Week 1 and 2 Homework

Please fill in your solution and highlight your answer.

The homework is due via email by midnight on November 2nd, 2018.
1. ABC, Inc., has current assets of $7,000, net fixed assets of $25,800, current liabilities of
$6,600, and long-term debt of $15,600.

 What is the value of the shareholders’ equity account for this firm?

Shareholders’ Equity = Total Asset – Total Liability

Here, Total Asset = Current Assets + Net Fixed Assets = $7,000+$25,800 = $32,800
And Total Liability = Current Liability + Long Term Debt = $6,600+$15,600 = $22,200

So Shareholders’ Equity = $32,800 - $22,200 = $10,600

 How much is net working capital?

Net Working Capital = Current Asset – Current Liability

Here, Current Asset = $7,000

And Current Liability = $6,600

So Net Working Capital = $7,000 - $6,000 = $400

2. ABC, Inc., has sales of $646,000, costs of $286,000, depreciation expense of $38,000,
interest expense of $29,000, and a tax rate of 35 percent.

 What is the net income for this firm?

Category Amount Total

Net Sales $646,000
Cost of Goods Sold $286,000
Gross Profit $360,000
Depreciation Expense $38,000
EBIT $322,000
Interest Expense $29,000
EBT $293,000
Tax 35% $102,550
Net Income $190,450

Net Income for the firm is $190,450.

3. ABC, Inc., has sales of $661,000, costs of $316,000, depreciation expense of $68,000,
interest expense of $44,000, a tax rate of 35 percent, and paid out $79,000 in cash
dividends.

 What is the addition to retained earnings?

Category Amount Total

Net Sales $661,000
Cost of Goods Sold $316,000
Gross Profit $345,000
Depreciation Expense $68,000
EBIT $277,000
Interest Expense $44,000
EBT $233,000
Tax 35% $81,550
Net Income $151,450
Cash Dividend Pay Out $79,000
Addition to Retained $72,450
Earnings

Addition to Retained Earnings = $72,450

4. ABC, Inc., has sales of $643,000, costs of $280,000, depreciation expense of $32,000,
interest expense of $26,000, a tax rate of 35 percent, and paid out $57,600 in cash
dividends. The firm has 80,000 shares of common stock outstanding.

 What are the earnings per share?

Category Amount Total

Net Sales $643,000
Cost of Goods Sold $280,000
Gross Profit $363,000
Depreciation Expense $32,000
EBIT $331,000
Interest Expense $26,000
EBT $305,000
Tax 35% $106,750
Net Income $198,250

EPS = (Net Income – Dividend Pay Out) ÷ Number of Outstanding Shares

= $198,250 ÷ 80,000
= $2.48
So Earning Per Share = $2.48

 What are the dividends per share?

DPS = Total Dividends Paid ÷ Number of Common Share

= $57,600 ÷ 80,000
= $0.72
So Dividend Per Share = $0.72

5. ABC, Inc., has sales of $45,500, costs of $20,200, depreciation expense of $2,000, and
interest expense of $1,200.

 If the tax rate is 35 percent, what is the operating cash flow, or OCF?

Category Amount Total

Net Sales $45,500
Cost of Goods Sold $20,200
Gross Profit $25,300
Depreciation Expense $2,000
EBIT $23,300
Interest Expense $1,200
EBT $22,100
Tax 35% $7,735
Net Income $14,365

OCF = EBIT + Depreciation – Tax

= $23,300 + $2,000 - $7,735
= $17,565
So Operating Cash Flow = $17,565

6. ABC’s 2014 balance sheet showed net fixed assets of $5.2 million, and the 2015 balance
sheet showed net fixed assets of $5.8 million. The company’s 2015 income statement
showed a depreciation expense of $335,000.

What was net capital spending for 2015?

Net Capital Spending = Ending Net Fixed Asset – Beginning Net Fixed Asset +
Depreciation
= $5,800,000 – $5,200,000 + $335,000
= $935,000
So Net Capital Spending = $935,000

7. The 2014 balance sheet of ABC, Inc., showed current assets of $4,515 and current
liabilities of $3,005. The 2015 balance sheet showed current assets of $2,990 and current
liabilities of $1,590.

What was the company’s 2015 change in net working capital, or NWC?

For 2014, NWC = Current Asset – Current Liability

= $4,515 - $3,005
= $1,510
For 2015, NWC = Current Asset – Current Liability
= $2,990 - $1,590
= $1,400
Change in NWC = Last Year NWC – Current Year NWC
= $1,510 - $1,400
= $110
So Change is NWC = $110
8. ABC, Inc., has net working capital of $3,220, current liabilities of $4,470, and inventory
of $4,400.

 What is the current ratio?

NWC = Current Asset – Current Liability

$3,220 = Current Asset - $4,470
Current Asset = $3,220+$4,470 = $7,690

Current Ratio = Current Asset ÷ Current Liability

= $7,690 ÷ $4,470
= 1.72
So Current Ratio = 1.72

 What is the quick ratio?

Quick Ratio = (Current Asset - Inventory) ÷ Current Liability

= ($7,690 - $4,400) ÷ $4,470
= 0.74
So Quick Ratio = 0.74

9. ABC, Inc., has sales of $24 million, total assets of $21.6 million, and total debt of $6.9
million. Assume the profit margin is 8 percent.

 What is the company's net income?

Net Income = Sales * Profit Margin = $24 Million * 8% = $1.92 Million

So Net Income = $1.92 Million

 What is the company's ROA?

