Chapter 2: Question 5-6DQ (page 143)
Discuss the limitations of financial leverage.
There is always a risk of loss or failure in generating the expected return along with the burden of paying interest on debts. It may increase the financial loss of the company.
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Vriend Software Inc.’s book value per share is \(15.20. If earnings per share is\)1.88 and the firm’s stock trades in the stock market at 3.5 times book value pershare, what will the P/E ratio be? (Round to the nearest whole number.)
The Rogers Corporation has a gross profit of \(880,000 and \)360,000 in depreciation expense. The Evans Corporation also has \(880,000 in gross profit,
with \)60,000 in depreciation expense. Selling and administrative expense is $120,000 for each company. Given that the tax rate is 40 percent, compute the cash flow for both companies.
Explain the difference in cash flow between the two firms.
A firm has net income before interest and taxes of \(193,000 and interest expense of \)28,100.
b. If the firm’s lease payments are $48,500, what is the fixed charge coverage?
Jim Short’s Company makes clothing for schools. Sales in 20X1 were
\(4,820,000. Assets were as follows:
Cash | \)163,000 |
Accounts receivable | 889,000 |
Inventory | 411,000 |
New plant and equipment | 520,000 |
Total assets | $1,983,000 |
a. Compute the following:
1. Accounts receivable turnover.
2. Inventory turnover.
3. Fixed asset turnover.
4. Total asset turnover.
The balance sheet for Stud Clothiers is shown below. Sales for the year were \(2,400,000, with 90 percent of sales sold on credit.
Stud Clothier | |||
Balance sheet 20X1 | |||
Assets | Liabilities and Equity | ||
Cash | \)60,000 | Account payable | \(220,000 |
Account receivable | 240,000 | Accrued taxes | 30,000 |
Inventory | 350,000 | Bonds payable (long term) | 150,000 |
Plant and equipment | 410,000 | Common stock | 80,000 |
Paid in capital | 200,000 | ||
Retained earnings | 380,000 | ||
Total assets | \)1,060,000 | Total LIbilities and Equity | $1,060,000 |
Compute the following:
a. Current ratio
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