River Rat Inc. (RRI) provided you with the following financial information:
River Rat Inc.
Combined Statement of Income and Retained Earnings
For the Year Ended December 31, 2017
Sales 1,200,000
Variable costs 450,000
Contribution margin 750,000
Fixed costs 525,000
Earnings before interest and taxes 225,000
Interest expense 75,000
Earnings before taxes 150,000
Tax expense 60,000
Net income 90,000
Opening retained earnings 280,000
Less: Dividends (100,000)
Closing retained earnings 270,000
Throughout the year RRI had 60,000 common shares and 10,000 preferred shares outstanding. The
preferred shares pay an annual dividend of $2, with the balance of the dividend being paid to the
common shareholders.
a) Calculate the EPS for RRI.
b) If RRI common shares sell for $12.50 per share, what is the P/E ratio?
c) Calculate RRIs Degree of Operating Leverage
d) Calculate RRIs Degree of Financial Leverage
e) Calculate RRIs Degree of Combined Leverage
,f) Using your answer to part e, if Sales were to increase by $300,000 by how much would net
income increase? (you get 0 if you just recreate the income statement)
g) Calculate the break-even point in $. (Assume that interest is a fixed cost
, Norman Co.
Income Statement
For the Year Ended December 31, 2017
Sales (all on credit) 6,500,000
Cost of goods sold 3,575,000
Gross Margin 2,925,000
Operating expenses 1,375,000
Earnings before interest and taxes 1,550,000
Interest expense 450,000
Earnings before taxes 1,100,000
Tax expense 440,000
Net income 660,000
Norman Co.
Balance Sheet
As at December 31, 2017
Cash 70,000
Accounts receivable 310,000
Inventory 520,000
Total current assets 900,000
Property, plant and equipment (net) 2,700,000
Total assets 3,600,000
Accounts payable 230,000
Accrued expenses 90,000
Total current liabilities 320,000
Long term loan payable 980,000
Total liabilities 1,300,000
Common stock 900,000
Retained earnings 1,400,000
Total liabilities and shareholders equity 3,600,000
, Using the financial statements for Norman Co. on the preceding page, calculate the following financial
statement ratios and indicate what they would be used for (i.e. who would be interested in them):
a) Profit margin
b) Receivables turnover
c) Current ratio
d) Debt to total asset
e) Average collection period
f) Return on equity
g) Quick ratio
h) Inventory turnover
i) Return on assets
j) Times interest earned
River Rat Inc.
Combined Statement of Income and Retained Earnings
For the Year Ended December 31, 2017
Sales 1,200,000
Variable costs 450,000
Contribution margin 750,000
Fixed costs 525,000
Earnings before interest and taxes 225,000
Interest expense 75,000
Earnings before taxes 150,000
Tax expense 60,000
Net income 90,000
Opening retained earnings 280,000
Less: Dividends (100,000)
Closing retained earnings 270,000
Throughout the year RRI had 60,000 common shares and 10,000 preferred shares outstanding. The
preferred shares pay an annual dividend of $2, with the balance of the dividend being paid to the
common shareholders.
a) Calculate the EPS for RRI.
b) If RRI common shares sell for $12.50 per share, what is the P/E ratio?
c) Calculate RRIs Degree of Operating Leverage
d) Calculate RRIs Degree of Financial Leverage
e) Calculate RRIs Degree of Combined Leverage
,f) Using your answer to part e, if Sales were to increase by $300,000 by how much would net
income increase? (you get 0 if you just recreate the income statement)
g) Calculate the break-even point in $. (Assume that interest is a fixed cost
, Norman Co.
Income Statement
For the Year Ended December 31, 2017
Sales (all on credit) 6,500,000
Cost of goods sold 3,575,000
Gross Margin 2,925,000
Operating expenses 1,375,000
Earnings before interest and taxes 1,550,000
Interest expense 450,000
Earnings before taxes 1,100,000
Tax expense 440,000
Net income 660,000
Norman Co.
Balance Sheet
As at December 31, 2017
Cash 70,000
Accounts receivable 310,000
Inventory 520,000
Total current assets 900,000
Property, plant and equipment (net) 2,700,000
Total assets 3,600,000
Accounts payable 230,000
Accrued expenses 90,000
Total current liabilities 320,000
Long term loan payable 980,000
Total liabilities 1,300,000
Common stock 900,000
Retained earnings 1,400,000
Total liabilities and shareholders equity 3,600,000
, Using the financial statements for Norman Co. on the preceding page, calculate the following financial
statement ratios and indicate what they would be used for (i.e. who would be interested in them):
a) Profit margin
b) Receivables turnover
c) Current ratio
d) Debt to total asset
e) Average collection period
f) Return on equity
g) Quick ratio
h) Inventory turnover
i) Return on assets
j) Times interest earned
