Question 1

Which of the following statements is CORRECT?

Accepted Answer

A)  Even though Firm A's current ratio exceeds that of Firm B, Firm B's quick ratio might exceed that of A. However, if A's quick ratio exceeds B's, then we can be certain that A's current ratio is also larger than B's. 
B)  Suppose a firm wants to maintain a specific TIE ratio. It knows the amount of its debt, the interest rate on that debt, the applicable tax rate, and its operating costs. With this information, the firm can calculate the amount of sales required to achieve its target TIE ratio. 
C)  Since the ROA measures the firm's effective utilization of assets without considering how these assets are financed, two firms with the same EBIT must have the same ROA. 
D)  Suppose all firms follow similar financing policies, face similar risks, have equal access to capital, and operate in competitive product and capital markets. However, firms face different operating conditions because, for example, the grocery store industry is different from the airline industry. Under these conditions, firms with high profit margins will tend to have high asset turnover ratios, and firms with low profit margins will tend to have low turnover ratios. 
E)  Klein Cosmetics has a profit margin of 5.0%, a total assets turnover ratio of 1.5 times, a zero debt ratio and therefore an equity multiplier of 1.0, and an ROE of 7.5%. The CFO recommends that the firm borrow money, use it to buy back stock, and raise the debt ratio to 50% and the equity multiplier to 2.0. She thinks that operations would not be affected, but interest on the new debt would lower the profit margin to 4.5%. This would probably not be a good move, as it would decrease the ROE from 7.5% to 6.5%. 
A)  Even though Firm A's current ratio exceeds that of Firm B, Firm B's quick ratio might exceed that of A. However, if A's quick ratio exceeds B's, then we can be certain that A's current ratio is also larger than B's. 
B)  Suppose a firm wants to maintain a specific TIE ratio. It knows the amount of its debt, the interest rate on that debt, the applicable tax rate, and its operating costs. With this information, the firm can calculate the amount of sales required to achieve its target TIE ratio. 
C)  Since the ROA measures the firm's effective utilization of assets without considering how these assets are financed, two firms with the same EBIT must have the same ROA. 
D)  Suppose all firms follow similar financing policies, face similar risks, have equal access to capital, and operate in competitive product and capital markets. However, firms face different operating conditions because, for example, the grocery store industry is different from the airline industry. Under these conditions, firms with high profit margins will tend to have high asset turnover ratios, and firms with low profit margins will tend to have low turnover ratios. 
E)  Klein Cosmetics has a profit margin of 5.0%, a total assets turnover ratio of 1.5 times, a zero debt ratio and therefore an equity multiplier of 1.0, and an ROE of 7.5%. The CFO recommends that the firm borrow money, use it to buy back stock, and raise the debt ratio to 50% and the equity multiplier to 2.0. She thinks that operations would not be affected, but interest on the new debt would lower the profit margin to 4.5%. This would probably not be a good move, as it would decrease the ROE from 7.5% to 6.5%.

Question 2

What is the firm's quick ratio?

Accepted Answer

A)  0.51 
B)  0.64 
C)  0.76 
D)  0.92 
E)  1.10 
A)  0.51 
B)  0.64 
C)  0.76 
D)  0.92 
E)  1.10

Question 3

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

Accepted Answer

A)  Company E probably has fewer growth opportunities. 
B)  Company E is probably judged by investors to be riskier. 
C)  Company E must have a higher market-to-book ratio. 
D)  Company E must pay a lower dividend. 
E)  Company E trades at a higher P/E ratio. 
A)  Company E probably has fewer growth opportunities. 
B)  Company E is probably judged by investors to be riskier. 
C)  Company E must have a higher market-to-book ratio. 
D)  Company E must pay a lower dividend. 
E)  Company E trades at a higher P/E ratio.

Question 4

Companies HD and LD are both profitable, and they have the same total assets (TA), Sales (S), return on assets (ROA), and profit margin (PM). However, Company HD has the higher debt ratio. Which of the following statements is CORRECT?

Accepted Answer

A)  Company HD has a lower total assets turnover than Company LD. 
B)  Company HD has a lower equity multiplier than Company LD. 
C)  Company HD has a higher fixed assets turnover than Company LD. 
D)  Company HD has a higher ROE than Company LD. 
E)  Company HD has a lower operating income (EBIT) than Company LD. 
A)  Company HD has a lower total assets turnover than Company LD. 
B)  Company HD has a lower equity multiplier than Company LD. 
C)  Company HD has a higher fixed assets turnover than Company LD. 
D)  Company HD has a higher ROE than Company LD. 
E)  Company HD has a lower operating income (EBIT) than Company LD.

Question 5

Which of the following statements is CORRECT?

