Here is a simplified balance sheet for Locust Farming:
Locust Farming
Balance Sheet
($ in millions)
Current assets $ 42,537 Current liabilities $ 29,742
Long-term assets 46,858 Long-term debt 27,765
Other liabilities 14,343
Equity 17,545
Total $ 89,395 Total $ 89,395
Locust has 658 million shares outstanding with a market price
of $96 a share.
a. Calculate the company’s market value added. (Enter your
answers in millions.)
b. Calculate the market-to-book ratio. (Round your answer
to 2 decimal places.)
c. How much value has the company created for its
shareholders?
Explanation
a.
Market value = 658 million × $96 = $63,168 million
Market value added = $63,168 – $17,545 = $45,623 million
b.
Market value / Book value = $63,168 / $17,545 = 3.60
c.
Yes. The company has increased the value of the equity investment by 360%.
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Home Depot’s common stock closed fiscal 2014 at a price of
$117.75 per share. There were 1,313 million shares
outstanding, At the end of 2014, the book value of Home
Depot’s equity was $9,325 million. Suppose the broad stock
market falls 10% in a year and Home Depot’s stock price falls
by 10%.
a. Will the company’s market value added rise or fall?
Rise
Fall
b. Should this change affect our assessment of the
performance of Home Depot’s managers?
Yes
No
c. Calculate the market value added, if the stock market were
unchanged and Home Depot’s stock fell by 10%. (Enter your
answer in millions. Round intermediate calculations and
final answer to the nearest whole number.)
: 09_09_2017_QC_ CS-98340
Explanation
Market value = 1,313 million × $117.75 = $154,606 million
The market value added for Home Depot = $154,606 − $9,325 = $145,281
million
Assuming the stock price drops 10%, the market value is now $154,606 × 0.90 =
$139,145
Market value added = $139,145 – $9,325 = $129,820
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Here are simplified financial statements for Watervan
Corporation:
INCOME STATEMENT
(Figures in $ millions)
Net sales $ 884.00
Cost of goods sold 744.00
Depreciation 34.00
Earnings before interest and taxes (EBIT) $ 106.00
Interest expense 15.00
Income before tax $ 91.00
Taxes 31.85
Net income $ 59.15
BALANCE SHEET
(Figures in $ millions)
End of
Year Start of
Year
Assets
Current assets $ 372 $ 318
Long-term assets 264 225
Total assets $ 636 $ 543
Liabilities and shareholders’
equity
Current liabilities $ 197 $ 160
Long-term debt 111 124
Shareholders’ equity 328 259
Total liabilities and
shareholders’ equity $ 636 $ 543
The company’s cost of capital is 9%.
a. Calculate Watervan’s economic value added (EVA). (Do not
round intermediate calculations. Enter your answer in
millions rounded to 2 decimal places.)
b. What is the company’s return on capital? (Use start-of-year
rather than average capital.) (Do not round intermediate
calculations. Enter your answer as a percent rounded to
2 decimal places.)
c. What is its return on equity? (Use start-of-year rather than
average equity.) (Enter your answer as a percent rounded
to 2 decimal places.)
d. Is the company creating value for its shareholders?
Yes
No
: 09_22_2017_QC_CS-101846, 10_31_2017_QC_CS-107766,
11_01_2017_QC_CS-107766, 11_07_2017_QC_CS-108534
Explanation
a.
Economic value added = After-tax interest + Net income – (Cost of capital × Total
capitalization)
Economic value added = (1 – 0.35) × $15 + 59.15 – (.090 × [$259 + 124]) =
$34.43
b.
Return on capital = (1 – 0.35) × $15.00 + 59.15 = 0.1799 , or 17.99 %
$ 259 + 124
c.
Return on equity = $59 = 0.2284 , or 22.84 %
$ 259
d.
Yes. The EVA indicates the firm is producing value in excess of the cost of capital.
Thus, it is producing value. The ROC and ROE are also consistent with this
conclusion.
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Home Depot entered fiscal 2016 with a total capitalization of
$27,222 million. In 2016, debt investors received interest
income of $833 million. Net income to shareholders was
$6,354 million. (Assume a tax rate of 35%.)
Calculate the economic value added assuming its cost of
capital is 10%. (Do not round intermediate calculations.
Enter your answer in millions rounded to 2 decimal
places.)
Explanation
Economic value added = After-tax interest + Net income – (Cost of capital × Total
capitalization)
Economic value added = (1 – .35) × $833 + 6,354 − (.10 × $27,222) =
$4,173.25
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Here are simplified financial statements for Phone Corporation
in a recent year:
INCOME STATEMENT
(Figures in $ millions)
Net sales $ 13,700
Cost of goods sold 4,360
Other expenses 4,047
Depreciation 2,698
Earnings before interest and taxes (EBIT) $ 2,595
Interest expense 715
Income before tax $ 1,880
Taxes (at 35%) 658
Net income $ 1,222
Dividends $ 916
BALANCE SHEET
(Figures in $ millions)
End of
Year Start of
Year
Assets
Cash and marketable securities $ 95 $ 164
Receivables 2,682 2,610
Inventories 217 268
Other current assets 897 962
Total current assets $ 3,891 $ 4,004
Net property, plant, and
equipment 20,033 19,975
Other long-term assets 4,276 3,830
Total assets $ 28,200 $ 27,809
Liabilities and shareholders’
equity
Payables $ 2,624 $ 3,100
Short-term debt 1,449 1,603
Other current liabilities 841 817
Total current liabilities $ 4,914 $ 5,520
Long-term debt and leases 5,524 5,759
Other long-term liabilities 6,238 6,209
Shareholders’ equity 11,524 10,321
Total liabilities and
shareholders’ equity $ 28,200 $ 27,809
Calculate the following financial ratios for Phone
Corporation: (Use 365 days in a year. Do not round
intermediate calculations. Round your final answers to
2 decimal places.)
