ ₱350,000 (9) ₱310,000

Liabilities and stockholders' equity

Accounts payable.......................................................................... ₱ 15,000 (7) ₱ 25,000
Short-term notes payable.............................................................. 35,000 30,000
Bonds payable............................................................................... 41,000 (10) 20,000
Common stock............................................................................... 200,000 200,000
Retained earnings.......................................................................... 59,000 35,000
Total liabilities and stockholders' equity............................... ₱350,000 (11) ₱310,000

PRATT COMPANY
Income Statement
For the Year Ended December 31, 2009
———————————————————————————————————————————
Net sales........................................................................................ ₱250,000
Cost of goods sold......................................................................... 125,000
Gross profit.................................................................................... 125,000

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Expenses
Depreciation expense............................................................. ₱25,000 (5)
Administrative expenses......................................................... 15,000
Selling expenses...................................................................... 10,000
Interest expense..................................................................... 5,000
Total expenses.................................................................. 55,000 (4)
Income before income taxes......................................................... 70,000 (2)
Income tax expense....................................................................... 20,000 (3)
Net income.................................................................................... ₱ 50,000 (1)

(1) Net income = ₱50,000 (₱250,000 × 20%).

(2) Income before income taxes = ₱70,000.

Let X = Income before income taxes and interest expense.
X
——— = 15 times
₱5,000
X = ₱75,000
₱75,000 – ₱5,000 = ₱70,000

(3) Income tax expense = ₱20,000 (₱70,000 – ₱50,000).

(4) Total operating expenses = ₱55,000 (₱125,000 – ₱70,000).

(5) Depreciation expense = ₱25,000 [₱55,000 – (₱5,000 + ₱10,000 + ₱15,000)].

(6) Accounts receivable (net) = ₱40,000.

Let X = Average receivables.
₱250,000
———— = 5 times
X
5X = ₱250,000.
X = ₱50,000.

Let Y = Accounts receivable at 12/31/09.

₱60,000 + Y
—————— = ₱50,000
2
₱60,000 + Y = ₱100,000
Y = ₱40,000

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 (7) Accounts payable = ₱15,000.
Let X = Current liabilities.
₱25,000 + ₱15,000 + ₱40,000
————————————— = 1.60
X
1.60X = ₱80,000
X = ₱50,000
₱50,000 – ₱35,000 = ₱15,000

(8) Inventory = ₱70,000

Let X = Total current assets
X
———— = 3
₱50,000
X = ₱150,000
₱150,000 – (₱25,000 + ₱15,000 + ₱40,000) = ₱70,000

(9) Total assets = ₱350,000 (₱25,000 + ₱15,000 + ₱40,000 + ₱70,000 + ₱200,000)

(10) Bonds payable = ₱41,000

Let X = Total debt
X
———— = 26%
₱350,000
X = ₱91,000
₱91,000 – (₱15,000 + ₱35,000) = ₱41,000

(11) Total liabilities and stockholders' equity = ₱350,000; same as total assets—see (9) above.

6.

DSO = P41,096/(P250,000/365) = 60 days.

New A/R = [(P250,000)(1.5)/(365)](60)(1.5) = P92,466.
Hence, increase in receivables = P92,466 - P41,096 = P51,370.

7. First solve for current annual sales using the DSO equation as follows: 50 = P1,000,000/(Sales/365) to find annual
sales equal to P7,300,000.
If sales fall by 10%, the new sales level will be P7,300,000(0.9) = P6,570,000. Again, using the DSO equation, solve
for the new accounts receivable figure as follows: 32 = AR/(P6,570,000/365) or AR = P576,000.

8. Equity multiplier = 1/(1 - D/A) = 1/(1 - 0.4) = 1.67.

ROE = ROA  Equity multiplier
18% = (ROA)(1.67)
ROA = 10.8%.

9.
Step 1: We must find TA. We are given BEP and EBIT.
EBIT EBIT
BEP = TA and TA = BEP .
Therefore, TA = P40,000,000/0.1, or P400 million.

Step 2: NI/TA = ROA, so now we need to find net income. Net income is found by working through the income
statement (in millions):

EBIT P40
Interest 5 (from TIE ratio: 8 = EBIT/Int)
EBT P35
Taxes (40%) 14
NI P21

Step 3: ROA = P21/P400 = 0.0525 = 5.25%.