Accepted Answer

A)  If one firm has a higher debt ratio than another, we can be certain that the firm with the higher debt ratio will have the lower TIE ratio, as that ratio depends entirely on the amount of debt a firm uses. 
B)  A firm's use of debt will have no effect on its profit margin. 
C)  If two firms differ only in their use of debt--i.e., they have identical assets, sales, operating costs, interest rates on their debt, and tax rates--but one firm has a higher debt ratio, the firm that uses more debt will have a lower profit margin on sales and a lower return on assets. 
D)  The debt ratio as it is generally calculated makes an adjustment for the use of assets leased under operating leases, so the debt ratios of firms that lease different percentages of their assets are still comparable. 
E)  If two firms differ only in their use of debt--i.e., they have identical assets, sales, operating costs, and tax rates--but one firm has a higher debt ratio, the firm that uses more debt will have a higher operating margin and return on assets. 
A)  If one firm has a higher debt ratio than another, we can be certain that the firm with the higher debt ratio will have the lower TIE ratio, as that ratio depends entirely on the amount of debt a firm uses. 
B)  A firm's use of debt will have no effect on its profit margin. 
C)  If two firms differ only in their use of debt--i.e., they have identical assets, sales, operating costs, interest rates on their debt, and tax rates--but one firm has a higher debt ratio, the firm that uses more debt will have a lower profit margin on sales and a lower return on assets. 
D)  The debt ratio as it is generally calculated makes an adjustment for the use of assets leased under operating leases, so the debt ratios of firms that lease different percentages of their assets are still comparable. 
E)  If two firms differ only in their use of debt--i.e., they have identical assets, sales, operating costs, and tax rates--but one firm has a higher debt ratio, the firm that uses more debt will have a higher operating margin and return on assets.

Question 6

Which of the following would, generally, indicate an improvement in a company's financial position, holding other things constant?

Accepted Answer

A)  The TIE declines. 
B)  The DSO increases. 
C)  The quick ratio increases. 
D)  The current ratio declines. 
E)  The total assets turnover decreases. 
A)  The TIE declines. 
B)  The DSO increases. 
C)  The quick ratio increases. 
D)  The current ratio declines. 
E)  The total assets turnover decreases.

Question 7

Faldo Corp sells on terms that allow customers 45 days to pay for merchandise. Its sales last year were $325,000, and its year-end receivables were $60,000. If its DSO is less than the 45-day credit period, then customers are paying on time. Otherwise, they are paying late. By how much are customers paying early or late? Base your answer on this equation: DSO - Credit Period = Days early or late, and use a 365-day year when calculating the DSO. A positive answer indicates late payments, while a negative answer indicates early payments.

Accepted Answer

A)  21.27 
B)  22.38 
C)  23.50 
D)  24.68 
E)  25.91 
A)  21.27 
B)  22.38 
C)  23.50 
D)  24.68 
E)  25.91

Question 8

A firm wants to strengthen its financial position. Which of the following actions would increase its quick ratio?

Accepted Answer

A)  Offer price reductions along with generous credit terms that would (1) enable the firm to sell some of its excess inventory and (2) lead to an increase in accounts receivable. 
B)  Issue new common stock and use the proceeds to increase inventories. 
C)  Speed up the collection of receivables and use the cash generated to increase inventories. 
D)  Use some of its cash to purchase additional inventories. 
E)  Issue new common stock and use the proceeds to acquire additional fixed assets. 
A)  Offer price reductions along with generous credit terms that would (1) enable the firm to sell some of its excess inventory and (2) lead to an increase in accounts receivable. 
B)  Issue new common stock and use the proceeds to increase inventories. 
C)  Speed up the collection of receivables and use the cash generated to increase inventories. 
D)  Use some of its cash to purchase additional inventories. 
E)  Issue new common stock and use the proceeds to acquire additional fixed assets.

Question 9

What is the firm's BEP?

Accepted Answer

A)  7.50% 
B)  7.90% 
C)  8.31% 
D)  8.73% 
E)  9.16% 
A)  7.50% 
B)  7.90% 
C)  8.31% 
D)  8.73% 
E)  9.16%

Question 10

What is the firm's market-to-book ratio?

Accepted Answer

A)  0.87 
B)  1.02 
C)  1.21 
D)  1.42 
E)  1.67 
A)  0.87 
B)  1.02 
C)  1.21 
D)  1.42 
E)  1.67

Question 11

One problem with ratio analysis is that relationships can sometimes be manipulated. For example, if our current ratio is greater than 1.5, then borrowing on a short-term basis and using the funds to build up our cash account would cause the current ratio to INCREASE.

