Financial Statements, Cash

| June 11, 2016

Chapter 2 Problems


Please show all work for each problem.

Financial Statements, Cash
Flow, and Taxes
Income Statement
Molteni Motors Inc. recently reported $6 million of net income. Its EBIT was $13 million,
and its tax rate was 40%. What was its interest expense? (Hint: Write out the headings for
an income statement, and then fill in the known values. Then divide $6 million net
income by 1 T = 0.6 to find the pre­tax income. The difference between EBIT and
taxable income must be the interest expense. Use this procedure to work some of the
other problems.)

Chapter 3 Problems


Complete problems 8 and 10 in chapter 3 of the textbook.
Please show all work for each problem.

Analysis of Financial
Profit Margin and
Debt Ratio
Assume you are given the following relationships for the Haslam Corporation:
Sales/total assets 1.2
Return on assets (ROA) 4%
Return on equity (ROE) 7%
Calculate Haslams profit margin and liabilities­to­assets ratio. Suppose half its liabilities
are in the form of debt. Calculate the debt­to­assets ratio.
Earned Ratio
The Morris Corporation has $600,000 of debt outstanding, and it pays an interest rate of
8% annually. Morriss annual sales are $3 million, its average tax rate is 40%, and its net
profit margin on sales is 3%. If the company does not maintain a TIE ratio of at least 5 to 1,
then its bank will refuse to renew the loan and bankruptcy will result. What is Morriss
TIE ratio?

Your stockbroker suggests you concentrate your portfolio on stocks with low P/E ratios.
She explains that these firms are likely to be out of favor with investors because they

have a low price relative to their current earnings. Is this necessarily a good investment
practice? Why or why not?

Discuss the practice problems completed
(a.) What specifically will you take away from this module?
(b.) What your experience working through the problems
(c.) Which of the problems was the least challenging and which one was the most challenging?

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