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 pre-tax income. The difference between EBIT and taxable income must be the interest expense. Use this procedure to work some of the other problems.)

Analysis of Financial

Statements?

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 Haslam’s profit margin and liabilities-to-assets ratio. Suppose half its liabilities

are in the form of debt. Calculate the debt-to-assets ratio.

Times-Interest-

Earned Ratio

The Morris Corporation has $600,000 of debt outstanding, and it pays an interest rate of

8% annually. Morris’s 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 Morris’s

TIE ratio?

(1.)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?

(2.)Discuss the practice problems completed 

What specifically will you take away from this module? 

(a.)   What your experience working through the problems

(b.) Which of the problems was the least challenging and which one was the most challenging?