: 09_06_2017_QC_CS-98341, 09_23_2017_QC_CS-100774
Explanation
a.
Return on equity = $1,222 = 0.1119, or 11.19%
($11,524 + 10,321) / 2
b.
Return on assets = $1,222 + 715 × (1 – 0.35) = 0.0602, or 6.02%
($28,200 + 27,809) / 2
c.
Return on capital = $1,222 + 715 × (1 – 0.35) = 13,700.0000, or 10.18%
[($5,524 + 11,524) + ($5,759 + 10,321)] / 2
d.
Days in inventory = $268 = 22.44 days
$4,360 / 365
e.
Inventory turnover = $4,360 = 16.27
268
f.
Average collection period = $2,610 = 69.54 days
$13,700 / 365
g.
Operating profit margin = $1,222 + 715 × (1 – .35) = 0.1231, or 12.31%
$13,700
h.
Long-term debt ratio = $5,524 = 0.32
$5,524 + 11,524
i.
Total debt ratio = $4,914 + 5,524 + 6,238 = 0.59
$28,200
j.
Times interest earned = $2,595 = 3.63
$715
k.
Cash coverage ratio = $2,595 + 2,698 = 7.40
$715
l.
Current ratio = $3,891 = 0.79
$4,914
m.
Quick ratio = $95 + 2,682 = 0.57
$4,914
Consider this simplified balance sheet for Geomorph Trading:
Current
assets $ 350 Current
liabilities $ 310
Long-term
assets 700 Long-term
debt 180
Other
liabilities 70
Equity 490
$1,05
0 $1,05
0
a. What is the company’s debt-equity ratio? (Round your
answer to 2 decimal places.)
b. What is the ratio of long-term debt to total long-term
capital? (Round your answer to 2 decimal places.)
c. What is its net working capital?
d. What is its current ratio? (Round your answer to 2
decimal places.)
Explanation
a.
Debt / Equity = $560 / $490 = 1.14
b.
Total long-term debt / Total long-term capital = $180 / ($180 + 490) = 0.27
c.
Net working capital = $350 – 310 = $40
d.
Current ratio = $350 / $310 = 1.13
Lever Age pays an 10% rate of interest on $10.50 million of
outstanding debt with face value $10.5 million. The firm’s EBIT
was $1.5 million.
a. What is its times interest earned? (Round your answer to
2 decimal places.)
b. If depreciation is $250,000, what is its cash coverage
ratio? (Round your answer to 2 decimal places.)
: 09_12_2017_QC_CS-99598, 09_14_2017_QC_CS-99598
Explanation
a.
Interest expense = 0.10 × $10.50 million = $1,050,000
Times interest earned = $1,500,000 / $1,050,000 = 1.43
b.
Cash coverage ratio = $1.5 million + 250,000 = 1.67
$1,050,000
Long-term debt ratio 0.2
Times interest earned 8.0
Current ratio 1.2
Quick ratio 1.0
Cash ratio 0.2
Inventory turnover 3.0
Average collection period 73 days
Use the above information from the tables to work out the
following missing entries, and then calculate the company’s
return on equity. Note: Turnover and the average collection
period are calculated using start-of-year, not average,
values. (Enter your answers in millions. Round
intermediate calculations and final answers to 2 decimal
places.)
Explanation
Total current liabilities = $30.00 + 35.00 = $65.00
Total current assets = $65.00 × 1.2 = $78.00
Cash = $65.00 × .2 = $13.00
Accounts receivable + Cash = $65.00 × 1.0 = $65.00
Accounts receivable = $65.00 – Cash = $65.00 – 13.00 = $52.00
Inventories = $78.00 – 13.00 – 52.00 = $13.00
Total assets = Total liabilities and shareholders’ equity = $230.00
Net property, plant, equipment = $230.00 – 78.00 = $152.00
Sales = (365 / Average collection period) × Beginning receivables = (365 / 73) ×
$46 = $230.00
Cost of goods sold = Inventory turnover × Beginning inventory = 3.0 × $38 =
$114.00
EBIT = $230.00 – 114.00 – 22.00 – 32.00 = $62.00
Interest = EBIT / Times interest earned = $62.00 / $8.0 = $7.75
Income before tax = EBIT – Interest expense = $62.00 – 7.75 = $54.25
Tax = Income before tax × .35 = $54.25 × .35 = $18.99
Net income = Income before tax – Tax = $54.25 – 18.99 = $35.26
Long-term debt + Equity = Total liabilities and equity – Total current liablities =
$230 – 65 = $165
Long-term debt ratio = .20 = Long-term debt / (Long-term debt + Equity) = Long-
term debt / $165; LTD = $33
Shareholders' equity = Total liabilities and equity – Total current liabilities – Long-
term debt = $230 – 65 – 33 = $132
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Torrid Romance Publishers has total receivables of $3,180,
which represents 20 days’ sales. Total assets are $77,380. The
firm’s operating profit margin is 6.2%. Find the firm's ROA and
asset turnover ratio. (Use 365 days in a year. Do not round
intermediate calculations. Round your final answers to
2 decimal places.)
Explanation
Total sales = $3,180 × 365 / 20 = $58,035
Asset turnover ratio = $58,035 / $77,380 = .75
ROA = Asset turnover × Operating profit margin = .75 × .06 = .0465, or 4.65%
