Finance for Global corporations

Take-Home Problem Set Two (THPS-2)

SOLUTION KEY
1. E
2. B
3. E
4. A
5. B
6. B,D,E,H. Operating cash flow items are changes in accounts receivable, inventory, accounts payable and
accruals. Asset decreases are net cash inflows and liability increases are net cash inflows.
7. C. ROE = net income/equity. If current assets decrease and net fixed assets remain unchanged, then total
assets decrease. If total assets decrease and the debt ratio stays the same, then debt will decrease and equity
will decrease (assume debt ratio = 40% and initially total assets = 100; then debt = 40 and equity = 60. Now
if total assets decrease to 80, debt becomes 32 and equity becomes 48). If sales and the net profit margin
remain constant, than net income does not change. So, ROE increases because net income stays the same
while equity decreases.
8. C. Gross profit = sales = COGS = 4.2B – 1.9B = 2.3B. Gross profit margin = gross profit/sales = 2.3 / 4.2 =
.5476 = 54.8%
9. E. Current ratio = current assets / current liabilities. Assume initially, CR = CA/CL = 800,000/1,000,000 =
0.8. Choice “a” will increase CL by 100,000 and also increase CA by 100,000 – this will increase the current
ratio to 900,000/1,100,000 = 0.82. Choice “b” will increase CA by 200,000 and have no effect on CL (thus,
CR will increase). Choice “c” will have no effect on either CL (the changes cancel out) and have no effect
on CA (thus, CR will remain the same). Choice “d” will have no effect on either CL or CA (thus, CR will
remain the same). Choice “e” is correct because none of the other choices will decrease the current ratio.
10. B. Assume that initially quick ratio = (CA – Inventory)/(CL) = (Cash + AR)/(CL) = 150/100. The action
described will cause both cash and CL to increase by the same amount (assume both increase by 20). Then
the new ratio will be 170/120 = 1.42, so the Quick Ratio will decrease.
11. B. Assume that initially debt ratio = D/A = 45/100 = .45. The new policy will cause by debt (D) and total
assets (A) to decrease by the same amount. Assume the decrease is 20. Then new debt ratio will be 25/80 =
.3125 = decrease.
12. B. Assume that initially current ratio = (CA)/(CL) = 150/100. The new policy will increase current assets
and current liabilities by the same amount. Assume the increase is 20. Then new CR will be 170/120 = 1.42,
so current ratio will decrease.

13. Given A = 5,000,000. Then from ROA = 16%, we know that NI (net income) = 800,000. If net profit margin
= .06, then sales = 800,000/.06 = 13,333,333
14. Assume A = 100, then from debt ratio = 82.5%, we know that D = 82.5 and from D + E = A, we know that E
= 17.5. Thus, D/E = 82.5/17.5 = 4.71
15. Assume A = 100, then from debt ratio = 55%, we know that D = 55 and E = 45. Since ROE = .08 and E =
45, we know that NI = 3.60. Thus, ROA = 3.60/100 = .036 = 3.6%
16. Assume that D = 55 and E = 100 so that D/E = .55. Thus, A = 155. If ROA = .17, then NI = 26.35. Thus,
ROE = 26.35/100 = .264 = 26.4%
17. Assume A = 100 (then from debt ratio = .60 = 60% we know that D = 60 and E = 40, but we do not need this
information). From ROA = .25 and A = 100, we know that NI = 25. Finally, from net profit margin = .125
and NI = 25, we know that sales (S) = 200.0. Thus, total asset turnover = S/A = 200/100 = 2.0
18. Assume A = 100, then from ROA = .175, we know that NI = 17.5. From ROE = .37 and NI = 17.5 we know
that E = 47.30, and thus D = 52.70. Thus, D/A = 52.70/100 =.5270 = 52.7%
For Problems 19 – 23, you can first create income statements and balance sheets for 2010 and 2011 from the
data given. This is not absolutely necessary, but if you do, it makes answers these questions very easy. The
statements are as follows:

Net sales 7,950 8,980

Cost of goods sold 4,100 4,850
Gross profit 3,850 4,130
Operating expenses 2,130 2,180
Depreciation expenses 400 560
EBIT 1,320 1,390
Interest expenses 290 300
EBT 1,030 1,090
Taxes 390 410
Net income 640 680