10.
BEP = EBIT/TA = 0.10, so EBIT = 0.10  P500,000 = P50,000.
TIE = EBIT/INT = 5, so INT = P50,000/5 = P10,000.

Page 4 of 15
 EBIT P50,000
Int -10,000
EBT P40,000
Taxes (40%) -16,000
NI P24,000

ROA = NI/TA = P24,000/P500,000 = 0.048, or 4.8%.

11.

(Sales per day)(DSO) = A/R

(Sales/365)(60) = P150,000
Sales = P912,500.

Profit margin = Net income/Sales.

Net income = 0.04(P912,500) = P36,500.
Debt ratio = 0.64 = Total debt/P3,000,000.
Total debt = P1,920,000.
Total equity = P3,000,000 - P1,920,000 = P1,080,000.
ROE = P36,500/P1,080,000 = 3.38%  3.4%.

12. Total equity = (P5,000,000)(2) = P10,000,000.

Total assets = P5,000,000 + P10,000,000 = P15,000,000.
Net income = (0.06)(P15,000,000) = P900,000.
ROE = P900,000/P10,000,000 = 9%.
ROE - ROA = 9% - 6% = 3%.

13.
Profit margin = (P1,500(1 - 0.3))/P5,000 = 21%.
Equity multiplier = 1.0 since firm is 100% equity financed.

ROE = (Profit margin)(Assets turnover)(Equity multiplier)

= (21%)(2.0)(1.0) = 42%.

14. Calculate debt, equity, and EBIT:

Debt = D/A  TA = 0.35(P1,000) = P350.
Equity = TA - Debt = P1,000 - P350 = P650.
EBIT = TA  BEP = P1,000(0.20) = P200.

Calculate net income and ROE:

Net income = (EBIT - I)(1 - T) = [P200 - 0.0457(P350)](0.6) = P110.4.
ROE = P110.4/P650 = 16.99%.

15.

Before: Equity multiplier = 1/(1 - D/A) = 1/(1 - 0.5) = 2.0.

ROE = (PM)(Assets turnover)(EM) = (10%)(0.25)(2.0) = 5%.

After: [ROE = 2(5%) = 10%]:

10% = (12%)(0.25)(EM)
EM = 3.33 = A/E.
E/A = 1/3.33 = 0.3.

D/A = 1 – 0.3 = 0.7 = 70%.

16.
NI/E = 15%; D/A = 40%; E/A = 60%; A/E = 1/0.6 = 1.6667; NI/S = 5%.

Step 1: Determine total assets turnover from the extended Du Pont equation:
NI/S  S/TA  A/E = ROE
(5%)(S/TA)(1.6667) = 15%
0.0833 S/TA = 15%
S/TA = 1.8.

Step 2: Determine sales from the total assets turnover ratio:

S/TA = 1.8
S/P800 = 1.8

Page 5 of 15
 S = P1,440 million.

17. Step 1: Calculate total assets from information given.

Sales = P10 million.

3.5 = Sales/TA
$ 10 ,000 ,000
3.5 = Assets
Assets = P2,857,142.8571.

Step 2: Calculate net income.

There is no debt, so Assets = Equity = P2,857,142.8571.

ROE = NI/S  S/TA  TA/E

0.15 = NI/P10,000,000  3.5  1
3 .5 NI
0.15 = $ 10 ,000 ,000
P1,500,000 = 3.5NI
P428,571.4286 = NI.

18.
Given: New D/A = 0.55 Interest = P7,000
EBIT = P25,000 Tax rate = 40%
Sales = P270,000 TATO = 3.0

Recall the Du Pont equation: ROE = (PM)(TATO)(EM).

ROE = (ROA)(EM).
ROE = NI/Equity.

EBIT P25,000
Interest 7,000 (Given)
EBT P18,000
Taxes (40%) 7,200 (P18,000  40%)
NI P10,800

TATO = Sales/Total assets

Total assets = Sales/TATO = P270,000/3 = P90,000.

Equity = [1 - (D/A)](Total assets)

Equity = [1 - 0.55](Total assets)
Equity = 0.45(P90,000) = P40,500.

ROE = NI/Equity = P10,800/P40,500 = 26.67%.

19. Industry average inventory turnover = 6 = Sales/Inventories.

To match this level: Inventories = Sales/6
P3,000,000/6 = P500,000.

Current inventories = P1,000,000. Reduction in inventories = P1,000,000 - P500,000 = P500,000. This P500,000 is
to be used to reduce debt.

New debt level = P4,000,000 - P500,000 = P3,500,000.

Interest on this level of debt = P3,500,000  0.1 = P350,000.

