Financial Reporting And Analysis - Financial Reporting And Analysis Section 2
56. The current ratio for XYZ industry is 3.00. Data for a firm in XYZ industry is presented below:
| As at June 30 | $‘000s |
| Cash | 800 |
| Accounts receivable | 700 |
| Inventory | 2,500 |
| Accounts payable | 500 |
| Taxes payable | 300 |
| Installment loan payable,due in two equal annual payments on Dec 31 | 800 |
The firm’s current ratio relative to that of the industry is best described as being:
- Option : C
- Explanation : Current ratio = Current assets / Current liabilities The higher the current ratio, the more liquid the company. Thus, with a current ratio of 3.33 (4,000 ÷ 1,200), the company is more liquid than the industry, with a current ratio of 3.00.
57. The financial ratios of a company are given below:
| Operating profit margin | 23.8% |
| Net profit margin | 14% |
| Total asset turnover | 0.9 |
| Return on assets | 12.6% |
| Financial leverage | 1.88 |
| Debt to equity | 0.88 |
The company’s return on equity (ROE) is closest to:
58. Selected information for a company and the common size data for its industry are provided below:
| Company (£) | Common Size IndustryData (% of sales) | |
| EBIT | 100,000 | 22.0 |
| Pretax profit | 85,500 | 18.2 |
| Net Income | 74,200 | 13.5 |
| Sales | 350,000 | 100 |
| Total assets | 650,000 | 150 |
| Total equity | 400,000 | 65.5 |
| ROE | 18.6% | 20.6% |
The company’s inferior ROE compared to that of the industry is most likely
due to its:
due to its:
- Option :
- Explanation : As shown below, the company’s financial leverage is lower that the industry’s leverage. The low ROE of the company is most likely because it has low financial leverage.
Company Industry Tax burden ratio 74.2/85.5 = 0.87 13.5/18.2 = 0.74 Financial leverage 650/400 = 1.625 150/65.5 = 2.29 Interest burden ratio 85.5/100 = 0.855 18.2/22 = 0.83
59. The following financial data is available for a company:
| ROA | 5.6% |
| Total asset turnover | 2.12 |
| Financial leverage | 1.89 |
| Dividend payout ratio | 52.3% |
The company’s sustainable growth rate is closest to:
- Option : B
- Explanation : Sustainable growth rate = retention ratio (b) × ROE. b = 1 - Dividend payout ratio = 1 - 0.523 = 0.477 ROE = ROA x Financial leverage = .056 x 1.89 = 0.10584 Sustainable growth rate = b x ROE = 0.477 x 0.10584 = 0.0505 = 5.05%.
- Option : C
- Explanation : A computer generated analysis based on probability models for the factors that drive outcomes is known as simulation.
