Corporate Finance
12th Edition
ISBN: 9781259918940
Author: Ross, Stephen A.
Publisher: Mcgraw-hill Education,
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Suppose a company has a days sales outstanding (DSO) that is considerably higher than itsindustry average. If the company could reduceits accounts receivable to the point where itsDSO was equal to the industry average withoutaffecting its sales or its operating costs, howwould this affect (a) its free cash flow, (b) itsreturn on common equity, (c) its debt ratio,(d) its times-interest-earned ratio, (e) its EBITDAcoverage ratio, (f) its price/earnings ratio, and(g) its market/book ratio?
A firm has been experiencing low profitability in recent years. Perform an analysis of the firm's financial position using the DuPont equation. The firm has no lease payments but has a $1 million
sinking fund payment on its debt. The most recent industry average ratios and the firm's financial statements are as follows:
Current ratio
Debt-to-capital ratio
Times interest earned
EBITDA coverage
Inventory turnover
Cash and equivalents
Accounts receivables
Inventories
Total current assets
Gross fixed assets
Days sales
outstandinga
aCalculation is based on a 365-day year.
Balance Sheet as of December 31, 2021 (millions of dollars)
$78
Accounts payable
74
147
$299
Less depreciation
Industry Average Ratios
Net fixed assets.
Total assets
2x
15%
5x
10x
9x
25days
Fixed assets turnover
Total assets turnover
Profit margin
Return on total assets
Return on common
equity
Return on invested
capital
216
55
$161
$460
Other current liabilities
Notes payable
Total current liabilities
Long-term debt
Total…
A firm has been experiencing low profitability in recent years. Perform an analysis of the firm's financial position using the DuPont equation. The firm has no lease payments but has a $1 million sinking fund payment on its debt. The most recent industry average ratios and the firm's financial statements are as follows:
Industry Average Ratios
Current ratio
Debt-to-capital ratio
Times interest earned
EBITDA coverage
Inventory turnover
Cash and equivalents
Accounts receivables
Inventories
Total current assets
Gross fixed assets
Less depreciation
Days sales
outstandinga
aCalculation is based on a 365-day year.
Balance Sheet as of December 31, 2021 (millions of dollars)
$78
Accounts payable
Other current liabilities
Net fixed assets
Total assets
Gross profit
Selling expenses
EBITDA
2x
15%
5x
10x
9x
25days
Taxes (25%)
Net income
74
147
$299
216
55
$161
$460
Depreciation expense
Earnings before interest and taxes (EBIT)
Interest expense
Earnings before taxes (EBT)
Fixed assets turnover…
Chapter 2 Solutions
Corporate Finance
Ch. 2 - Prob. 1CQCh. 2 - Prob. 2CQCh. 2 - Prob. 3CQCh. 2 - Prob. 4CQCh. 2 - Prob. 5CQCh. 2 - Cash Flow from Assets Why is it not necessarily...Ch. 2 - Operating Cash flow Why is it not necessarily bad...Ch. 2 - Net Working Capital and Capital Spending Could a...Ch. 2 - Cash Flow to Stockholders and Creditors Could a...Ch. 2 - Prob. 10CQ
Ch. 2 - Building a Balance Sheet Alesha, Inc., has current...Ch. 2 - Building an Income Statement Gia, Inc, has sales...Ch. 2 - Market Values and Book Values Klingon Cruisers,...Ch. 2 - Calculating Taxes Terri Simmons is single and had...Ch. 2 - Calculating OCF Sheaves, Inc., has sales of...Ch. 2 - Prob. 6QAPCh. 2 - Prob. 7QAPCh. 2 - Prob. 8QAPCh. 2 - Prob. 9QAPCh. 2 - Prob. 10QAPCh. 2 - Cash Flows Ritter Corporations accountants...Ch. 2 - Financial Cash Flows The Stancil Corporation...Ch. 2 - Building an Income Statement During the year, the...Ch. 2 - Prob. 14QAPCh. 2 - Prob. 15QAPCh. 2 - Residual Claims Stark: Inc., is obligated to pay...Ch. 2 - Net Income and OCF During 2019, Rainbow Umbrella...Ch. 2 - Prob. 18QAPCh. 2 - Prob. 19QAPCh. 2 - Prob. 20QAPCh. 2 - Prob. 21QAPCh. 2 - Prob. 22QAPCh. 2 - Cash Flows You are researching Time Manufacturing...Ch. 2 - Prob. 24QAPCh. 2 - Prob. 1MCCh. 2 - Prob. 2MCCh. 2 - Prob. 3MC
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- Now it's time for you to practice what you've learned. Suppose that you are given the following data for Niles Company: Note: The data and calculations are based on a 365-day year. Cash and equivalents Fixed assets Sales Net income Current liabilities Current ratio DSO ROE Accounts receivable Current assets Total assets Fill in the table with the appropriate values. (Hint: Use the formulas you learned in the video and exercises in the previous stage of the problem.) $ ROA Common equity $ Quick ratio $787,500 $2,275,000 $8,750,000 $393,750 $840,000 $ $ 2.5 18.25 12.00% Fill in the table with the appropriate values. (Hint: Use the formulas you learned in the video and exercises in the previous stage of the problem.) Hint: Recall that Current Assets = Cash and Equivalents + Accounts Receivable + Inventories.arrow_forwardA firm has been experiencing low profitability in recent years. Perform an analysis of the firm's financial position using the DuPont equation. The firm has no lease payments but has a $1 million sinking fund payment on its debt. The most recent Industry average ratios and the firm's financial statements are as follows: Current ratio Debt-to-capital ratio Times interest earned EBITDA coverage Inventory turnover Days sales outstanding *Calculation is based on a 365-day year. Cash and equivalents Accounts receivables Inventories Total current assets Gross fixed assets Less depreciation Industry Average Ratios Net fixed assets Total assets 2x 15% 5x 10x 9x Balance Sheet as of December 31, 2021 (millions of dollars) $ 78 Accounts payable 74 Other current liabilities Notes payable Taxes (25%) Net Income 25days 147 $299 216 55 $161 $460 Fixed assets turnover Profit margin Total assets turnover Equity multiplier Total assets turnover Profit margin Return on total assets Return on common…arrow_forwardA firm has $600,00 in current assets and $150,000 in current liabilities. If it uses cash to pay $50,000 in accounts recievalbes will the current ratio increase or decraese? Will the net working capital increase or decrease or stay the same? Why?arrow_forward
- A firm’s balance sheets for the last two years are as follows (refer to image): Sales in 20X1 were $250,000. Sales in 20X2 were $250,000. a. Based solely on the current ratio and the quick ratio, has the firm’s liquidity position deteriorated or improved? b. Without doing a calculation, has days sales outstanding (receivables turnover) improved? How do you know? c. Without doing a calculation, has inventory turnover deteriorated? How do you know? d. If the firm earned $5,000 during 2012, what proportion of those earningswere distributed?arrow_forwardA debt-free firm has profit for the year of $128 400, taxes of $46 200 and depreciation of $21 300. What is the operating cash flow?arrow_forward6) During the year, Lasko's repaid $12,500 in long-term debt, borrowed $8,400, paid $611 in interest and $740 in dividends, and had an operating cash flow of $16,207. The firm acquired $33,500 in new fixed assets and sold $8,400 of old assets. Net working capital declined by $1,592 during the year. What is the annual cash flow to stockholders?arrow_forward
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