Look at the income statement to determine net income:

EBIT P1,400,000
Interest 350,000
EBT P1,050,000
Taxes (40%) 420,000
NI P 630,000

ROE = Net income/Equity = P630,000/P2,000,000 = 0.3150 or 31.50%.

20. The firm is not using its “free” trade credit (that is, accounts payable (A/P)) to the same extent as other companies.
Since it is financing part of its assets with 10% notes payable, its interest expense is higher than necessary.

Calculate the increase in payables:

Page 6 of 15
 Current (A/P)/Inventories ratio = P100/P500 = 0.20.
Target A/P = 0.60(Inventories) = 0.60(P500) = P300.
Increase in A/P = P300 - P100 = P200.

Since the current ratio and total assets remain constant, total liabilities and equity must be unchanged. The
increase in accounts payable must be matched by an equal decrease in interest-bearing notes payable. Notes
payable decline by P200. Interest expense decreases by P200  0.10 = P20.

Construct comparative Income Statements:

Old New
Sales P2,000 P2,000
Operating costs 1,843 1,843
EBIT P 157 P 157
Interest 37 17
EBT P 120 P 140
Taxes (40%) 48 56
Net income (NI) P 72 P 84

ROE = NI/Equity = P72/P800 = 9%. P84/P800 = 10.5%.

New ROE = 10.5%.

21. Relevant information: Old ROE = NI/Equity = 0.06 = 6%.

Sales = P300,000; EBIT = 0.11(Sales) = 0.11(P300,000) = P33,000.
Debt = P200,000; D/A = 0.80 = 80%.
Tax rate = 40%.
Interest rate change: Old bonds 14%; new bonds 10%.

Calculate total assets and equity amounts:

Since debt = P200,000, total assets = P200,000/0.80 = P250,000.
Equity = 1 - D/A = 1 - 0.80 = 0.20.
Equity = E/TA  TA = 0.20  P250,000 = P50,000.

Construct comparative Income Statements from EBIT, and calculate new ROE:
Old New
EBIT P33,000 P33,000
Interest 28,000 20,000
EBT P 5,000 P13,000
Taxes (40%) 2,000 5,200
Net income P 3,000 P 7,800

New ROE = NI/Equity = P7,800/P50,000 = 0.1560 = 15.6%.

22. Equity multiplier = 4.0 = Total assets/Total equity = 4/1.

Assets = Debt + Equity

4 = Debt + 1
Debt = 3.

Debt/Assets = 3/4 = 0.75.

23.
TIE = EBIT/I, so find EBIT and I.
Interest = P800,000  0.1 = P80,000.
Net income = P3,200,000  0.06 = P192,000.
Pre-tax income = P192,000/(1 - T) = P192,000/0.6 = P320,000.
EBIT = P320,000 + P80,000 = P400,000.
TIE = P400,000/P80,000 = 5.0.

24.

EBIT
TIE = I =?
TA Turnover = S/A = 2
S/P10,000 = 2
S = P20,000.

Page 7 of 15
 TD
TA = 0.6;
TD = 0.6(P10,000)
Debt = P6,000.

I = P6,000(0.1) = P600.

NI
PM = S = 3%
NI
PM = $20,000 = 0.03
NI = P600.

$600
EBT = ( 1-0 . 4 ) = P1,000.

EBIT P1,600
Interest 600
EBT P1,000
Taxes (40%) 400
NI P 600

TIE = P1,600/P600 = 2.67.

25.

TA = P8,000,000,000; T = 40%; EBIT/TA = 12%; ROA = 3%; TIE ?

EBIT
= 0. 12
$8,000,000,000
EBIT =$ 960 ,000 , 000 .

NI
= 0. 03
$8,000,000,000
NI= $ 240 , 000 , 000 .

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

INT = EBIT – EBT

EBIT $960,000,000 See above. = $960,000,000 - $400,000,000
INT 560,000,000
EBT $400,000,000 EBT = $240,000,000/0.6
Taxes (40%) 160,000,000
NI $240,000,000 See above.

TIE = EBIT/INT
= P960,000,000/P560,000,000
= 1.7143  1.71.

26.

Remember, TIE = EBIT/Interest. We need to find EBIT and Interest.

TA = P20,000,000; BEP = 25%; ROA = 10%; T = 40%.

BEP = EBIT/TA
25% = EBIT/P20,000,000
P5,000,000= EBIT.

ROA = NI/TA
10% = NI/P20,000,000
P2,000,000= NI.

