Corporate finance chapter 4 -solutions

Chapter 4
Analysis of Financial Statements

Learning Objectives





Solutions of End-of-Chapter Problems


4-1 AR = $800,000.


4-2 A/E = 2.4; D/A = 58.33%




4-3 ROA = 10%; PM = 2%; ROE = 15%; S/TA = 5; TA/E = 1.5
ROA = NI/A; PM = NI/S; ROE = NI/E.
4-4 M/B = 4.2667.
4-5 P/E = $24.00/$2.00 = 12.0.


4-6 PM = 2%; EM = 2.0; Sales = $100,000,000; Assets = $50,000,000; ROE = 8%
4-7 $112,500 = NI.


4-8 ROA = 8%; net income = $600,000; TA = $7,500,000

BEP =
=
= 0.1531 = 15.31%.


4-9 Stockholders’ equity = $3,750,000,000; M/B = 1.9; P = $142.50.



4-11 TA = $30,000,000,000; EBIT/TA = 20%; TIE = 8; DA = $3,200,000,000; Lease payments = $2,000,000,000; Principal payments = $1,000,000,000; EBITDA coverage = 2.9867



4-12 TA = $12,000,000,000; T = 40%; EBIT/TA = 15%; ROA = 5%; TIE = 2.25




4-13 TIE = $192,857/$50,000 = 3.86.


4-14 ROE = = 23.1%.
4-15 New quick ratio = 1.2.
4-16 Difference in ROE = 19.2% – 12.0% = 7.2%.

*If D/A = 50%, then half of the assets are financed by debt, so Debt = $500,000. At an 8% interest rate, INT = $40,000.


4-18 TA = $5,000,000,000; T = 40%; EBIT/TA = 10%; ROA = 5%; TIE = 6

4-19 NP = $262,500.

Short-term debt can increase by a maximum of $262,500 without violating a 2 to 1 current ratio, assuming that the entire increase in notes payable is used to increase current assets. Since we assumed that the additional funds would be used to increase inventory, the inventory account will increase to $637,500 and current assets will total $1,575,000, and current liabilities will total $787,500.
4-20 Sales = $4,977,272.73.
AR = $405,681.82  $405,682.