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ch_14_sol - CHAPTER 14 FINANCIAL STATEMENT ANALYSIS 1 ROA =...

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CHAPTER 14: FINANCIAL STATEMENT ANALYSIS 1. ROA = ROS × ATO. The only way that Crusty Pie can have an ROS higher than the industry average and an ROA equal to the industry average is for its ATO to be lower than the industry average. 2. ABC’s asset turnover must be above the industry average. 3. ROE = (1 – tax rate)[ROA + (ROA - Interest rate)Debt/Equity] ROE A > ROE B Firms A and B have the same ROA. Assuming the same tax rate, they must have different interest rates and/or debt ratios. 4. (c) Old plant and equipment is likely to have a low net book value, making the ratio of sales to net fixed assets higher. 5. The current ratio will increase. The equal reduction in current assets and current liabilities will have a larger proportionate impact on current liabilities, and therefore the ratio of current assets to current liabilities will rise. Turnover will rise. Sales should remain unaffected, but assets are lower. 6. (d). Lower dividend payouts will result in higher retained earnings and higher growth. 7. ROE = = 5.5% × 2 × 1/.6 = 18.3%. 8. Par value 20,000 × $20 = $ 400,000 Additional paid in capital 5,000,000 Addition to RE during year 70,000 Book value of equity $5,470,000 Book value per share = 5470,000/20,000 = $273.50 9. (2) (The numerator in (c) equals the total return to all security holders, so the ratio equals return on total assets.) 14-1
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