NI = (EBIT - I)(1 - T)
P2,000,000= (P5,000,000 - I)(1 - 0.4)
P2,000,000= (P5,000,000 - I)(0.6)
P3,333,333= P5,000,000 - I
P1,666,667= I.

Page 8 of 15
 Therefore, TIE = EBIT/I
= P5,000,000/P1,666,667
= 3.0.

27.
The times interest earned (TIE) ratio is calculated as the ratio of EBIT and interest expense. We can find EBIT from
the BEP ratio and total assets given in the problem.

EBIT
BEP = TA
EBIT
25% = $3,000,000
EBIT = P750,000.

Interest expense can be obtained from the income statement by simply working your way up the income
statement. To do this, however, we must first calculate net income from the data given for ROA.

NI
ROA = TA
NI
12% = $3,000,000
NI = P360,000.

Solving for EBT and then interest, we find:

NI
EBT = ( 1-T )
$ 360 , 000
EBT = (1−0. 35 )
EBT = P553,846.

EBIT – INT = EBT

P750,000 – INT = P553,846
INT = P196,154.

We can now calculate the TIE as follows:

EBIT
TIE = INT
$750 , 000
TIE = $196 , 154
TIE = 3.82.

28.
TA = P9,000,000,000; EBIT/TA = 9%; TIE = 3; DA = P1,000,000,000; Lease payments = P600,000,000; Principal
payments = P300,000,000; EBITDA coverage = ?

EBIT/P9,000,000,000 = 0.09
EBIT = P810,000,000.

3 = EBIT/INT
3 = P810,000,000/INT
INT = P270,000,000.

EBITDA = EBIT + DA
= P810,000,000 + P1,000,000,000
= P1,810,000,000.

EBITDA + Lease payments

EBITDA coverage ratio = INT + Princ . pmts + Lease pmts
$ 1 , 810 ,000 , 000+ $ 600 , 000 , 000
= $ 270 , 000 , 000+$ 300 ,000 , 000+$ 600 , 000 , 000

Page 9 of 15
 $2 ,410 ,000 , 000
= $1 ,170 ,000 ,000 = 2.0598  2.06.

29.
Debt ratio = Debt/Total assets.

Sales/Total assets = 6
Total assets = P24,000,000/6 = P4,000,000.

ROE = NI/Equity
Equity = NI/ROE = P400,000/0.15 = P2,666,667.

Debt = Total assets - Equity = P4,000,000 - P2,666,667 = P1,333,333.

Debt ratio = P1,333,333/P4,000,000 = 0.3333.

30.

Equity multiplier = 1/(1 - 0.35) = 1.5385.

ROE = (Profit margin)(Assets utilization)(Equity multiplier)

15% = (PM)(2.8)(1.5385)
PM = 3.48%.

31.

Given ROA = 10% and net income of P500,000, total assets must be P5,000,000.

NI
ROA = A
$500,000
10% = TA
TA = P5,000,000.

To calculate BEP, we still need EBIT. To calculate EBIT construct a partial income statement:

EBIT P1,033,333 (P200,000 + P833,333)

Interest 200,000 (Given)
EBT P 833,333 P500,000/0.6
Taxes (40%) 333,333
NI P 500,000

EBIT
BEP = TA
$1,033,333
= $5,000,000
= 0.2067 = 20.67%.

32.

The current EPS is P1,500,000/300,000 shares or P5. The current P/E ratio is then P60/P5 = 12. The new number of
shares outstanding will be 400,000. Thus, the new EPS = P2,500,000/400,000 = P6.25. If the shares are selling for 12
times EPS, then they must be selling for P6.25(12) = P75.

33.
Step 1: Determine average daily sales using the old DSO.
Receivables
DSO = Average Daily Sales .

If DSO changes while sales remain the same, then receivables must change.
$ 400
40 = Average Daily Sales
P10 = Average Daily Sales.

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 Step 2: Determine the new level of receivables required for Parcells to achieve the industry average DSO.
Receivables
30 = $10
P300 = Receivables.

Step 3: Calculate the new current ratio.

Receivables decline by P100, so current assets declined by P100. Therefore, the new level of current assets
is P800 - P100 = P700. Since the P100 cash freed up is used to reduce long-term bonds, cur-rent liabilities
remain at P400. Current ratio = P700/P400 = 1.75.

34.

Currently:
DSO = AR/Average Daily Sales
= P250/P10
= 25 days.

