# Chap014 - Chapter 14 Financial Statement Analysis CHAPTER...

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Chapter 14 - Financial Statement Analysis CHAPTER 14 FINANCIAL STATEMENT ANALYSIS 1. N a. Inventory turnover ratio in 2009. = 2850 / (490 + 480) x .5 = 1.47 b. Debt equity ratio in 2009. = 3340 / 960 = 3.48 c. Cash flow from operating activities in 2009. Net Income 330,000 + Depreciation 280,000 change in AR 30,000 chagne in AP -110,000 change in inventory -10,000 CF from Operations 520,000 d. Average collection period. = (660+690)x.5 / 5500 x 365 = 44.80 e. Asset turnover ratio. = 5500 / (4300 + 4010) x .50 = 0.33 f. Interest coverage ratio. = 870 / 130 = 6.69 g. Operating profit margin. =870 / 5500 = 0.16 h. Return on equity. = 410 / 960 = .43 i. P/E ratio. j. Compound leverage ratio. = (870 – 130) / 130 x 4300 / 960 = 3.81 k. Net cash provided by operating activities. See answer to part c. 14-1

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Chapter 14 - Financial Statement Analysis 2. N a. Purchase of Bus -33000 Sale of old equipment 72000 Cash from Investments 39000 b. Dividend -80000 Repurchase stock -55000 Cash from financing -135000 c. Cash dividend (\$80,000) Purchase of bus (\$33,000) Interest paid on debt (\$25,000) Sales of old equipment \$72,000 Repurchase of stock (\$55,000) Cash payments to suppliers (\$95,000) Cash collections from customers \$300,000 Total cash flow \$84,000 3. ROA = (EBIT/Sales) × (Sales/Total Assets) = 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. 4. ABC’s asset turnover must be above the industry average. 5. This transaction would increase the current ratio. The transaction reduces both current assets and current liabilities by the same amount, but the reduction has a larger proportionate impact on current liabilities than on current assets. Therefore, the current ratio would increase. This transaction would increase the asset turnover ratio. Sales should remain unaffected, but assets are reduced. 6. C 7. C 14-2
Chapter 14 - Financial Statement Analysis 8. equity profit Net ROE = = 5.5% × 2.0 × 2.2 = 24.2% 9. Using equation 14.1, solve for ROA .03 = (1 - .35) x (ROA + (ROA - .06) x .5) ROA = .05 10. Using equation 14.3, solve for ROE ROE = .75 x .6 x .10 x 2.4 x 1.25 = .135 11. Par value 20,000 × \$20 = \$ 400,000 Retained earnings 5,000,000 Addition to Retained earnings 70,000 Book value of equity \$5,470,000 Book value per share = \$5,470,000/20,000 = \$273.50 CFA 1 Since ROE is a function of net profit and equity, it is possible to maintain a stable ROE, while net profits decline so long as equity also declines proportionally. CFA 2

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## This note was uploaded on 12/06/2011 for the course PHYSICS 111&112 taught by Professor Unknown during the Spring '11 term at Ohio State.

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Chap014 - Chapter 14 Financial Statement Analysis CHAPTER...

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