Question 1
Here is a simplified balance sheet for Locust Farming:
Locust Farming
Balance Sheet
($ in millions)
Current assets$42,530 Current liabilities$29,749
Long-term assets 46,844 Long-term debt 27,758
Other liabilities 14,329
Equity 17,538
Total$89,374 Total$89,374
Locust has 663 million shares outstanding with a market price of $89 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 as the company created for its shareholders as a percent of shareholders’
equity, that is, the net capital contributed to the firm by its shareholders? (Enter your answer as
a percentage rounded to the nearest whole number.)
Explanation
a.
Market value = 663 million × $89 = $59,007 million
Market value added = $59,007 – $17,538 = $41,469 million
b.
Market value / Book value = $59,007 / $17,538 = 3.36
c.
Value added as a multiple of the equity investment is $41,469/$17,538 = 2.36, or equivalently,
236% of the book value of equity.
Question 2
Here are simplified financial statements for Watervan Corporation:
INCOME STATEMENT
(Figures in $ millions)
Net sales$882.00
Cost of goods sold 742.00
Depreciation 32.00
Earnings before interest and taxes (EBIT)$108.00
Interest expense 13.00
Income before tax$95.00
Taxes 19.95
Net income$75.05
BALANCE SHEET
(Figures in $ millions)
End of Year Start of Year
Assets
Current assets$370 $314
Long-term assets 260 223
Total assets$630 $537
Liabilities and shareholders’ equity
Current liabilities$195 $158
Long-term debt 109 122
Shareholders’ equity 326 257
Total liabilities and shareholders’ equity$630 $537
The company’s cost of capital is 8.5%.
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?
Explanation
a.
Economic value added = After-tax interest + Net income – (Cost of capital × Total capitalization)
Economic value added = (1 – 0.21) × $13 + 75.05 – (0.085 × [$257 + 122]) = $53.11
b.
(1 – 0.21) × $13 + 75.05
Return on capital = = 0.2251 , or 22.51%
$257 + 122
c.
$75.05
Return on equity = = 0.2920 , or 29.20%
$257
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.
Question 4
Home Depot entered fiscal 2017 with a total capitalization of $21,922 million. In 2017, debt
investors received interest income of $883 million. Net income to shareholders was $8,672
million. (Assume a tax rate of 21%.)
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 – 0.21) × $883 + 8,672 − (0.10 × $21,922) = $7,177.37
Question 5
Here are simplified financial statements for Phone Corporation in a recent year:
INCOME STATEMENT
(Figures in $ millions)
Net sales$13,100
Cost of goods sold 4,010
Other expenses 4,042
Depreciation 2,488
Earnings before interest and taxes (EBIT)$2,560
Interest expense 680
Income before tax$1,880
Taxes (at 30%) 564
Net income$1,316
Dividends $866
BALANCE SHEET
(Figures in $ millions)
End of Year Start of Year
Assets
Cash and marketable securities$88 $157
Receivables 2,332 2,470
Inventories 182 233
Other current assets 862 927
Total current assets$3,464 $3,787
Net property, plant, and equipment 19,963 19,905
Other long-term assets 4,206 3,760
Total assets$27,633 $27,452
Liabilities and shareholders’ equity
Payables$2,554 $3,030
Short-term debt 1,414 1,568
Other current liabilities 806 782
Total current liabilities$4,774 $5,380
Long-term debt and leases 7,267 7,012
Other long-term liabilities 6,168 6,139
Shareholders’ equity 9,424 8,921
Total liabilities and shareholders’ equity$27,633 $27,452
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.)
Explanation
a.
$1,316= 0.1435, or 14.35%
Return on equity =
($9,424 + 8,921) / 2
ROE= NI/((Shareholders equity EOY+ SOY)/2)
b.
$1,316 + 680 × (1 – 0.30)
Return on assets == 0.0651, or 6.51%
($27,633 + 27,452) / 2
ROA= NI+((Interest) x (1-Taxes))/ Average of Total Liabilities/Shareholders equity
c.
$1,316 + 680 × (1 – 0.30)
Return on capital == 0.1099, or 10.99%
[($7,267 + 9,424) + ($7,012 + 8,921)] / 2
ROC= NI+((Interest) x (1-Taxes))/(Long term debt+Share equity EOY) + (SOY)/ 2
d.
$233
Days in inventory == 21.21 days
$4,010 / 365
Days in Inventory= Inventory SOY/ (COGS/365)
e.
$4,010
Inventory turnover == 17.21
233
Inventory Turnover= COGS/Inventory SOY
f.