Cash 165 160

Accounts receivable 1,680 1,510
Inventory 4,375 4,050
Current assets 6,220 5,720
Net fixed assets 6,940 7,090
Total Assets 13,160 12,810

Notes payable 600 740

Accounts payable 360 390
Accruals 165 190
Current Liab 1,125 1,320
Long-term debt 4,500 4,150
Common stock 1,660 1,380
Retained earnings 5,875 5,960
Total liab and equity 13,160 12,810

19. Gross profit (2016) = 4130

20. TIE (2015) = EBIT/Interest = 1320/290 = 4.55
21. ROE (2016) = net income / (common stock + retained earnings) = 680/(1380 + 5960) = .093 = 9.3%
 Net income 680
Depreciation 560
AR 170
Inv 325
AP 30
Acc 25
NCF Operating Activities 1,790

GFA (710)
NCF Operating Activities (710)

NP 140
LTD (350)
CS (280)
- Dividends (595)
NCF Operating Activities (1,085)

Change in Cash (5)

22. Cash flow from operating activities (2016) = 1790

23. Cash flow from investing activities = purchase of new gross fixed assets = change in NFA + Dep. = -710
24. Cash flow from financing activities (2016) = -1085

For 25 - 27:
Net income 9,980
Dep 1,290
AR (200)
Inv 650
AP 1,870
Acc 250
NCF Operating Activities 13,840

GFA (8,040)
NCF Investing Activities (8,040)

NP 380
CP LT Debt 140
LT Debt (2,470)
Stock 500
PIC 4,510
- Dividends (8,820)
NCF Financing Activities (5,760)

Change in cash = 40
25. Cash flow from operating activities (2016) = 13,840
26. Cash flow from investing activities = purchase of new gross fixed assets = change in NFA + Dep. = -8040
27. Cash flow from financing activities (2016) = --5760

For 28 - 30: (use information given to fill in the balance sheet)

NOTE: Since gross profit margin = 30% and sales – COGS = gross profit, COGS = 224,000. Also, since net
profit margin = 4% and sales = 320,000, net income = 12,800

Cash 11,400
Accounts receivable 30,000
Inventory 28,000
Gross fixed assets 48,000
(Accumulated depreciation) (15,000)
Net fixed assets 33,000
Total assets 102,400

Notes payable 1,800

Accounts payable 11,200
Long-term debt 38,200
Equity 51,200

Total liab & equity 102,400

28. Cash = 11,400

29. Long-term debt = 38,200
30. Total assets = 102,400
For 31 - 34: (use information given to fill in the balance sheet)
NOTE: Since sales = 1,800,000 and gross profit margin = 10%, COGS = 1,620,000. Also, since net profit
margin = 15% and sales = 1,800,000, net income = 270,000.

Cash 33,000
Accounts receivable 180,000
Inventory 162,000
Net fixed assets 975,000
Total assets 1,350,000

Notes payable 75,000

Accounts payable 135,000
Accruals 40,000
LT Debt 290,000
Common stock 30,000
Capital surplus 435,000
Retained earnings 345,000
Total liab & equity 1,350,000

31. Cash = 33,000

32. Long-term debt = 290,000
33. Total assets = 1,350,000
34. Capital surplus = 435,000

35. Net fixed assets (2014) = total assets (2014) – current assets (2014) = 2,293,500 – 1,053,500 = 1,240,000
36. COGS/Sales = .24; COGS/500,000 = .24; COGS (2013) = 120,000
37. Debt ratio (2014) = total liabilities / total assets = (265,000 + 1,050,000) / 2,293,500 = .573 = 57.3%
 Net income 84,550
+ depreciation 15,000
+ decrease in AR 25,000
- increase in Inv (45,000)
+ increase in AP 25,000
+ increase in Accruals 10,000
NCF Operating Activities 114,550

Change in NFA 115,000

+ depreciation 15,000
Change in GFA 130,000
NCF Investing Activities (130,000)

Change in NP (25,000)
Change in LT Debt 50,000
Change in common stock 3,500
Change in paid in capital 70,000
- payment of dividends (54,550)
NCF Financing Activities 43,950

Change in cash 28,500

38. NCF Operating activities = 114,550

39. NCF Investing activities = -130,000
40. Total dividends paid (2014) = NI(2014) – change in RE = 54,550