ROA = Net Income ÷ Total Asset

= $1.92 Million ÷ $21.6 Million
= 0.08888
= 8.89%
So ROA = 8.89%

 What is the company's ROE?

We Know, Asset = Debt + Equity

Equity = Asset – Debt
Equity = $21.6 Million – $6.9 Million
 Equity = $14.7 Million

ROE = Net Income ÷ Shareholders Equity

= 1.92 Million ÷ 14.7 Million
= 0.1306 = 13.06%
So ROE = 13.06%

10. ABC Corp. has a current accounts receivable balance of $337,800. Credit sales for the
year just ended were $4,644,750.

 What is the company's receivables turnover?

Account Receivables Turnover = Net Credit Sales ÷ Average Account Receivables

= $4,644,750 ÷ $337,800
= 13.75 Times
Account Receivables Turnover = 13.75 Times

 What is the company's days' sales in receivables?

Days’ Sales in Receivables = (Account Receivables ÷ Total Credit Sales) * No. of Days
= ($337,800 ÷ $4,644,750) * 365
= 26.55 Days
Days’ Sales in Receivables = 26.55 Days

 How long did it take on average for credit customers to pay off their accounts
during the past year?

It took on average of 26.55 days for credit customers to pay off their accounts during the
past year.

11. ABC, Inc., has a total debt ratio of .36.

 What is its debt-equity ratio?

Debt Ratio = Total Debt / Total Asset
Debt Ratio = Total Debt / (Total Debt + Total Equity)
0.36 = Total Debt / (Total Debt + Total Equity)
0.36*Total Equity = 0.64*Total Debt
Total Debt / Total Equity = 0.36 / 0.64
 So Debt-Equity Ratio = Total Debt / Total Equity = 0.36 / 0.64 = 0.56

 What is its equity multiplier?

Equity Multiplier = 1 + (Total Debt / Total Equity)

= 1 + 0.56
= 1.56
Equity Multiplier = 1.56
12. Makers Corp. had additions to retained earnings for the year just ended of $359,000. The
firm paid out $181,000 in cash dividends, and it has ending total equity of $4.86 million.
The company currently has 150,000 shares of common stock outstanding.

 What are earnings per share?

Net Income = Retained Earnings + Dividends = $359,000 + $181,000 = $540,000

EPS = Net Income / Number of Shares = $3.60

 What are dividends per share?

DPS = Total Ordinary Dividend / Number of Shares = $181,000 / 150,000 = $1.21

 What is the book value per share?

Book Value Per Share = Equity / Number of Shares = $4.86 Million / 150,000 = 32.4

 If the stock currently sells for $75 per share, what is the market-to-book ratio?

Market-to-Book Ratio = Market Price Per Share / Book Value Per Share = 2.31

 What is the price-earnings ratio?

Price-Earnings Ratio = Market Price Per Share / EPS = 20.83

 If the company had sales of $4.59 million, what is the price-sales ratio?

Price-Sales Ratio = Market Capitalization / Total Revenue = ($75*150,000)/$4.59Million

= $11,250,000 / $4,590,000 = 2.45
 Price-Sales Ratio = 2.45

13. If ABC, Inc., has an equity multiplier of 1.57, total asset turnover of 1.70, and a profit
margin of 6.7 percent, what is its ROE?

ROE = (Net Income/Sales) * (Sales/Average Total Asset) * (Average Total Asset/Average

Shareholders Equity)
So ROE = Profit Margin * Total Asset Turnover * Equity Multiplier
ROE = 1.57 * 1.70 * 0.067 = 0.1788 = 17.88%

14. SME Company has a debt-equity ratio of .70. Return on assets is 8.6 percent, and total
equity is $530,000.

 What is the equity multiplier?

Equity Multiplier = 1 + (Total Debt / Total Equity)

Equity Multiplier = 1 + 0.70 = 1.70

 What is the return on equity?

ROE = ROA * Equity Multiplier = 0.086 * 1.70 = 0.1462 = 14.62%

 What is the net income?

Net Income = ROE * Total Equity = 0.1462 * $530,000 = $77,486

 15. Use information below to answer the following questions:

What is the:
(Calculating Considering 2015)
Current Ratio = Current Assets / Current Liabilities = $72,400 / $60,000 = 1.21
Quick Ratio = (Current Assets – Inventory) / Current Liabilities = ($72,400 - $29,100) / $60,000
= 0.72
Cash Ratio = Cash / Current Liabilities = $26,100 / $60,000 = 0.435
Total Asset Turnover = Net Sales / Total Asset = $380,968 / $437,000 = 0.87 Times
Inventory Turnover = Cost of Goods Sold / Inventory = $282,500 / $29,100 = 9.71 Times
Total Debt Ratio = Total Debt / Total Asset = ($60,000+$101,000) / $437,000 = 0.37
Debt-Equity Ratio = Total Debt / Total Equity = ($60,000+$101,000) / $276,000 = 0.58
Equity Multiplier = 1 + (Total Debt / Total Equity) = 1 + 0.58 = 1.58
Times Interest Earned = EBIT / Interest = $69,268 / $16,300 = 4.25 Times
Cash Coverage Ratio = (EBIT + Depreciation Expense) / Interest = ($69,268+$29,200) / $16,300
= 6.40
Profit Margin = Net Income / Net Sales = $42,374 / $380,968 = 0.1112 = 11.12%
Return on Assets = Net Income / Total Asset = $42,374 / $437,000 = 0.0969 = 9.69%
Return on Equity = Net Income / Total Equity = $42,374 / $276,000 = 0.1535 = 15.35%