Question 1

Last year Swensen Corp. had sales of $303,225, operating costs of $267,500, and year-end assets of $195,000. The debt-to-total-assets ratio was 27%, the interest rate on the debt was 8.2%, and the firm's tax rate was 37%. The new CFO wants to see how the ROE would have been affected if the firm had used a 45% debt ratio. Assume that sales and total assets would not be affected, and that the interest rate and tax rate would both remain constant. By how much would the ROE change in response to the change in the capital structure?

Accepted Answer

A)   2.08%
B)   2.32%
C)   2.57%
D)   2.86%
E)   3.14%F) D) and E)
G) C) and E)

Question 2

Companies Heidee and Leaudy have the same total assets, sales, operating costs, and tax rates, and they pay the same interest rate on their debt. However, company Heidee has a higher debt ratio. Which of the following statements is CORRECT?

Accepted Answer

A)   if the interest rate the companies pay on their debt is less than their basic earning power (bep) , then company heidee will have the higher roe.
B)   given this information, leaudy must have the higher roe.
C)   company leaudy has a higher basic earning power ratio (bep) .
D)   company heidee has a higher basic earning power ratio (bep) .
E)   if the interest rate the companies pay on their debt is more than their basic earning power (bep) , then company heidee will have the higher roe.F) B) and C)
G) B) and E)

Question 3

Suppose firms follow similar financing policies, face similar risks, have equal access to capital, and operate in competitive product and capital markets. Under these conditions, then firms that have high profit margins will tend to have high asset turnover ratios, and firms with low profit margins will tend to have low turnover ratios.

Accepted Answer

A) True 
 B)False

Question 4

Orono Corp.'s sales last year were $435,000, its operating costs were $362,500, and its interest charges were $12,500. What was the firm's times interest earned (TIE)  ratio?

Accepted Answer

A)   4.72
B)   4.97
C)   5.23
D)   5.51
E)   5.80F) B) and D)
G) A) and C)

Question 5

Other things held constant, which of the following alternatives would increase a company's cash flow for the current year?

Accepted Answer

A)   increase the number of years over which fixed assets are depreciated for tax purposes.
B)   pay down the accounts payables.
C)   reduce the days' sales outstanding (dso)  without affecting sales or operating costs.
D)   pay workers more frequently to decrease the accrued wages balance.
E)   reduce the inventory turnover ratio without affecting sales or operating costs.F) A) and C)
G) B) and D)

Question 6

Heidee Corp. and Leaudy Corp. have identical assets, sales, interest rates paid on their debt, tax rates, and EBIT. However, Heidee uses more debt than Leaudy. Which of the following statements is CORRECT?

Accepted Answer

A)   heidee would have the higher net income as shown on the income statement.
B)   without more information, we cannot tell if heidee or leaudy would have a higher or lower net income.
C)   heidee would have the lower equity multiplier for use in the dupont equation.
D)   heidee would have to pay more in income taxes.
E)   heidee would have the lower net income as shown on the income statement.F) C) and E)
G) A) and B)

Question 7

Which of the following statements is CORRECT?

Accepted Answer

A)   all else equal, increasing the debt ratio will increase the roa.
B)   the use of debt financing will tend to lower the basic earning power ratio, other things held constant.
C)   a firm that employs financial leverage will have a higher equity multiplier than an otherwise identical firm that has no debt in its capital structure.
D)   if two firms have identical sales, interest rates paid, operating costs, and assets, but differ in the way they are financed, the firm with less debt will generally have the higher expected roe.
E)   holding bonds is better than holding stock for investors because income from bonds is taxed on a more favorable basis than income from stock.F) A) and D)
G) C) and D)

Question 8

Lincoln Industries' current ratio is 0.5. Considered alone, which of the following actions would increase the company's current ratio?

Accepted Answer

A)   use cash to reduce long-term bonds outstanding.
B)   borrow using short-term notes payable and use the cash to increase inventories.
C)   use cash to reduce accruals.
D)   use cash to reduce accounts payable.
E)   use cash to reduce short-term notes payable.F) A) and D)
G) B) and D)

Question 9

Which of the following statements is CORRECT?

