Q.01 K.

BILLINGSWORTH & COMPANY

EARNING PER SHARE (EPS) 4.00
LESS: DIVIDEND PER SHARE (DPS) (2.00)
RETAINED EARNING PER SHARE INCREASED BY 2.00
NO.OF SHARE (12,000,000 2) 6,000,000 RETAINED EARNINGS R.E. PER SHARE
EQUITY (6,000,000 X 40) 240,000,000 BVPS X NO.OF SHARE
ADD: DEBT 120,000,000
TOTAL ASSETS 360,000,000
DEBTASSETS RATIO 0.33
Q.02 A.L. KAISER & COMPANY
A/R (1,000/360X40) 111.11 A/R = DSO X SALES PER DAY
CURRENT LIABILITIES [(100+111.11)/2] 105.56 CL=(CASH & MKT SECURITIES + A/R) / QR
CURRENT ASSETS (105.56 X 3) 316.67 CA = CL X CR
TOTAL ASSETS (316.67 + 283.50) 600.17 CURRENT ASSETS + FIXED ASSETS
RETURN ON ASSETS (50/600.17X100) 8.33 ROA = NI / TOTAL ASSETS X 100
COMMON EQUITY (50 / 12%) 416.67 CE = NI / ROE
LONG TERM DEBT (600.17-416.67-105.56) 77.94 LTD = TA - CE - CL
SOLUTION
A/R WHILE DSO 40 111.11
LESS: A/R WHILE DSO 30 (1,000/360X30) (83.33) A/R = DSO X SALES PER DAY
CASH GENERATED 27.78
NEW EQUITY (416.67 - 27.78) 388.89 NEW EQUITY = OLD EQUITY - CASH GENER
NEW ROE (50/388.89X100) 12.86% ROE = NI /EQUITY
NEW ASSETS (600.17 - 27.78) 572.39 NEW ASSETS = OLD ASSETS - CASH GENER
NEW ROA (50/572.39X100) 8.74% NI / TA
TOTAL DEBT (105.56+77.94) 183.50 TOTAL DEBT = CL + LTL
DEBT/ASSETS RATIO (183.50/572.39) 0.32
Q.03 ACE INDUSTRIES
CURRENT LIABILITIES (3,000,000 / 1.5) 2,000,000 CL = CA CR
INVENTORY [(3,000,000-INV)/2,000,000 = 1 1,000,000 QR = (CA - INV)/CL
Q.04 BAKER BROTHERS
ACCOUNTS RECEIVABLE (20,000 X 40) 800,000 A/R = DSO X SALES PER DAY
Q.05 BARTLY BARSTOOLS
EQUITY (100/2.4) 41.67% EQUITY MULTIPLIER = TA / EQUITY
DEBT RATIO (100% - 41.67%) 58.33% ASSETS ARE ALWAYS 100%
Q.06 DOUBLEWIDE DEALERS
TATAL ASSETS TURNOVER (10% 2%) 5.00 ROA = PM X TATO
EQUITY MULTIPLIER (15% 10%) 1.50 ROE = PM X TATO X EQUITY MULTIPLIER =
Q.07 BAUER CORORATION
PROFIT MARGIN (3% 1.5) 2.00% ROA = PM X TATO
EQUITY MULTIPLIER (5% 3%) 1.67 ROE = PM X TATO X EQUITY MULTIPLIER =
EQUITY (100/1.67) 60.00% EQUITY MULTIPLIER = TA / EQUITY
DEBT RATIO (100% - 60%) 40.00% ASSETS ARE ALWAYS 100%
Q.08 PETRAY COMPANY
CURRENT RATIO (1,312,500 / 525,000) 2.50 CR = CA / CL
INCREASE IN INV = INCREASE IN N/P = 'X' CR = (CA+'X') (CL+'X')
INCREASE IN 'X' 262,500 2 = (1,312,500+'X')(525,000+'X')
NEW CURRENT ASSETS (1,312,500+262,500) 1,575,000
NEW CURRENT LIABILITIES (525,000+262,500) 787,500
NEW INVENTORY (375,000+262,500) 637,500
QUICK RATIO [(1,575,000 - 637,500) / 787,500] 1.19 QR = (CA - INV)/CL
Q.09 KETROVITCH COMPANY
CURRENT LIABILITIES (810,000 / 3) 270,000 CR = CA/CL
QUICK ASSETS (270,000 X 1.4) 378,000 QR = QA / CL
A/R (378,000 - 120,000) 258,000 A/R = QUICK ASSETS - CASH & MKT SEC
INVENTORY (810,000-378,000) 432,000
SALES (432,000 X 6) 2,592,000 INV T/O = SALES / INV
DSO (258,000 2,592,000/360) 35.83 DSO = A/R / SALES PER DAY
Q.10 H.R. PICKETT CORPORATION
NET PROFIT (2,000,000 X 5%) 100,000 NET PROFIT MARGIN = NI / SALES
PROFIT BEORE TAX {100,000 (1 - 0.30)} 142,857 PBT = NI / (1-T)
ADD: INTEREST (500,000 X 10%) 50,000 INTEREST = DEBT X INTEREST RATE
EBIT 192,857
TIME INTEREST EARNED (192,857 / 50,000) 3.86 TIE = EBIT / INT
Q.11 MIDWEST PACKAGING
EBIT 1,000,000
LESS: INTEREST (300,000)
EBT 700,000
LESS: 34% TAX 238,000
NI 462,000
TOTAL ASSETS (10,000,000 / 2) 5,000,000 TATO = SALES / TA
EQUITY RATIO (100% - 60%) 40%
EQUITY (5,000,000 X 40%) 2,000,000 EQUITY RATIO = EQUITY / TA
ROE (462,000 / 2,000,000 X 100) 23.10%
Q.12 CENTRAL CITY CONSTRUCTION COMPANY
EBIT (1,000,000 x 20%) 200,000 BEP = EBIT / TA
PLAN I: ALL EQUITY (NO DEBT)
EQUITY = TOTAL ASSETS 1,000,000
EBIT (1,000,000 x 20%) 200,000.00
LESS: 8% INTEREST -
EBT 200,000.00
LESS: 40% TAX (80,000.00)
NI 120,000.00
ROE (120,000 / 1,000,000) 12.00%
PLAN 2: 50% DEBT 50% EQUITY
DEBT (1,000,000 x 50%) 500,000 ASSETS = DEBT + EQUITY
EQUITY (1,000,000 X 50%) 500,000
TOTAL ASSETS 1,000,000
EBIT (1,000,000 x 20%) 200,000
LESS: 8% INTEREST 40,000
EBT 160,000
LESS: 40% TAX (64,000)
NI 96,000
ROE (120,000 / 500,000) 19.20%
DIFFERENCE IN ROE (19.20% - 12%) 7.20%
Q.13 SOLUTION
Statement "a" is correct. Refer to the solution of Q.12
(i) Adding assets will not affect common equity if the assets are financed with debt
(ii) Adding assets will cause expected EBIT to increase by the amount EBIT = BEP x Added Assets
(iii) Interest expenses will increase by the amount Kd x Added Assets
(iv) Pretax income will rise by amount Added Assets x (BEP - Kd). Assuming BEP > Kd, Net Income will also increases.
(v) If expected net income increases but common equity is held constant, then the expected ROE will also increase.
Statement 'b' & 'c' are false because the BEP ratio uses EBIT, which is calculated before the effect of Interest and Tax
Statement 'e' is also false.
Q.14 LLOYD AND DAUGHTERS INC
CURRENT ROE (15,000/200,000) 7.50% ROE = NI/CE
NEW CURRENT RATIO 2.50
CURRENT LIABILITIES (30,000+20,000) 50,000 IT WILL NOT CHANGED
OLD CURRENT ASSETS (300,000 - 90,000) 210,000 TA - FA
NEW CURRENT ASSETS (50,000 X 2.50) 125,000
DECREASE IN ASSETS (210,000 - 125,000) 85,000 GENERATED
NEW EQUITY (200,000 - 85,000) 115,000 OLD EQUITY - FUNDS GENERATED
NEW ROE (15,000/115,000) 13.04%
INCREASE IN ROE (13.04% - 7.50%) 5.54%
b(1) Doubling the rupees amount would not affect the answer
b(2) NEW CURRENT RATIO 3.00
CURRENT LIABILITIES (30,000+20,000) 50,000 IT WILL NOT CHANGED
OLD CURRENT ASSETS (300,000 - 90,000) 210,000 TA - FA
NEW CURRENT ASSETS (50,000 X 3.00) 150,000
DECREASE IN ASSETS (210,000 - 150,000) 60,000 GENERATED
NEW EQUITY (200,000 - 60,000) 140,000 OLD EQUITY - FUNDS GENERATED
NEW ROE (15,000/140,000) 10.71%
INCREASE IN ROE (10.71% - 7.50%) 3.21%
b(3) NEW INVENTORY (200,000 / 2) 100,000 INV T/O = SALES / INV
CHANGE IN CA (150,000 - 100,000) 50,000.00 GENERATED
 NEW EQUITY (200,000 - 50,000) 150,000 OLD EQUITY - FUNDS GENERATED
NEW ROE (15,000/150,000) 10.00%
INCREASE IN ROE (10.00% - 7.50%) 2.50%

