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Unformatted text preview: Chapter 8 Analysis of Financial Statements ANSWERS TO BEGINNING-OF-CHAPTER QUESTIONS Answers and Solutions: 8 - 1 The answers to these questions are all contained in the BOC Excel model for this chapter, where they are illustrated with actual data and the ratios are calculated. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 A B C D E F G H I Worksheet for Chapter 8 BOC Questions 3/13/2009 We like to answer the Chapter 8 questions by going through the following model, which also helps students become more familiar with Excel. Note that the data used in this file are the same as for the Chapter 7 BOC questions. 2. Suppose Company X has the data shown in the following financial statements. Answer the following questions, giving numbers if all the required data are available or in general terms if the necessary data are not available. Note that additional data are provided in the chapter BOC model. (a) What is X’s DSO? If the industry average DSO is 30 days, and if X could reduce its accounts receivable to the point where its DSO became 50 without affecting its sales or operating costs, how would this affect: (b) Its free cash flow? (c) Its ROE? (d) Its debt ratio? (e) Its TIE ratio? (f) Its Loan/EBITDA ratio? (g) Its P/E ratio? (h) Its M/B ratio? Balance Sheets 2008 2009 Income Statements 2008 2009 Cash in bank $5 $6 Sales (net of discounts) 90.00 $ 100.00 $ Marketable securities $5 $6 Cost of goods sold (COGS) 73.00 76.00 Accounts receivable $10 $12 Admin and credit costs 5.00 6.00 Inventories $25 $26 Deprn and amortization 4.00 5.00 Current assets $45 $50 Operating Income (EBIT) 8.00 $ 13.00 $ Net fixed assets $45 $50 Interest expense 3.00 3.00 Total assets $90 $100 Taxable income 5.00 $ 10.00 $ Taxes (40%) 2.00 4.00 Accounts payable $35 $36 Net income 3.00 $ 6.00 $ Notes payable $9 $8 Dividends 1.00 $ 2.00 $ Accrued wages & taxes $5 $6 Additions to R.E. 2.00 $ 4.00 $ Current liabilities $49 $50 Long-term debt $25 $30 Total liabilities $74 $80 Common stock $1 $1 Retained earnings $15 $19 Total common equity $16 $20 Total liabilities & equity $90 $100 1. Why are financial ratios used? Name five categories of ratios, and then list several ratios in each category. Would a bank loan officer, a bond analyst, a stock analyst, and a manager be likely to put the same emphasis and interpretation on each ratio? Answer: (1) Liquidity (Current, Quick), (2) Asset Management (Inventory Turnover, DSO), Debt Management (Debt/Total Assets, TIE), (3), Profitability (ROE, Profit Margin), Market Value ((P/E, Market/Book). Different analysts would probably emphasize somewhat different types of ratios. A banker considering a short-term loan would be especially interested in liquidity ratios and the debt/assets ratio to assess the short- term probability of repayment and the firm's liquidating value. Stock and bond analysts would be more interested in the long-term situation, and they would consider all types of ratios, as would managers.interested in the long-term situation, and they would consider all types of ratios, as would managers....
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This note was uploaded on 05/12/2010 for the course BA 464 taught by Professor Kien-quocvanpham during the Spring '10 term at Humboldt State University.
- Spring '10