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Exam 3: Analysis of financial statements

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Question 1

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Bostian, Inc.has total assets of $625, 000.Its total debt outstanding is $185, 000.The Board of Directors has directed the CFO to move towards a debt-to-assets ratio of 55%.How much debt must the company add or subtract to achieve the target debt ratio?

A) $158, 750
B) $166, 688
C) $175, 022
D) $183, 773
E) $192, 962

F) B) and C)
G) C) and E)

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Question 2

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Debt management ratios show the extent to which a firm's managers are attempting to magnify returns on owners' capital through the use of financial leverage.

A) True
B) False

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Question 3

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Companies Heidee and Leaudy have the same tax rate, sales, total assets, and basic earning power.Both companies have positive net incomes.Company Heidee has a higher debt ratio and, therefore, a higher interest expense.Which of the following statements is CORRECT?

If a firm finances with only debt and common equity, and if its equity multiplier is 3.0, then its debt ratio must be 0.667.

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

Last year Mason Inc.had a total assets turnover of 1.33 and an equity multiplier of 1.75.Its sales were $195, 000 and its net income was $10, 549.The CFO believes that the company could have operated more efficiently, lowered its costs, and increased its net income by $5, 250 without changing its sales, assets, or capital structure.Had it cut costs and increased its net income in this amount, by how much would the ROE have changed?

Which of the following statements is CORRECT?

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

Muscarella Inc.has the following balance sheet and income statement data: The new CFO thinks that inventories are excessive and could be lowered sufficiently to cause the current ratio to equal the industry average, 2.70, without affecting either sales or net income.Assuming that inventories are sold off and not replaced to get the current ratio to the target level, and that the funds generated are used to buy back common stock at book value, by how much would the ROE change?

High current and quick ratios always indicate that a firm is managing its liquidity position well.

Exhibit 3.1 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 Exhibit 3.1.What is the firm's total assets turnover?

Exhibit 3.1 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 Exhibit 3.1.What is the firm's profit margin?

Harper Corp.'s sales last year were $395, 000, and its year-end receivables were $42, 500.Harper sells on terms that call for customers to pay 30 days after the purchase, but many delay payment beyond Day 30.On average, how many days late do customers pay? Base your answer on this equation: DSO - Allowed credit period = Average days late, and use a 365-day year when calculating the DSO.

Which of the following statements is CORRECT?

Significant variations in accounting methods among firms make meaningful ratio comparisons between firms more difficult than if all firms used similar accounting methods.

Lofland's has $20 million in current assets and $10 million in current liabilities, while Smaland's current assets are $10 million versus $20 million of current liabilities.Both firms would like to "window dress" their end-of-year financial statements, and to do so each plans to borrow $10 million on a short-term basis and to then hold the borrowed funds in their cash accounts.Which of the statements below best describes the results of these transactions?

An investor is considering starting a new business.The company would require $475, 000 of assets, and it would be financed entirely with common stock.The investor will go forward only if she thinks the firm can provide a 13.5% return on the invested capital, which means that the firm must have an ROE of 13.5%.How much net income must be expected to warrant starting the business?

Suppose Firms A and B have the same amount of assets, pay the same interest rate on their debt, have the same basic earning power (BEP), and have the same tax rate.However, Firm A has a higher debt ratio.If BEP is greater than the interest rate on debt, Firm A will have a higher ROE as a result of its higher debt ratio.

Exhibit 3.1 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 Exhibit 3.1.What is the firm's debt-to-assets ratio?

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