Accepted Answer

A)   if a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days' sales outstanding will decline.
B)   if a security analyst saw that a firm's days' sales outstanding (dso)  was higher than the industry average and was also increasing and trending still higher, this would be interpreted as a sign of strength.
C)   if a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days' sales outstanding (dso)  will increase.
D)   there is no relationship between the days' sales outstanding (dso)  and the average collection period (acp) . these ratios measure entirely different things.
E)   a reduction in accounts receivable would have no effect on the current ratio, but it would lead to an increase in the quick ratio.F) A) and B)
G) A) and D)

Question 10

Ratio analysis involves analyzing financial statements in order to appraise a firm's financial position and strength.

Accepted Answer

A) True 
 B)False

Question 11

It is appropriate to use the fixed assets turnover ratio to appraise firms' effectiveness in managing their fixed assets if and only if all the firms being compared have the same proportion of fixed assets to total assets.

Accepted Answer

A) True 
 B)False

Question 12

Stewart Inc.'s latest EPS was $3.50, its book value per share was $22.75, it had 215,000 shares outstanding, and its debt-to-assets ratio was 46%. How much debt was outstanding?

Accepted Answer

A)   $3,393,738
B)   $3,572,356
C)   $3,760,375
D)   $3,958,289
E)   $4,166,620F) A) and C)
G) B) and E)

Question 13

The times-interest-earned ratio is one, but not the only, indication of a firm's ability to meet its long-term and short-term debt obligations.

Accepted Answer

A) True 
 B)False

Question 14

Pettijohn Inc.
The balance sheet and income statement shown below are for Pettijohn Inc. Note that the firm has no amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over.
 
-Refer to the data for Pettijohn Inc.What is the firm's ROE?

Accepted Answer

A)   8.54%
B)   8.99%
C)   9.44%
D)   9.91%
E)   10.41%F) B) and E)
G) A) and D)

Question 15

Last year Rosenberg Corp. had $195,000 of assets, $18,775 of net income, and a debt-to-total-assets ratio of 32%. Now suppose the new CFO convinces the president to increase the debt ratio to 48%. Sales and total assets will not be affected, but interest expenses would increase. However, the CFO believes that better cost controls would be sufficient to offset the higher interest expense and thus keep net income unchanged. By how much would the change in the capital structure improve the ROE?

Accepted Answer

A)   4.36%
B)   4.57%
C)   4.80%
D)   5.04%
E)   5.30%F) None of the above
G) A) and E)

Question 16

Considered alone, which of the following would increase a company's current ratio?

Accepted Answer

A)   an increase in accounts payable.
B)   an increase in net fixed assets.
C)   an increase in accrued liabilities.
D)   an increase in notes payable.
E)   an increase in accounts receivable.F) B) and C)
G) C) and E)

Question 17

Hutchinson Corporation has zero debtσit is financed only with common equity. Its total assets are $410,000. The new CFO wants to employ enough debt to bring the debt/assets ratio to 40%, using the proceeds from the borrowing to buy back common stock at its book value. How much must the firm borrow to achieve the target debt ratio?

Accepted Answer

A)   $155,800
B)   $164,000
C)   $172,200
D)   $180,810
E)   $189,851F) A) and B)
G) C) and E)

Question 18

Profitability ratios show the combined effects of liquidity, asset management, and debt management on operating results.

Accepted Answer

A) True 
 B)False

Question 19

Emerson Inc.'s would like to undertake a policy of paying out 45% of its income. Its latest net income was $1,250,000, and it had 225,000 shares outstanding. What dividend per share should it declare?

Accepted Answer

A)   $2.14
B)   $2.26
C)   $2.38
D)   $2.50
E)   $2.63F) None of the above
G) All of the above

Question 20

Companies A and C each reported the same earnings per share (EPS) , but Company A's stock trades at a higher price. Which of the following statements is CORRECT?

Accepted Answer

A)   company a trades at a higher p/e ratio.
B)   company a probably has fewer growth opportunities.
C)   company a is probably judged by investors to be riskier.
D)   company a must have a higher market-to-book ratio.
E)   company a must pay a lower dividend.F) None of the above
G) A) and B)

Exam 7: Analysis of Financial Statements

It is appropriate to use the fixed assets turnover ratio to appraise firms' effectiveness in managing their fixed assets if and only if all the firms being compared have the same proportion of fixed assets to total assets.

