3.

Byrne Dareed Corp

1. Kerry Inc. (1) $375,000 / [($4,350,000 + $3,540,000)/2] = $375,000 / $3,945,000 = 9.51%
(1) 2005: $540,000 / $300,000 = 1.80 to 1 (2) ($375,000 + $144,000) / $144,000 = 3.6 times
2004: $440,000 / $240,000 = 1.83 to 1 (3) ($375,000 - $90,000) / 112,500 shares = $2.53 per share
(4) $65 / $2.53 = 25.69 times
(2) 2005: $120,000 / $1,400,000 = 8.57% (5) $1,950,000 / $4,350,000 = 0.45 to 1
2004: $200,000 / $800,000 = 25%
4.
(3) 2005: $560,000 / $1,400,000 = 40% Current Acid-Test Debt
2004: $360,000 / $800,000 = 45% Transactions Ratio Ratio Ratio
1. Bought inventory for cash. 0 - 0
(4) 2005: $620,000 / $720,000 = 0.86 to 1 2. A sale is made on account; cost of sales is less than + + -
2004: $560,000 / $600,000 = 0.93 to 1 selling price.
3. Issued long-term bonds for cash. + + +
(5) 2005: ($120,000 + $40,000 + $25,600*) / $25,600 = 7.25 times 4. Sold land for cash at its book value. + + 0
2004: ($200,000 + $30,000 + $25,600*) / $25,600 = 9.98 times
* (8%  $320,000)

2. Massin Company 5.

1. Current ratio 2.9 : 1 $1,070/$370 Transaction Current Ratio Acid-Test Ratio

2. Acid-test ratio 1.8 : 1 ($220 + $440)/$370 1. Buy inventory for cash 0 -
3. Accounts receivable turnover 10.7 times $4,700/$440 2. Pay an account payable + +
4. Inventory turnover 5.6 times $2,300/$410 3. Borrow cash on a short-term loan - -
5. Gross profit ratio 51.1% $2,400/$4,700 4. Purchase plant assets for cash - -
6. Return on sales 8.9% $420/$4,700 5. Issue long-term bonds payable + +
7. Return on assets 18.6% $850/$4,570 6. Collect an account receivable 0 0
8. Return on equity 18.8% $420/($1,810 + $430) 7. Record accrued expenses payable - -
9. Earnings per share $0.42 $420/1,000 8. Sell a plant asset for cash at a profit. + +
10. Price-earnings ratio 19.0 $8/$0.42 9. Sell a plant asset for cash at a loss + +
11. Dividend yield 1.3% $0.10/$8 10. Buy marketable securities, for cash, as a 0 0
12. Payout ratio 24% $0.10/$0.42 short-term investment
13. EVA $90 $850 x (1 - .40) - (10% x [$4,570 - $370])
14. Debt ratio 51.0% ($370 + $1,960)/$4,570
15. Times interest earned 5.7 $850/$150
16. Cash flow to total debt 31.7% ($420 + $320)/($370 + $1,960)
6.

8.
Effect
1. Tax rate of 40%
on Ratio Ratio of Concern
All Equity Debt and Preferred and
Equity Common Equity
Income before interest and taxes $2,000,000 $2,000,000 $2,000,000
Transaction Interest expense ($3,200,000 x 10%) 0 320,000 0
Income before taxes 2,000,000 1,680,000 2,000,000
Income taxes at 40% rate 800,000 672,000 800,000
1. Write off an uncollectible account 0 Current ratio of 3 to 1 Net income $1,200,000 $1,008,000 $1,200,000
2. Sell merchandise, on account, at less than 0 42 days' sales in Preferred dividends
normal price accounts receivable ($3,200,000 x 12%) 0 0 384,000
3. Borrow cash on a short-term loan + Acid-test ratio of .9 to 1 Earnings available for common $1,200,000 $1,008,000 $ 816,000
4. Write off an uncollectible account 0 Return on sales of 18% Common equity $8,000,000 $4,800,000 $4,800,000
5. Sell treasury stock at a price greater than its -* Return on equity of ROE 15% 21% 17%
cost 20%
6. Acquire plant asset by issuing long-term note. + Debt ratio of 40%
7. Record accrued salaries payable - Times interest earned,
3.2 2. Tax rate of 60%
8. Record depreciation on plant assets 0 Cash flow to debt, 60% Income before taxes (above) $2,000,000 $1,680,000 $2,000,000
9. Return inventory items to supplier for credit + Inventory turnover of 8 Income taxes at 60% 1,200,000 1,008,000 1,200,000
10. Acquire plant asset by issuing common stock - Debt ratio of 60% Net income 800,000 672,000 800,000
Preferred dividends 0 0 384,000
* The decrease in ROE results from the increase in total stockholders' equity that results Earnings available for common $ 800,000 $ 672,000 $416,000
ROE (common equity as above) 10% 14% 8.7%
from the decrease in treasury stock (a contra to stockholders' equity).

7.

