Exercise 3: Debt/Coverage Ratios (“Helen Wiseman”) Complete this exercise from the text (pp. 167-168). [a sаwith company require any CACal Cas How At year: yes, nowmuch?3 Analyze financial statements by using meaningful ratios.EXERCISE 3: DEBT/COVERAGE RATIOSHelen Wiseman, owner of a convenience store, is meeting her banker and hopes toincrease her working capital loan. She figures that an additional loan would increaseher finance costs by an extra $10,000. Before seeing her banker, she asks her accoun-tant to determine whether she would have difficulty servicing her debt with theadditional finance costs.With the following information, calculate the company's TIE ratio and fixed-chargescoverage ratio. If you were the banker, would you approve the loan? Why or why not?NELCopyright 2013 Cengige Learning. All Rights Reserved. May not be copied, wanned, or duplicated in whole or in part. Due to electronic rights, some third party content may be suppressed from the elok andereChapters) Edital reviewdeemed that any suppressed content does not materially affect the overall learning experience. Cengage Leaming reserves the right to remove additional content at any time it suoquent rights restrictions require168 CHAPTER 4 Financial Statement AnalysisStatement of Income191Revenue$ 600,000(200,000)Cost of salesGross profit400,000ExpensesSales salaries(150,000)Rent(20,000)Office salaries(90,000)Advertising(23,000)Finance costs(30,000)Total expenses(313,000)Profit before taxes87,000Income tax expense(25,000)Profit for the year$ 62,000EXERCISE 4: USING FINANCIAL RATIOS TO CALCULATE CASH FLOWPROJECTIONSAfter being in business for six years, Graham Mason, owner of a small retail store, isconsidering buying a new information system that would provide him with betteroperating and financial information. Graham feels that the new system would givehim better control over his inventories so that he would be able to manage his pur-chases more wisely. He is also interested in renovating his store.After going through some detailed calculations, he determines that he would haveto invest around $250,000 in early January 2014. Graham is considering borrowingsome money from the bank. However, before meeting his banker, he asks his accoun-tant to figure out how much cash he could squeeze from his operations (internally)to help him finance his two projects.Graham feels that he can improve his average collection period to 40 days and turnhis inventory three times a year by December 31, 2013 (industry averages). With thefollowing partial information, calculate how much cash Graham could raise internallyby December 2013.Partial Statement of Financial PositionAs at December 31, 2013(in S)Inventories200,000Trade and other payables150,000Trade receivables100,000Notes payable50,00020,000Future taxes payable50,000CashTotal320,000Total250,000Copyright 2013 Caps Learning. All Rights Reserved. May the copied, and, or duplicatest, in whole or in part. Due to electric rights, we third party content may be apped from the eilook araktedeemed that any suppressed content does not materially affect the overall learning experience. Cengage Leaming reserves the right inre aditional content at any time if sequent rights restriLearning Exercises 169↑U7:

Times Interest Earned (TIE) ratio and Fixed-charge coverage ratios are the ratios used by analysts…

EXERCISE 3: DEBT/COVERAGE RATIOS Helen Wiseman, owner of a convenience store, is meeting her banker and hopes to increase her working capital loan. She figures that an additional loan would increase her finance costs by an extra $10,000. Before seeing her banker, she asks her accoun- tant to determine whether she would have difficulty servicing her debt with the additional finance costs. With the following information, calculate the company's TIE ratio and fixed-charges coverage ratio. If you were the banker, would you approve the loan? Why or why not? hes Reserved. May not be copied, wanned, or deplicated, in whole or in part. Due to electronic rights, see third party content may be rappressed from the ellion and/or Chapters) are content does not materially affect the overall leaming experience. Cengage Leaming reserves the right to remove addual content at any time if subsequent nghis restrictions require t Financial Statement Analysis Statement of Income Revenue $ 600,000 Cost of sales Gross profit 400,000 Expenses Sales salaries Rent Office salaries Advertising Finance costs Total expenses (313,000) 87,000 Profit before taxes Income tax expense (25,000) Profit for the year (200,000) (150,000) (20,000) (90,000) (23,000) (30,000) $ 62,000 191

10th Edition

ISBN:9781259964947

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Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q