b(4) EXISTING EPS (15,000 / 10,000) 1.50 EPS = NI / NO.OF SHARES OUTSTANDING
BOOK VALUE PER SHARE (200,000 / 10,000) 20.00 BVPS = CE / NO.OF SHARE OUTSTANDING
SHARES RETIRED (85,000 / 20) 4,250 SHARE RETIRED = FUNDS GENERATED / BV
REMAINING SHARES OUTSTANDIND (10,000 - 4,250) 5,750 TOTAL SHARES - SHARES RETIRED
NEW EPS (15,000 / 5,750) 2.61 EPS = NI / NO.OF SHARES OUTSTANDING
INCREASE IN EPS (2.61 - 1.50) 1.11
b(5) MARKET VALUE PER SHARE (20 X 2) 40.00 MVPS = BVPS X 2
SHARES RETIRED (85,000 / 40) 2,125 SHARE RETIRED = FUNDS GENERATED / MV
REMAINING SHARES OUTSTANDIND (10,000 - 2,125) 7,875 TOTAL SHARES - SHARES RETIRED
NEW EPS (15,000 / 7,875) 1.90 EPS = NI / NO.OF SHARES OUTSTANDING
INCREASE IN EPS (2.61 - 1.50) 0.40
Q.15 ABC LIMITED
CURRENT ASSETS/CURRENT LIABILITIES 1.98
DAYS SALES OUTSTANDING 75.25
SALES/INVENTORIES 6.66
SALES/TOTAL ASSETS 1.70
NET INCOME/SALES 1.70%
NET INCOME/TOTAL ASSETS 2.88%
NET INCOME/EQUITY 7.56%
TOTAL DEBT TO TOTAL ASSETS 61.90%
b ROE (1.70% x 1.70 x 947,500/361,000) 7.56% ROE = PM X TATO X EQUITY MULTIPLIER
EQUITY MULTIPLIER FOR IND [100%/(100%-60%)] 2.50
ROE IND (1.2% x 3 x 2.5) 9.00%