Return on Return on Earnings per

Transaction Sales Assets Share
1. Sell a plant asset for cash, at twice the + + +
asset's book value
2. Declare and issue a stock dividend 0 0 -
3. Purchase inventory on account 0 - 0
4. Purchase treasury stock for cash 0 + +
5. Acquire land by issuing common stock 0 - -
 9. 11.
1. Income = $1,080,000
1. $500,000 ($200,000 x 2.5, current liabilities x current ratio) Income plus interest expense ($12,000,000 assets x 12% ROA) $1,440,000
2. $40 million ($4 million/10%, net income/ROE) Interest expense, given 360,000
3. (a) $300,000 ($270,000/0.9, quick assets/quick ratio) Income $1,080,000
(b) $480,000 Average stockholders' equity = $8,400,000
Total current assets $750,000 ($300,000 CL x current ratio of 2.5) Total assets, given $12,000,000
Quick assets 270,000 (given) Less debt ($12,000,000 x debt ratio of 30%) 3,600,000
Inventory $480,000 Stockholders' equity $ 8,400,000
4. (a) 91 days (365/4 turnovers) ROE = 12.9% ($1,080,000/$8,400,000)
(b) 73 days (365/5 turnovers)
The total time from purchase to collection, 164 days, can be helpful in determining the
company's cash requirements. For example, if suppliers allow 30 days for payment, then
the company has to operate for 134 (164 - 30) days from the time it pays for goods until it 2. Income = $396,000
collects cash from the sale. Sales $10,800,000
Times return on sales:
5. $345,000 After the payment current assets were $510,000 ($600,000 - $90,000). Current
Income, requirement 1 $ 1,080,000
liabilities after the payment were $255,000 (half of current assets), so they were $345,000
Divided by total sales $10,800,000
before the payment.
Equals return on sales 10%
6. About $111,000 Average daily credit sales are $2,466 ($900,000/365). $2,466 x 45 days =
Plus 1%
$110,970.
Equals revised return on sales 11%
New income ($10,800,000 x 11%) $1,188,000
Return on assets = 12.9%
10. Income, above $ 1,188,000
Add interest expense, given 360,000
1. Net income $1.2 million $24 million x 5%, sales x ROS Revised income $ 1,548,000
ROA 9.375% ($1.2 million + $0.3 million)/$16 million, net income plus interest divided by total Divided by total assets, given $12,000,000
assets Equals return on assets 12.9%
ROE 12.5% $1.2 million/($16 million x 60%), net income divided by stockholders' equity, Return on equity = 14.1%
which is total assets times one minus the debt ratio

2. Net income $1.44 million $24,000,000 x 6% Income, above $ 1,188,000

ROA 10.875% ($1.44 million + $0.3 million)/$16 million Divided by stockholders' equity, requirement 1 $ 8,400,000
ROE 15.0% $1.44 million/($16 million x 60%) Equals return on equity 14.1%

3. ROA 9.375% ($1.35 million + $0.15 million)/$16 million 3. Income = $1,260,000 ($1,080,000, from part 1, plus $180,000 saved interest)
ROE 10.5% $1.35 million/($16 million x 80%) Return on assets = 12%
Income, above $ 1,260,000
Add interest ($360,000 - $180,000 saved) 180,000
Income before interest $ 1,440,000
 Divided by average assets, given $12,000,000
Equals return on assets 12.0%
13.
Note that the return on assets is the same as given in the original problem. Because taxes are Total current assets $1,125,000, the 2.5 to 1 current ratio multiplied by current liabilities
ignored, the difference in interest expense went straight to income. of $450,000
Net income $300,000, return on equity of 20% multiplied by stockholders' equity
Return on equity = 12.4% of $1,500,000
Income, as above $ 1,260,000 Sales $3,000,000, ROS of 10% divided into net income of $300,000
Divided by stockholders' equity: Gross profit $1,200,000, gross profit ratio of 40% multiplied by sales of
Total assets $12,000,000 $3,000,000
Less debt retired 1,800,000 Cost of goods sold $1,800,000, sales of $3,000,000 less gross profit of $1,200,000
Revised stockholders' equity $10,200,000 All other expenses $900,000, gross profit of $1,200,000 minus net income of $300,000
Equals return on equity 12.4% Accounts receivable $452,000, average daily credit sales are $8,220 (rounded), and
$8,220 multiplied by 55 days = $452,000
12. Inventory $450,000, cost of goods sold of $1,800,000 divided by turnover of 4
times
Cash $223,000, total current assets of $1,125,000 minus accounts
Sales $900 (given)
receivable of $452,000 and inventory of $450,000
Cost of sales 540 (one minus gross profit percentage x sales) Total assets $2,500,000, stockholder equity of $1,500,000 divided by 60%, which
Gross profit 360 (gross profit percentage x sales, 40% x $900) is 1 - the debt ratio
Operating expenses 306 (plug after net income determined) Plant and equipment (net) $1,375,000, $2,500,000 total assets - $1,125,000 current assets
Net income $ 54 (return on sales x sales, 6% x $900) Long-term debt $550,000, $2,500,000 total equities - $450,000 current liabilities -
$1,500,000 stockholders' equity
Cash $ 30 (given)
Receivables 180 (sales/turnover, $900/5) Wasserman Pharmaceutical Company
Inventory 135 (cost of sales/turnover, $540/4) Balance Sheet as of December 31, 20X2
Plant and equipment 670 (given)
Total assets $1,015 Assets Equities
Cash $ 223,000 Total current $ 450,000
Current liabilities $ 115 (current assets/3, ($30 + $180 + $135) = $345 liabilities
Long term debt 291 (see below) Accounts receivable 452,000 Long-term debt 550,000
Stockholders' equity 609 (see below) Inventory 450,000
Total equities $1,015 Total current assets $1,125,000
Plant and equipment (net) 1,375,000 Stockholders' equity 1,500,000
Total $2,500,000 Total $2,500,000
Stockholders' equity must be 60% of total assets, or $609, so total debt is 40% of total
Income Statement for 20X2
assets, or $406. Subtracting $115 current liabilities from total debt of $406 leaves $291
Sales $3,000,000
long-term debt. Cost of goods sold 1,800,000
Gross profit $1,200,000
Other expenses 900,000
Net income $ 300,000