Qs 1: Company currently has long-term debt of 1000 and equity of 1000. How much equity should the company issue in order to reduce the long-term debt ratio to 25%?

Qs 2: Company currently has EBIT of 100 and interest payments of 50. To what extent can EBIT fall so that Times Interest Earned is 1.0?

Qs 3: Describe two ways in which company can increase its net working capital to total asset ratio?

Qs 4: If the company’s cash balance increases by 500 but marketable securities decrease by 200 and account receivable remain the same with no change to current liabilities, what will happen to the quick ratio?

Qs 5: Suggest two ways in which Operating profit margin remains the same but net profit margin decreases?

Qs 6: Company already had 1000 in equity and issued 1000 worth of more equity during the year. Its profit increased from 250 to 500? What will happen to the firm’s ROE? (Average equity last year was 1000)

Qs 7: Company currently has long-term debt of 1000 and equity of 1000. How much long-term debt should the company issue in order to increase the long-term debt ratio to 75%?

Qs 8: Company’s current assets are 1000 and current liabilities are 500, while total assets stand at 5000. What happens to the net working capital to total asset ratio if current assets increase by 100 but current liabilities stays the same?

Qs 9: Company already has cash balance of 500, account receivables worth 500 and current liability at 800. Later company decides to borrow 500 as short-term loans and invest in marketable securities what will happen to the quick ratio?

Qs 10: Suggest in what situation Operating profit margin remains the same but net profit margin increases?

Qs 11: Company makes a constant profit each year and gives no cash dividends, what will happen to ROE over time?

Qs 12: Compute ROE and ROA for the company via Dupont Analysis and suggest ways in which company can boost its ROE and ROA.

Balance Sheet 2010 2009AssetsFixed Assets 4,000 4,000 Current Assets 500 600 Cash 600 400

5,100 5,000

Liabilities 2,500 2,800 Equity 2,600 2,300

5,100 5,100

Income Statement 2010 2009Sales 5,000 4,000 COGS 3,500 3,000 Gross Profit 1,500 1,000 Admin Expenses 700 400 EBIT 800 600 Interest Expense 200 200 Tax 300 400 Net Income 300 -

Qs 12: Use the following information to compute Additional Financing Needed for the company.

Income Statement 2010 2009Sales 6,000 5,000 COGS 4,800 4,000 Gross Profit 1,200 1,000 Other Expenses 240 200 Net Income 960 800 Dividend 480 400

Balance Sheet 2010 2009Assets 10,200 9,600

Liabilities 4,920 4,800 Equity 5,280 4,800

10,200 9,600

Qs 12: Use the following information to compute Working Capital requirement for the company.

– Projected Annual Sales = 1000,000 units

– Selling Price = PKR 3 per unit

– Carry inventory for 10 weeks

– Credit received from customer is 12 weeks

– Credit received from supplier is 8 weeks

– Profit Margin is 20%

– Contingency is 20% of Net Working Capital

– Calculate GWC, NWC and length of the Working Capital Cycle?

Formula Sheet:

Long-term debt ratio = Long-term debt / (long-term debt + equity)

Times Interest Earned = EBIT / Interest Payments

Cash Coverage Ratio = (EBIT + depreciation) / interest payments

Net working capital to total asset ratio = Net Working Capital / Total Assets

Quick Ratio = (Cash + Marketable Securities + Receivables) / Current Liabilities

Cash Ratio = (Cash + Marketable Securities) / (Current liabilities)

NWC Turnover = Sales / (Average Net working capital)

Average Collection Period = average receivables / average daily sales

Inventory Turnover Ratio = Cost of goods sold / average inventory

Day’s sales in inventory = (Average Inventory / Cost of Goods Sold) x 365

Net Profit Margin = Net Profit / Sales

Operating Profit Margin = EBIT / Sales

Gross Profit Margin = Gross Profit / Sales

Return on Asset = Net Income / average total assets

Return on Equity = Net Income / average equity

Payout Ratio = Dividends / Net Income

Plowback Ratio = 1 – Payout Ratio

P/E Ratio = Current Price per share / Earning per Share

Forecasted P/E Ratio = Current Price per Share / Forecasted Earning per share

Dividend Yield = Dividend per Share / Current Price per Share

Dividend Discount Model - Price per Share = Next yr’s dividend / (r-g)

Market to Book Ratio = Stock Price / Book Value per Share

Tobin’s Q = Market Value of Assets / estimated replacement cost

Dupont Analysis:

ROA = (Sales / Assets) x (Net Income / Sales)

ROE = (Assets / Equity) x (Sales / Assets) x (EBIT / Sales) x (Net Income / EBIT)

Economic Profit = (ROI – r) x Capital invested

Economic Value Added (EVA) = Income earned – (cost of capital x investment)

Additional Financing Needed = (A/S) x g x S – (L/S) x g x S – Net Margin x (1 + g) x S – D

Gross Working Capital = Total Current Assets

Net Working Capital = Current Assets – Current Liabilities