Finance A

October 21, 2021 (Week 4)

Prof. Tatsuo KUROGI
TransSystems Inc. has a total equity of $560,000;
sales of $2,250,000; total assets of $995,000; and
current liabilities of $310,000.
What is TransSystems Inc.'s debt ratio?

A) 55.4%
B) 43.7%
C) 31.2%
D) 66.7%

Question 1 2
<Question 1> B

Debt ratio = Total debt / Total assets

= (995,000 – 560,000) / 995,000
= 435,000 / 995,000
= 0.4371

Answer 3
SNL has sales of $2,250,000; a gross profit of
$825,000; total operating costs of $620,000;
income taxes of $74,800; total assets of $995,000;
and interest expense of $18,000.
What is SNL's times-interest-earned ratio?

A) 1.3
B) 11.4
C) 8.1
D) 45.8

Question 2 4
<Question 2> B

Times interest earned

= Operating income / Interest expense
= (825,000 - 620,000) / 18,000
= 205,000 / 18,000
= 11.388

Answer 5
Denver Systems has total assets of $1,000,000;
common equity of $400,000; a gross profit of
$800,000; total operating expenses of $620,000;
interest expense of $20,000; and income taxes of
$74,000. What is Denver Systems’ ROE?

A) 7.5%
B) 20.0%
C) 21.5%
D) 14.0%

Question 3 6
<Question 3> C

Return on equity (ROE)

= Net income / Common equity
= (800,000 - 620,000 – 20,000 – 74,000) / 400,000
= 86,000 / 400,000 = 0.215

Answer 7
Benkart Corporation has sales of $5,000,000, net
income of $800,000, total assets of $2,000,000, and
100,000 shares of common stock outstanding.
If Benkart's P/E ratio is 12, what is the company's
current stock price?

A) $60 per share

B) $96 per share
C) $240 per share
D) $360 per share

Question 4 8
<Question 4> B

Earnings per share = $800,000 / 100,000 = $8

P/E = Stock price / Earnings per share
= Stock price / $8 = 12
Stock price = $8 x 12 = $96

Answer 9
Change, Inc.’s balance sheet shows a stockholders’
equity-book value (total common equity) of
$750,000. The firm’s earnings per share is $3,
resulting in a price/earnings ratio of 12.25x. There
are 50,000 shares of common stock outstanding.

What is the price/book ratio?

What does this indicate about how shareholders
view Change, Inc.?

Group Discussion 1 10
To calculate the price-to-book ratio, we would need to
determine the market price per share as well as the balance
sheet book value. The market price is derived as follows:
Price/earnings = Price/$3 = 12.25
Market price per share = $3 X 12.25 = $36.75
Book values per share = $750,500/50,000 shares = $15.01
Price/book ratio = $36.75 / $15.01 = 2.45

This ratio indicates that the shareholders believe that the

company’s shares are worth more than twice their historical
cost value on the balance sheet.

Answer 11
 Yen Inc.
Balance Sheet Income Statement
For the year ended December 31, 2010
2009 2010 Sales $196,000
Cash $8,000 $12,200 Cost of goods sold (140,000)
Accounts receivable 12,000 13,000 Gross profit $56,000
Inventories 9,000 10,000 Operating expenses (26,000)
Land 20,000 20,000 Depreciation (2,000)
Other fixed assets 16,000 19,800 EBIT 28,000
Accumulated (4,000) (5,000) Interest expense (2,000)
depreciation
EBT 26,000
Total assets $61,000 $70,000
Taxes (9,000)
Net Income $17,000
Accounts payable $11,000 $12,000
Long-term Bonds 24,000 24,000
Common stock 14,000 14,000
Retained earnings 12,000 20,000
Liabilities & Equity $61,000 $70,000

Group Discussion 2 12
1. What was the total amount of Yen's common stock
dividend for 2010?
A) $17,000 B) $12,800 C) $9,000 D) $8,000
2. What was Yen's quick ratio at the end of 2010?
A) 2.10 B) 1.43 C) 2.93 D) 1.79
3. What was Yen's return on equity for 2010?
A) 50.0% B) 85.0% C) 121.4% D) 24.3%
4. What was Yen's operating profit margin for 2010?
A) 26.50% B) 21.34% C) 14.29% D) 11.67%

Group Discussion 2 13
<1> C Total amount of common stock dividend
= Net income – Increase in Retained earnings
= 17,000 – (20,000 – 12,000) = 9,000
<2> A Quick ratio = (Cash + A/R) / Cur. Liabilities
= (12,200 + 13,000) / 12,000 = 2.10
<3> A Return on equity = Net income / Equity
= 17,000 / (14,000 + 20,000) = 0.5
<4> C Operating profit margin
= Operating profit (EBIT) / Sales
= 28,000 / 196,000 = 0.14285

Answers 14