AIMST UNVERSITY

FACULTY OF BUSINESS AND MANAGEMENT

BMFM 32112 PRINCIPLES OF CORPORATE FINANCE

CHAPTER EXERCISE - TOPIC: WORKING WITH FINANCIAL STATEMENTS

Multiple Choice Questions

1. Which one of the following statements concerning market and book values is correct?
a. The market value of accounts receivable is generally much lower than the book
value of those receivables.
b. The market and book values of current assets tend to be relatively equal.
c. The market value of fixed assets will always exceed the book value of those assets.
d. Book values represent the amount of cash that will be received if an asset is sold.
e. The current book value of equipment purchased last year is equal to the initial cost
of the equipment.

2. The internal growth rate is best described as the _____ growth rate achievable _____.
a. minimum; if a firm retains all of its net income
b. minimum; if a firm maintains a constant debt-equity ratio
c. maximum; without any additional external equity financing
d. maximum; without any additional external financing of any type
e. maximum; if external debt financing is maximized

3. . A firm has a days' sales in inventory value of 46. This means the firm:
a. has sufficient inventory to support its sales for 46 weeks.
b. has sufficient inventory to support its sales for 46 days.
c. pays its suppliers in 46 days.
d. grants its customers 46 days to pay for their purchases.
e. sells its inventory an average of 46 times each year.

4. Which of the following will increase the profit margin of a firm, all else constant?
I. increasing depreciation
II. decreasing cost of goods sold
III. decreasing the tax rate
IV. increasing interest expense
a. I and III only
b. II and IV only
c. II and III only
d. I, II, and III only
e. I, II, III, and IV
5. . The Du Pont identity helps financial managers determine:
I. why a firm's return on equity is lower than anticipated.
II. the operating efficiency of a firm.
III. the utilization rate of a firm's assets.
IV. the rate of return on a firm's assets.
a. II and III only
b. I and III only
c. II, III, and IV only
d. I, II, and III only
e. I, II, III, and IV

6. Which of the following represent problems encountered when analyzing financial statements?
I. Conglomerates do not fit neatly into any one industrial classification.
II. Firms use different methods of accounting.
III. Firms with seasonal sales may have different fiscal years.
IV. Many firms have global operations.
a. I and II only
b. II and IV only
c. I, II, and III only
d. I, II, and IV only
e. I, II, III, and IV

7. The Book & Magazine Co. has inventory of RM193,000, equity of RM395,100, total assets of
RM578,800, and sales of RM612,300. What is the common-size percentage for the inventory
account?
a. 16.20 percent
b. 19.82 percent
c. 31.52 percent
d. 33.34 percent
e. 48.85 percent

8. The Endicott Co. has net income of RM72,700, total assets of RM285,000, total equity of
RM196,000, and total sales of RM523,200. What is the common-size percentage for the net
income?
a. 9.00 percent
b. 13.90 percent
c. 15.11 percent
d. 25.51 percent
e. 37.09 percent
9. You are analyzing a company that has cash of RM2,000, accounts receivable of RM3,700,
fixed assets of RM10,900, accounts payable of RM6,600, and inventory of RM4,100. What is
the quick ratio?
a. .30
b. .67
c .86
d. 1.48
e. 3.30

10. Thayer, Inc. has earnings before interest and taxes of RM10,350 and net income of
RM2,528.50. The tax rate is 35 percent. What is the times interest earned ratio?
a. .22
b. .62
c. .96
d. 1.04
e. 1.60

Structured Questions

1. Explain with example the kind of information that the following financial ratios provide about
a firm:

a) Quick ratio
b) Cash ratio
c) Capital intensity ratio
d) Total assets turnover
e) Equity multiplier
f) Long-term debt ratio
g) Times interest earned ratio
h) Profit margin
i) Return on assets
j) Return on equity
k) Price-earning ratio
 2. Berkat Mining Company reports the following Statement of Financial Position information for
2017 and 2018. Use this information to answer the following questions:

Berkat Mining Company

Statement of Financial Position as of December 2017 and 2018
2017 2018 2017 2018
Assets Liabilities and Owners’ Equity
Current assets Current Liabilities
Cash RM 18,288 RM 22,455 Accounts Payable RM 149,940 RM 144,722
Accounts
Receivable RM 44,062 RM 55,457 Notes Payable RM 69, 246 RM 101, 134
Inventory RM 104,339 RM 144,696 Total RM 219, 186 RM 245, 856
Total RM 166,689 RM 222,608 Long Term debt RM 190, 000 RM 131, 250
Owners’ Equity
Fixed assets Common stock and paid-in
surplus
RM 160, 000 RM 160, 000
Net plant and Accumulated retained
equipment RM 582,190 RM 561,988 earnings RM 179, 693 RM 247, 490
Total RM 339, 693 RM 407, 490

Total assets RM 748,879 RM 784,596 Total Liabilities and owners’ RM 748, 879 RM 784, 596
Equity

a) Prepare common-size Statement of Financial Position for Perdana Mining Company for 2017
and 2018.

b) Based on the Statement of Financial Position given for Perdana Mining Company, compute
the following ratios for both years:
- Current ratio
- Quick ratio
- Cash ratio
- Debt-equity ratio and equity multiplier
- Total debt ratio

c) Suppose that the Perdana Mining Company had sales of RM 3,678,461 and net income of RM
132, 186 for the year ending December 31, 2018. Compute the Du Pont Identity.

3. Based on the following information, calculate the sustainable growth rate for Southern Sky:

Profit margin = 7.6%

Capital intensity ratio = 0.45
Debt-equity ratio = 0.25
Net income = RM 85,000
Dividends = RM 35,000
4. Based on the following information, calculate the sustainable growth rate for ABC Triangle
Corporation:

Profit margin = 6.6%

Capital intensity ratio = 0.55
Debt-equity ratio = 0.35
Net income = RM 75,000
Dividends = RM 45,000

5. Assuming the following ratios are constant, determine the sustainable growth rate?

Total asset turnover = 1.75

Profit margin = 8.25%
Equity multiplier = 1.80
Payout ratio = 35%

6. The Pawlonia Tree Company has an ROA of 13%, an 8 % profit margin and an ROE of 16%.
Compute the total asset turnover; equity multiplier.

7. Construct the Statement of Financial Position for Malaysia Aviation Berhad based on the
following financial data.

Malaysia Aviation Berhad

Statement of Financial Position
As at 31 December 2019

Assets RM
Property, plant and equipment ______________
Less: Accumulated Depreciation 50,000
Property, plant and equipment ______________
Total non-current assets ______________

Inventories ______________
Trade and other receivables ______________
Marketable securities ______________
Cash and cash equivalents 16,010
Total current assets ______________
 Total assets ______________

Equity
Share capital
Ordinary shares, issued and fully paid 60,000
Paid in capital in excess of par 13,400
Preferred shares, issued and fully paid 7,353
Retained earnings 181,600
Total equity attributable to owners of the Company ______________

Liabilities
Long Term Loans and Borrowings ______________
Total non-current liabilities
Accruals 37,928
Notes payable ______________
Trade payables 57,600
Total current liabilities ______________
Total liabilities ______________
Total equity and liabilities ______________

Key Financial Data (2019)

1. Revenue totaled RM950,000.
2. The gross profit margin was 40 percent.
3. Inventory turned 6 times.
4. There are 360 days in a year.
5. The average collection period was 52.80 days.
6. The current ratio was 2.08 times.
7. The total asset turnover was 2.03 times.
8. The debt ratio was 43.9392 percent.
9. Total current assets equal RM274,350.