Mechanic

Given the following income statement:

Net Sales	200
Cost of Goods Sold	55
Gross Profit	145
Operating Expenses	30
Operating Profit (EBIT)	115
Interest	15
Earnings Before Taxes (EBT)	100
Taxes	40
Earnings After Taxes (EAT)	60

What are the gross profit margin and operating profit margin?

Gross Profit Margin

Operating Profit Margin

A) 0.725 0.575

B) 2.630 1.226

C) 0.379 0.725

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Gross profit margin = gross profit / net sales = 145 / 200 = 0.725Operating profit margin = EBIT / net sales = 115 / 200 = 0.575

Mechanic

Goldstar Manufacturing has an accounts receivable turnover of 10.5 times, an inventory turnover of 4 times, and payables turnover of 8 times. What is Goldstar’s cash conversion cycle?

A) 6.50 days.

B) 80.38 days.

C) 171.64 days.

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The cash conversion cycle = average receivables collection period + average inventory processing period – payables payment period. The average receivables collection period = 365 / average receivables turnover or 365 / 10.5 = 34.76. The average inventory processing period = 365 / inventory turnover or 365 / 4 = 91.25. The payables payment period = 365 / payables turnover ratio = 365 / 8 = 45.63. Putting it all together: cash conversion cycle = 34.76 + 91.25 – 45.63 = 80.38.

Mechanic

Using a 365-day year, if a firm has net annual sales of $250,000 and average receivables of $150,000, what is its average collection period?

A) 1.7 days.

B) 46.5 days.

C) 219.0 days.

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Receivables turnover = $250,000 / $150,000 = 1.66667
Collection period = 365 / 1.66667 = 219 days

Mechanic

If the inventory turnover ratio is 7, what is the average number of days the inventory is in stock?

A) 52 days.

B) 70 days.

C) 25 days.

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Average Inventory Processing Period = 365 / inventory turnover = 365 / 7 = 52 days.

Mechanic

Which of the following items is NOT in the numerator of the quick ratio?

A) Inventory.

B) Cash.

C) Receivables.

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Quick ratio = (cash + marketable securities + receivables) / current liabilities
Current ratio = (cash + marketable securities + receivables + inventory) / current liabilities

Mechanic

An analyst has collected the following data about a firm:

• Receivables turnover = 20 times.
• Inventory turnover = 16 times.
• Payables turnover = 24 times.

What is the cash conversion cycle?

A) 26 days.

B) Not enough information is given.

C) 56 days.

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Cash conversion cycle = receivables collection period + inventory processing period – payables payment period.
Receivables collection period = (365 / 20) = 18
Inventory processing period = (365 / 16) = 23
Payables payment period = (365 / 24) = 15
Cash conversion cycle = 18 + 23 – 15 = 26

Mechanic

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

Balance Sheet
Assets	Year 2003	Year 2004
Cash	500	450
Accounts Receivable	600	660
Inventory	500	550
Total CA	1300	1660
Plant, prop. equip	1000	1250
Total Assets	2600	2910
Liabilities
Accounts Payable	500	550
Long term debt	700	700
Total liabilities	1200	1652
Equity
Common Stock	400	400
Retained Earnings	1260	1260
Total Liabilities & Equity	2600	2910
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

What is the operating profit margin?

A) 0.45.

B) 0.50.

C) 0.67.

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Operating profit margin = (EBIT / sales) = (1,500 / 3,000) = 0.5

Mechanic

Assume a firm with a debt to equity ratio of 0.50 and debt equal to $35 million makes a commitment to acquire raw materials with a present value of $12 million over the next 3 years. For purposes of analysis the best estimate of the debt to equity ratio should be:

A) 0.500.

B) 0.671.

C) 0.573.

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The original debt / equity ratio = 35 / 70 = 0.5. Now adjust the numerator but not the denominator. Why? You have commitments (liabilities) but no new equity because (non-current) liabilities and assets are increased by the same amount. D/E = (35 + 12) / 70 = 0.671.

Mechanic

Paragon Company's operating profits are $100,000, interest expense is $25,000, and earnings before taxes are $75,000. What is Paragon's interest coverage ratio?

A) 4 times.

B) 1 time.

C) 3 times.

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ICR = operating profit ÷ I = EBIT ÷ I
= 100,000 ÷ 25000 = 4

Mechanic

A firm has a cash conversion cycle of 80 days. The firm's payables turnover goes from 11 to 12, what happens to the firm's cash conversion cycle? It:

A) lengthens.

B) shortens.

C) may shorten or lengthen.

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CCC = collection period + Inv Period – Payment period.
Payment period = (365 / payables turnover) = (365 / 11) = 33; (365 / 12) = 30. This means the CCC actually increased to 83.