Correct Answer
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Orono Corp.'s sales last year were $435,000, its operating costs were $362,500, and its interest charges were $12,500. What was the firm's times interest earned (TIE) ratio?

Correct Answer
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Profitability ratios show the combined effects of liquidity, asset management, and debt management on operating results.

Correct Answer
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Considered alone, which of the following would increase a company's current ratio?

Correct Answer
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Emerson Inc.'s would like to undertake a policy of paying out 45% of its income. Its latest net income was $1,250,000, and it had 225,000 shares outstanding. What dividend per share should it declare?

Correct Answer
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Correct Answer
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Correct Answer
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Companies A and C each reported the same earnings per share (EPS) , but Company A's stock trades at a higher price. Which of the following statements is CORRECT?

Correct Answer
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Ratio analysis involves analyzing financial statements in order to appraise a firm's financial position and strength.

Correct Answer
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Stewart Inc.'s latest EPS was $3.50, its book value per share was $22.75, it had 215,000 shares outstanding, and its debt-to-assets ratio was 46%. How much debt was outstanding?

Correct Answer
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Correct Answer
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Heidee Corp. and Leaudy Corp. have identical assets, sales, interest rates paid on their debt, tax rates, and EBIT. However, Heidee uses more debt than Leaudy. Which of the following statements is CORRECT?

Correct Answer
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Companies Heidee and Leaudy have the same total assets, sales, operating costs, and tax rates, and they pay the same interest rate on their debt. However, company Heidee has a higher debt ratio. Which of the following statements is CORRECT?

Correct Answer
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The times-interest-earned ratio is one, but not the only, indication of a firm's ability to meet its long-term and short-term debt obligations.

Correct Answer
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Correct Answer
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Correct Answer
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Lincoln Industries' current ratio is 0.5. Considered alone, which of the following actions would increase the company's current ratio?

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Other things held constant, which of the following alternatives would increase a company's cash flow for the current year?

Correct Answer
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Exam 7: Analysis of Financial Statements

It is appropriate to use the fixed assets turnover ratio to appraise firms' effectiveness in managing their fixed assets if and only if all the firms being compared have the same proportion of fixed assets to total assets.

Correct AnswerverifiedShow Answer

Orono Corp.'s sales last year were $435,000, its operating costs were $362,500, and its interest charges were $12,500. What was the firm's times interest earned (TIE) ratio?

Correct AnswerverifiedShow Answer

Profitability ratios show the combined effects of liquidity, asset management, and debt management on operating results.

Correct AnswerverifiedShow Answer

Considered alone, which of the following would increase a company's current ratio?

Correct AnswerverifiedShow Answer

Emerson Inc.'s would like to undertake a policy of paying out 45% of its income. Its latest net income was $1,250,000, and it had 225,000 shares outstanding. What dividend per share should it declare?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Companies A and C each reported the same earnings per share (EPS) , but Company A's stock trades at a higher price. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Ratio analysis involves analyzing financial statements in order to appraise a firm's financial position and strength.

Correct AnswerverifiedShow Answer

Stewart Inc.'s latest EPS was $3.50, its book value per share was $22.75, it had 215,000 shares outstanding, and its debt-to-assets ratio was 46%. How much debt was outstanding?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Heidee Corp. and Leaudy Corp. have identical assets, sales, interest rates paid on their debt, tax rates, and EBIT. However, Heidee uses more debt than Leaudy. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Companies Heidee and Leaudy have the same total assets, sales, operating costs, and tax rates, and they pay the same interest rate on their debt. However, company Heidee has a higher debt ratio. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

The times-interest-earned ratio is one, but not the only, indication of a firm's ability to meet its long-term and short-term debt obligations.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Lincoln Industries' current ratio is 0.5. Considered alone, which of the following actions would increase the company's current ratio?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Other things held constant, which of the following alternatives would increase a company's cash flow for the current year?

Correct AnswerverifiedShow Answer

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