Q.16 MINTER COMPANY

CURRENT LIABILITIES (180 / 1.25) 144.00 CR = CA / CL
LONG TERM ILABILITIES (45 / 15%) 300.00 INTEREST = DEBT X INTEREST RATE
TOTAL ASSETS [(300+144)/0.40] 1,110.00 DEBT RATIO = DEBT / TA
NET WORTH (1,110 - 300 - 144) NET WORTH = EQUITY 666.00 NET WORTH = TA - CL - LTL
 FIXED ASSETS (1,110 - 180) 930.00 FA = TA - CA
PROFIT AFTER TAX (666 x 15.23%) 101.43 RETURN ON NET WORTH = NI / NET WORTH
TAX = 50% OF BEFORE TAX PROFIT 101.43 EQUAL TO PROFIT AFTER TAX
PROFIT BEFORE TAX (101.43 + 101.43) 202.86 PROFIT BEFORE TAX = PAT + TAX
EBIT (202.86 + 45) 247.86 EBIT = EBT + INTEREST
SALES (101.43 / 4%) 2,535.80 NET PROFIT MARGIN = NI / SALES
COST OF GOODS SOLD (2,535.80 - 700 - 247.86) 1,587.93 COGS = SALES - OPERATING EXP - EBIT
INVENTORY (2,535.80 / 25) 101.43 INV T/O = SALES / INV
CASH (180 - 60 - 101.43) 18.57 CASH = CA - A/R - INV
Q.17 ABC LIMITED
TOTAL EQUITY TO TOTAL ASSETS (100% - 40%) 60.00% EQUITY RATIO = TA - DEBT RATIO
TOTAL ASSETS (600,000 / 60%) 1,000,000 EQUITY RATIO = CE / TA
SALES (1,000,000 X 2) 2,000,000 TOTAL ASSETS TURNOVER = SALES / TA
A/R (2,000,000 / 360 X 54) 300,000 AVG COLLECTION PERIOD = A/R SALES P
INVENTORY (2,000,000 / 5) 400,000 INV T/O = SALES / INV
CURRENT LIABILITIES [(100,000+300,000+400,000)/2.5] 320,000 CR = CACL
TOTAL DEBT (1,000,000 - 600,000) 400,000 TOTAL DEBT = TOTAL ASSETS - COMMON S
LONG TERM LIAB (400,000 - 320,000) 80,000 LTL = TOTAL DEBT - CL
 R.E. PER SHARE

URITIES + A/R) / QR

XED ASSETS

UITY - CASH GENERATED

SSETS - CASH GENERATED

TA / EQUITY

UITY MULTIPLIER = ROA X EM

UITY MULTIPLIER = ROA X EM

TA / EQUITY

525,000+'X')

CASH & MKT SEC

NI / SALES

TEREST RATE
increases.

ENERATED

ENERATED
ENERATED

ES OUTSTANDING
ARE OUTSTANDING
DS GENERATED / BVPS
ES RETIRED
ES OUTSTANDING

DS GENERATED / MVPS
ES RETIRED
ES OUTSTANDING

UITY MULTIPLIER

TEREST RATE
H = NI / NET WORTH

PAT + TAX

NI / SALES
ATING EXP - EBIT

EBT RATIO

VER = SALES / TA
OD = A/R SALES PER DAY

ASSETS - COMMON STOCK