Now, Cartwright wants to reduce DSO to 15. The firm needs to reduce accounts receivable because it doesn’t
want to reduce average daily sales. So, we can calculate the new AR balance as follows:
DSO = AR/Average Daily Sales
15 = AR/P10
P150 million = AR.

If the firm reduces its DSO to the industry average, its AR will be P150 million, reduced by P100 million. Therefore,
there must be an equal reduction on the right side of the balance sheet. Half of this P100 million of freed-up cash
will be used to reduce notes payable, and the other half will be used to reduce accounts payable. Therefore, notes
payable will fall by P50 million to P250 million, and accounts payable will fall by P50 million to P250 million.

Therefore, we can now calculate the firm’s new current ratio:

Current Ratio = CA/CL
= (Cash + AR + Inv.)/(Notes Payable + Accounts Payable)
= (P250 + P150 + P250)/(P250 + P250)
= P650/P500
= 1.30.

35.

Step 1: Calculate the firm’s current inventory turnover.

Inv. turnover = Sales/Inv.
= P3,000,000/P500,000
= 6.0.

New Inv. turnover = 10.0 (but sales stay the same).

Step 2: Calculate what the firm’s inventory balance should be if the firm maintains the industry average
inventory turnover.
Inv. turnover = Sales/Inv.
10 = P3 million/Inv.
P300,000 = Inv.

The new inventory level will be P300,000, so inventories will be reduced by P200,000 from the old level. This
means that current assets will decrease by P200,000.

Step 3: Calculate the firm’s new current assets level.

CA = Cash + Inv. + A/R
= P100,000 + P300,000 + P200,000
= P600,000.

Half of the P200,000 that is freed up will be used to reduce notes payable, and the other half will be used to reduce
common equity. Therefore, notes payable will be reduced by P100,000 to a new level of P100,000.

Step 4: Calculate the firm’s new liabilities level.

CL = A/P + Accruals + Notes payable
= P200,000 + P100,000 + P100,000
= P400,000.

Step 5: Calculate the firm’s new current ratio with the improved inventory management.
CR = CA/CL

Page 11 of 15
 = P600,000/P400,000
= 1.5.

36.

Old DSO = 40; CA = P2,500,000; CA/CL = 1.5; AR = P1,600,000.

Step 1: Calculate average daily sales:

DSO = AR/Average daily sales
40 = P1,600,000/Average daily sales
P40,000 = Average daily sales.

Step 2: Calculate the new level of accounts receivable when DSO = 30:
30 = AR/P40,000
P1,200,000 = AR.
So, the change in receivables will be P1,600,000 – P1,200,000 = P400,000.

Step 3: Calculate the old level of current liabilities:

Current ratio = CA/CL
1.5 = P2,500,000/CL
P1,666,667 = CL.

Step 4: Calculate the new current ratio:

The change in receivables will cause a reduction in current assets of P400,000 and a reduction in current
liabilities of P400,000.
CA new = P2,500,000 - P400,000 = P2,100,000.
CL new = P1,666,667 - P400,000 = P1,266,667.
CR new = P2,100,000/P1,266,667 = 1.66.

37.

Use the DSO formula to calculate accounts receivable under the new policy as 36 = AR/(P730,000/365) or AR =
P72,000. Thus, P125,000 - P72,000 = P53,000 is the cash freed up by reducing DSO to 36 days. Retiring P53,000 of
long-term debt leaves P247,000 in long-term debt. Given a 10% interest rate, interest expense is now
P247,000(0.1) = P24,700. Thus, EBT = EBIT - Interest = P70,000 - P24,700 = P45,300. Net income is P45,300(1 - 0.3)
= P31,710. Thus, ROE = P31,710/P200,000 = 15.86%.

38.

Here are some data on the initial situation:

EPS = P50/20 = P2.50.
Stock price = P2.50(8) = P20.

If XYZ had the industry average inventory turnover, its inventory balance would be:
Sales $1,000
Turnover = 5 = Inv = Inv
Inv = P1,000/5 = P200.
Therefore, inventories would decline by P100.

The income statement would remain at the initial level. However, the company could now repurchase and retire 5
shares of stock:
Funds available $100
Price/share = $20 = 5 shares.

Thus, the new EPS would be:

Net income $50
New EPS = Shares outstanding = 20-5 = P3.33.

The new stock price would be:

New price = New EPS(P/E) = P3.33(8) = P26.67.
Stock price increase = P26.67 - P20.00 = P6.67.

39.