Average collection period =$2,470= 68.82 days
Question 5
$13,100 / 365
Avg Collection period= SOY Receivables/(Net sales/365)
g.
$1,316 + 680 × (1 – 0.30)
Operating profit margin == 0.1368, or 13.68%
$13,100
Operating Profit Margin= NI+(Int x (1-Tax)) / Net sales
h.
$7,267
Long-term debt ratio == 0.44
$7,267 + 9,424/
= long term debt EOY/ (long term debt EOY +Shareholders equity EOY)
i.
$4,774 + 7,267 + 6,168
Total debt ratio == 0.66
$27,633
Total Debt Ratio= Total Current liabilities EOY+ long term debt and leases+other debt/
Total liabilities
j.
$2,560
Times interest earned == 3.76
$680
Times interest earned= EBIT/Interest
k.
$2,560 + 2,488
Cash coverage ratio == 7.42
$680
Cash Coverage ratio= EBIT+depreciation/ interest
l.
$3,464
Current ratio == 0.73
$4,774
Current ratio = total current assets/ total current liabilities
m.
$88 + 2,332
Quick ratio == 0.51
$4,774
Quick ratio = cash and marketable securities EOY + EOY receivables /total current liabilities
Consider this simplified balance sheet for Geomorph Trading:
Current assets$150 Current liabilities$85
Long-term assets 550 Long-term debt 255
Other liabilities 120
Equity 240
$700 $700
a. What is the company’s debt-equity ratio? (Round your answer to 2 decimal places.)
b. What is the ratio of total 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 = $460 / $240 = 1.92
b.
Total long-term debt / Total long-term capital = $255 / ($255 + $240) = 0.52
c.
Net working capital = $150 – $85 = $65
d.
Current ratio = $150 / $85 = 1.76
Question 6
Lever Age pays an 9% rate of interest on $10.40 million of outstanding debt with face value
$10.4 million. The firm’s EBIT was $1.4 million.
a. What is its times interest earned? (Round your answer to 2 decimal places.)
b. If depreciation is $240,000, what is its cash coverage ratio? (Round your answer to 2
decimal places.)
Explanation
a.
Interest expense = 0.09 × $10.40 million = $936,000
Times interest earned = $1,400,000 / $936,000 = 1.50
b.
Explanation
Total current liabilities = $20.00 + $30.00 = $50.00
$1,400,000 + $240,000
Cash coverage ratio == 1.75
$936,000
Question 7
Long-term debt ratio0.2
Times interest earned8.0
Current ratio1.7
Quick ratio1.0
Cash ratio0.4
Inventory turnover4.0
Average collection period73days
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.)
Total current assets = $50.00 × 1.7 = $85.00
Cash = $50.00 × 0.4 = $20.00
Accounts receivable + Cash = $50.00 × 1.0 = $50.00
Accounts receivable = $50.00 – Cash = $50.00 – $20.00 = $30.00
Inventories = $85.00 – $20.00 – $30.00 = $35.00
Total assets = Total liabilities and shareholders’ equity = $190.00
Net property, plant, equipment = $190.00 – $85.00 = $105.00
Sales = (365 / Average collection period) × Beginning receivables = (365 / 73) × $43 = $215.00
Cost of goods sold = Inventory turnover × Beginning inventory = 4.0 × $35 = $140.00
EBIT = $215.00 – $140.00 – $19.00 – $29.00 = $27.00
Interest = EBIT / Times interest earned = $27.00 / $8.0 = $3.38
Income before tax = EBIT – Interest expense = $27.00 – $3.38 = $23.62
Tax = Income before tax × 0.35 = $23.62 × 0.35 = $8.27
Net income = Income before tax – Tax = $23.62 – $8.27 = $15.35
Long-term debt + Equity = Total liabilities and equity – Total current liablities = $190 – $50 =
$140
Long-term debt ratio = 0.20 = Long-term debt / (Long-term debt + Equity) = Long-term debt /
$140; LTD = $28.00
Shareholders' equity = Total liabilities and equity – Total current liabilities – Long-term debt =
$190 – $50 – $28.00 = $112.00
Question 8
Torrid Romance Publishers has total receivables of $2,920, which represents 20 days’ sales. Total
assets are $73,000. The firm’s operating profit margin is 6%. 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 = $2,920 × 365 / 20 = $53,290
TOT
Asset turnover ratio = $53,290 / $73,000 = 0.73
ROA = Asset turnover × Operating profit margin = 0.73 × 0.060 = 0.0438, or 4.38%
