Reading 41: Financial Analysis Techniques - LOS e ～ Q4-5 following, balance, company, border, income

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4.Given the following income statement and balance sheet for a company:

Balance Sheet
Assets	Year 2006		Year 2007
Cash	200		450
Accounts Receivable	600		660
Inventory	500		550
Total CA	1300		1660
Plant, prop. equip	1000		1580
Total Assets	2600		3240
Liabilities
Accounts Payable	500		550
Long term debt	700		1052
Total liabilities	1200		1602
Equity
Common Stock	400		538
Retained Earnings	1000		1100
Total Liabilities & Equity	2600		3240
Income Statement
Sales		3000
Cost of Goods Sold		(1000)
Gross Profit		2000
SG&A		500
Interest Expense		151
EBT		1349
Taxes (30%)		405
Net Income		944

Which of the following is closest to the company's return on equity (ROE)?

A)   0.292.

B)   0.576.

C)   1.833.

D)   0.752.

 

5.Kellen Harris is a credit analyst with the First National Bank. Harris has been asked to evaluate Longhorn Supply Company’s cash needs. Harris began by calculating Longhorn’s turnover ratios for 2007. After a discussion with Longhorn’s management, Harris decides to adjust the turnover ratios for 2008 as follows:

	2007 Actual Turnover	Expected Increase / (Decrease)
Accounts receivable	5.0	10%
Fixed asset	3.0	7%
Accounts payable	6.0	(20%)
Inventory	4.0	(5%)
Equity	5.5	—
Total asset	2.3	8%

Longhorn’s expected cash conversion cycle for 2008, based on the expected changes in turnover and assuming a 365 day year, is closest to:

A)   46 days.

B)   93 days.

C)   86 days.

D)   82 days.

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答案和详解如下：

4.Given the following income statement and balance sheet for a company:

Balance Sheet
Assets	Year 2006		Year 2007
Cash	200		450
Accounts Receivable	600		660
Inventory	500		550
Total CA	1300		1660
Plant, prop. equip	1000		1580
Total Assets	2600		3240
Liabilities
Accounts Payable	500		550
Long term debt	700		1052
Total liabilities	1200		1602
Equity
Common Stock	400		538
Retained Earnings	1000		1100
Total Liabilities & Equity	2600		3240
Income Statement
Sales		3000
Cost of Goods Sold		(1000)
Gross Profit		2000
SG&A		500
Interest Expense		151
EBT		1349
Taxes (30%)		405
Net Income		944

Which of the following is closest to the company's return on equity (ROE)?

A)   0.292.

B)   0.576.

C)   1.833.

D)   0.752.

The correct answer was B)

There are several ways to approach this question but the easiest way is to recognize that ROE = NI/equity thus ROE = 944/1638 = 0.567.

If using the traditional DuPont, ROE = (NI/Sales)*(Sales/Assets)*(Assets/Equity):

ROE = (944/3000)*(3000/3240)*(3240/1638)= 0.576

The 5-part Dupont formula gives the same result:

ROE = [(EBIT/Sales)*(Sales/Assets) – (Interest/Assets)]*(Assets/Equity)*(tax retention rate)

Where EBIT = EBT + interest = 1349 + 151 = 1500

ROE 2007 = [(1500/3000)*(3000/3240) – (151/3240)]*(3240/1638)*0.7 = 0.576

 

5.Kellen Harris is a credit analyst with the First National Bank. Harris has been asked to evaluate Longhorn Supply Company’s cash needs. Harris began by calculating Longhorn’s turnover ratios for 2007. After a discussion with Longhorn’s management, Harris decides to adjust the turnover ratios for 2008 as follows:

	2007 Actual Turnover	Expected Increase / (Decrease)
Accounts receivable	5.0	10%
Fixed asset	3.0	7%
Accounts payable	6.0	(20%)
Inventory	4.0	(5%)
Equity	5.5	—
Total asset	2.3	8%

Longhorn’s expected cash conversion cycle for 2008, based on the expected changes in turnover and assuming a 365 day year, is closest to:

A)   46 days.

B)   93 days.

C)   86 days.

D)   82 days.

The correct answer was C)

2008 expected days of sales outstanding is 66 [365 / (5.0 × 1.1)], 2008 days of inventory on hand is 96 [365 / (4.0 × 0.95)], and 2008 days of payables is 76 [365 / (6.0 × 0.8)]. Expected cash conversion cycle is 86 days [66 days of sales outstanding + 96 days of inventory on hand – 76 days of payables].

mcdullpong

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sir_2005

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