NI S A
× ×
S A EQ = ROE.

Data for A:

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 NI $1,000 $500
× ×
$1,000 $500 0 .7 ( $500) = 0.15
NI
0. 7($500 ) = 0.15 = NI = P52.50.
NI $52. 50
ROE = S = $1,000 = 0.0525 = 5.25%.

Data for B:
NI S A
× ×
S A EQ = 0.30
$500
0.0525  2  EQ = 0.30
$500
0.1050  EQ = 0.30
$500
EQ = 2.8571
Equity = P175.

Debt = P500 - P175 = P325.

Therefore, D/A = P325/P500 = 0.65 or 65%.

40.

Sales P15,000
Cost of goods sold _______
EBIT P 1,065
Interest 465
EBT P 600
Taxes (35%) 210
NI P 390

EBIT EBIT
BEP = TA = $8,000 = 0.133125; EBIT = P1,065.

Now fill in: EBIT = P1,065.

Interest = EBIT - EBT = P1,065 - P600 = P465.

D D
A = $8,000 = 0.45; D = 0.45(P8,000) = P3,600.
Interest $465
Interest rate = Debt = $3,600 = 0.1292 = 12.92%.
41.

Write down equations with given data, then find unknowns:

NI
Profit margin = S = 0.06.
D D
Debt ratio = A = $100,000 = 0.4; D = P40,000.
S S
TA turnover = A = 3.0 = $100,000 = 3; S = P300,000.

Now plug sales into profit margin ratio to find NI:

NI
$300,000 = 0.06; NI = P18,000.

Now set up an income statement:

Sales P300,000
Cost of goods sold ________
EBIT P 33,200 (EBIT = EBT + Interest)
Interest 3,200 (P40,000(0.08) = P3,200)

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 EBT P 30,000 (EBT = P18,000/(1 - T) = P30,000)
Taxes (40%) 12,000
NI P 18,000

42.

You need to work backwards through the income statement to solve this problem.

The new NI will be: (P1,800,000)(1.25) = P2,250,000.

Now find EBT:

(EBT)(1 - T) = NI
EBT = NI/(1 - T)
= P2,250,000/(1 - 0.4)
= P3,750,000.

Now find EBIT:

EBIT - I = EBT
EBIT = EBT + I
EBIT = P3,750,000 + P1,500,000
= P5,250,000.

Now find Sales:

(Sales)(Operating Margin) = EBIT
Sales = EBIT/Operating Margin
= P5,250,000/0.4
= P13,125,000.

Therefore, sales need to rise to P13,125,000. How much of an increase is this?

P13,125,000/P12,000,000 = 1.09375. Therefore, sales have gone up by 9.375% (rounded to 9.38%).

43.

The Du Pont analysis of return on equity gives us:

ROE = ROA  EM
14% = 10%  EM
1.4 = EM.

From the equity multiplier (A/E), we can calculate the debt ratio:

1.4 = A/E
E/A = 1/1.4
E/A = 0.7143.

D/A = 1 – E/A
D/A = 1 – 0.7143
D/A = 0.2857 = 28.57%.

44.

Using the Du Pont analysis again, we can calculate the profit margin.

ROE = PM  TATO  EM
14% = PM  5  1.4
14% = PM  7
2% = PM.

45.
ROA = NI/Assets. Total assets = P3,200,000,000 (from the balance sheet).

We, know ROE = NI/Common equity = 0.20, with Common equity = P900,000,000 (from the balance sheet).

0.20 = NI/P900,000,000
NI = P180,000,000.

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 So, ROA = P180,000,000/P3,200,000,000 = 0.05625, or 5.625%.

46.

Recall the current ratio is CA/CL = P900,000,000/P800,000,000 = 1.125.

The plan looks like this: Debit Fixed assets P300,000,000

Credit Notes payable P300,000,000

So, current liabilities increase by P300 million, while current assets do not change.

So, the new current ratio is P900,000,000/(P800,000,000 + P300,000,000) = P900,000,000/P1,100,000,000 = 0.818.

47.
A. Processing time 15.0
Inspection time 0.5
Waiting time in production 3.0
Move time 1.5
Total 20.0

B. Processing time (15.0) ÷ [Processing time (15.0) + inspection time (0.5) + waiting
time in production (3.0) + move time (1.5)] = 0.75

C. 1. 75% (cycle efficiency)

2. 25% (100% - 75%)

D. Waiting time until start of project 6.0

Manufacturing cycle time 20.0
Total 26.0

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