FINANCE: Please show all work for the three multiple choice questions.
(1). Peterson Packaging Corp. has a basic earning power of (BEP) of 9% on $9 billion of total assets, and its times interest earned (TIE) ratio is 3.0. Peterson’s depreciation and amortization expense totals $1 billion. It has $0.6 billion in lease payments and $0.3 billion must go towards principal payments on outstanding loans and long-term debt.
What is Peterson’s EBITDA coverage ratio? Explain your answer.
(2). Georgia Electric reported the following income statement and balance sheet for the previous year:
Cash $ 100,000
Accounts receivable 500,000
Current assets $1,600,000
Total debt $4,000,000
Net fixed assets 4,400,000 Total equity 2,000,000
Total assets $6,000,000 Total claims $6,000,000
Operating costs 1,600,000
Operating income (EBIT) $1,400,000
Taxable income (EBT) $1,000,000
Taxes (40%) 400,000
Net income $ 600,000
The company’s interest cost is 10%, so the company’s interest expense each year is 10% of its total debt.
While the company’s financial performance is quite strong, its CFO is always looking for ways to improve. The CFO has noticed that the company’s inventory turnover ratio is considerably weaker than the industry average, which is 6.0. As an exercise, the CFO asks what would the company’s ROE have been last year if the following had occurred:
The company maintained the same sales, but reduced inventories enough to achieve the industry average inventory turnover ratio.
Cash generated from the inventory reduction was used to reduce the company’s outstanding debt. So, the company’s total debt would have been $4 million less the freed-up cash from the improvement in inventory policy. (Assume equity does not change and all earnings are paid out as dividends.)
Under this scenario, what would have been the company’s ROE last year? Explain your answer.
(3). Below are the 2004 and 2005 year-end balance sheets for Kewell Boomerangs:
Cash $ 100,000 $ 85,000
Accounts receivable 432,000 350,000
Inventories 1,000,000 700,000
Total current assets $1,532,000 $1,135,000
Net fixed assets 3,000,000 2,800,000
Total assets $4,532,000 $3,935,000
Accounts payable $ 700,000 $ 545,000
Notes payable 800,000 900,000
Total current liabilities $1,500,000 $1,445,000
Long-term debt 1,200,000 1,200,000
Common stock 1,500,000 1,000,000
Retained earnings 332,000 290,000
Total common equity $1,832,000 $1,290,000
Total liabilities and equity $4,532,000 $3,935,000
Kewell Boomerangs has never paid a dividend on its common stock. Kewell issued $1,200,000 of long-term debt in 1997. This debt was non-callable and is scheduled to mature in 2027. As of the end of 2005, none of the principal on this debt has been repaid. Assume that 2004 and 2005 sales were the same in both years.
Which of the following statements is most correct? Explain your answer.
a. Kewell’s current ratio in 2005 was higher than it was in 2004.
b. Kewell’s inventory turnover ratio in 2005 was higher than it was in 2004.
c. Kewell’s debt ratio in 2005 was higher than it was in 2004.
d. Since retained earnings increased, the company must have paid no dividends.
e. Because fixed assets turnover increased slower than total assets, the total assets turnover is greater than the fixed assets turnover.
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