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    Tutorial 7

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    Tutorial 7

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    Tutorial 7

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    of 3

    University of Tunis

    Tunis Business School


    Principles of Finance
    Tutorial n°7 : Financial Statement Analysis
    Professor: Dr. Ridha Esghaier
    (Spring 2022)

    Multiple Choice Questions:

    Q1. A high current ratio is always a good indication of a well-managed liquidity position
    a. True b. False

    Q2. In order to assess a company’s ability to fulfill its long-term obligations, an analyst would most likely
    examine:
    a. activity ratios.
    b. liquidity ratios.
    c. solvency ratios.
    d. profitability ratios.

    Q3. Which of the following is NOT CORRECT?


    a. a Low inventory turnover ratio suggests that firm might have old inventory or its control might be poor
    b. The equity multiplier can be expressed as 1 – (Debt/Assets)
    c. a high DSO means that firm collects on sales is too slowly
    d. Firms with low debt ratios are less risky, but also forgo the opportunity to leverage up their return on equity
    e. Stockholders may want more leverage because it magnifies expected earnings

    Q4. Which of the following statements is most correct?


    a. Having a high current ratio is always a good indication that a firm is managing its liquidity position well.
    b. A decline in the inventory turnover ratio suggests that the firm’s liquidity position is improving.
    c. If a firm’s times-interest-earned (TIE) ratio is relatively high, then this is one indication that the firm
    should be able to meet its debt obligations.
    d. Since ROA measures the firm’s effective utilization of assets (without considering how these assets are
    financed), two firms with the same EBIT must have the same ROA.
    e. If, through specific managerial actions, a firm has been able to increase its ROA, then, because of the
    fixed mathematical relationship between ROA and ROE, (ROE = ROA × Assets/Equity) it must also have
    increased its ROE.

    Q5. Which of the following statements is False?


    a. The use of debt lower the ROA but also could raise the ROE
    b. If a company is financed only with common equity, the return on assets (ROA) and the return on equity
    (ROE) are the same
    c. Higher M/B ratios are generally associated with firms with relatively high rates of ROE
    d. Generally, firms with high profit margins have high asset turnover ratios and firms with low profit margins
    have low turnover ratios; this result is exactly as predicted by the extended Du Pont equation.
    e. The Basic Earning Power ratio is useful for comparing firms with different tax situations and different
    degrees of financial leverage

    Page | 1
    Q6.

    Based only on the information above, the most appropriate conclusion is that, over the period FY13 to FY15,
    the company’s:
    a. net profit margin and financial leverage have decreased.
    b. net profit margin and financial leverage have increased.
    c. net profit margin has decreased but its financial leverage has increased.

    Exercise n°1: Target Debt ratio


    A company’s assets are $500,000, and its total debt outstanding is $200,000. The new CFO (Chief
    Financial Officer) wants to employ a debt ratio of 60%. How much debt must the company add or
    subtract to achieve the target debt ratio?

    Exercise n°2: Return on Assets & return on Equity


    An investor is considering starting a new business. The company would require $500,000 of assets
    and would be financed with 30% debt and 70% common equity. The investor will go forward only if
    she thinks the firm can provide a 15% return on equity.
    a. How much net income must be expected to warrant starting the business?
    b. What would be the expected ROA of the company?
    Exercise n°3: Market value ratios
    A company’s has 200,000 common equity with total book value of $4,000,000. Its stock price at
    the end of the last year was $30.5 and its earnings per share for the year were $2.5. What were its
    Price earnings ratio and its market to book ratio?
    Exercise n°4: EPS, DPS, and Payout
    A company’s latest net income was $1 million, and it had 200,000 shares outstanding. The
    company wants to pay out 40% of its income. Compute the earnings per share and the dividend per
    share that the company should declare.
    Exercise n°5: book value and debt ratio
    A company’s book value per share was $20, it had 200,000 shares outstanding, and its debt ratio
    was 20%. How much debt was outstanding?
    Exercise n°6: Profit Margin and ROE
    A company has $500,000 of assets, and it uses only common equity capital (zero debt). Its sales
    for the last year were $600,000, and its net income after taxes was $25,000. Stockholders recently
    voted in a new management team that has promised to lower costs and get the ROE up to 15%.
    a. Calculate the current profit margin and current ROE of the firm.
    b. What profit margin would the company need in order to achieve the 15% ROE, holding
    everything else constant?
    Exercise n°7: The Du Pont System
    During the latest year a corporation had sales of $300,000 and a net income of $20,000, and its
    year-end assets were $200,000. The firm's debt ratio was 40%.
    Based on the Du Pont equation, what was the firm's Return on Equity?
    Page | 2
    Exercise n°8: Debt management Ratios
    A Company has $12 million in total assets. Its basic earning power (BEP) is 15%, and its times-
    interest-earned ratio (TIE) is 4. The company’s depreciation and amortization expense totals $1.28
    million. It has $0.8 million in lease payments and $0.4 million must go towards principal payments on
    outstanding loans and long-term debt. What is its EBITDA coverage ratio?
    Exercise n°9: Du Pont Equation: Effect of increasing debt ratio on the ROE
    A company’s ROE last year was 2.5%, but its management has developed a new operating plan
    designed to improve things. The new plan calls for a total asset of $5,000 that would be financed with
    50% debt, which will result in interest charges of $240 per year. Management projects an EBIT of $800
    on sales of $8,000. Under these conditions, the federal-plus-state tax rate will be 40%. If the changes
    are made, what return on equity will the company earn?

    Page | 3

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