Accepted Answer

A) True 
 B)False

Question 12

Wie Corp's sales last year were $315,000, and its year-end total assets were $355,000. The average firm in the industry has a total assets turnover ratio (TATO) of 2.4. The firm's new CFO believes the firm has excess assets that can be sold so as to bring the TATO down to the industry average without affecting sales. By how much must the assets be reduced to bring the TATO to the industry average, holding sales constant?

Accepted Answer

A)  $201,934 
B)  $212,563 
C)  $223,750 
D)  $234,938 
E)  $246,684 
A)  $201,934 
B)  $212,563 
C)  $223,750 
D)  $234,938 
E)  $246,684

Question 13

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

Accepted Answer

A)  Company HD has a lower equity multiplier. 
B)  Company HD has more net income. 
C)  Company HD pays more in taxes. 
D)  Company HD has a lower ROE. 
E)  Company HD has a lower times-interest-earned (TI
E)  ratio. 
A)  Company HD has a lower equity multiplier. 
B)  Company HD has more net income. 
C)  Company HD pays more in taxes. 
D)  Company HD has a lower ROE. 
E)  Company HD has a lower times-interest-earned (TI
E)  ratio.

Question 14

What is the firm's P/E ratio?

Accepted Answer

A)  12.0 
B)  12.6 
C)  13.2 
D)  13.9 
E)  14.6 
A)  12.0 
B)  12.6 
C)  13.2 
D)  13.9 
E)  14.6

Question 15

Which of the following statements is CORRECT?

Accepted Answer

A)  Other things held constant, the less debt a firm uses, the lower its return on total assets will be. 
B)  The advantage of the basic earning power ratio (BEP) over the return on total assets for judging a company's operating efficiency is that the BEP does not reflect the effects of debt and taxes. 
C)  The return on common equity (RO
E)  is generally regarded as being less significant, from a stockholder's viewpoint, than the return on total assets (RO
A) . 
D)  The price/earnings (P/
E)  ratio tells us how much investors are willing to pay for a dollar of current earnings. In general, investors regard companies with higher P/E ratios as being more risky and/or less likely to enjoy higher future growth. 
E)  Suppose you are analyzing two firms in the same industry. Firm A has a profit margin of 10% versus a margin of 8% for Firm B. Firm A's debt ratio is 70% versus 20% for Firm B. Based only on these two facts, you cannot reach a conclusion as to which firm is better managed, because the difference in debt, not better management, could be the cause of Firm A's higher profit margin. 
A)  Other things held constant, the less debt a firm uses, the lower its return on total assets will be. 
B)  The advantage of the basic earning power ratio (BEP) over the return on total assets for judging a company's operating efficiency is that the BEP does not reflect the effects of debt and taxes. 
C)  The return on common equity (RO
E)  is generally regarded as being less significant, from a stockholder's viewpoint, than the return on total assets (RO
A) . 
D)  The price/earnings (P/
E)  ratio tells us how much investors are willing to pay for a dollar of current earnings. In general, investors regard companies with higher P/E ratios as being more risky and/or less likely to enjoy higher future growth. 
E)  Suppose you are analyzing two firms in the same industry. Firm A has a profit margin of 10% versus a margin of 8% for Firm B. Firm A's debt ratio is 70% versus 20% for Firm B. Based only on these two facts, you cannot reach a conclusion as to which firm is better managed, because the difference in debt, not better management, could be the cause of Firm A's higher profit margin.

Question 16

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 17

Song Corp's stock price at the end of last year was $23.50 and its earnings per share for the year were $1.30. What was its P/E ratio?

Accepted Answer

A)  17.17 
B)  18.08 
C)  18.98 
D)  19.93 
E)  20.93 
A)  17.17 
B)  18.08 
C)  18.98 
D)  19.93 
E)  20.93

Question 18

Which of the following statements is CORRECT?

Accepted Answer

A)  Suppose a firm's total assets turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin rises from 9% to 10% and its debt increases from 40% of total assets to 60%. Under these conditions, the ROE will increase. 
B)  Suppose a firm's total assets turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin rises from 9% to 10% and its debt increases from 40% of total assets to 60%. Without additional information, we cannot tell what will happen to the ROE. 
C)  The DuPont equation provides information about how operations affect the ROE, but the equation does not include the effects of debt on the ROE. 
D)  Other things held constant, an increase in the debt ratio will result in an increase in the profit margin. 
E)  Suppose a firm's total assets turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin rises from 9% to 10%, and its debt increases from 40% of total assets to 60%. Under these conditions, the ROE will decrease. 
A)  Suppose a firm's total assets turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin rises from 9% to 10% and its debt increases from 40% of total assets to 60%. Under these conditions, the ROE will increase. 
B)  Suppose a firm's total assets turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin rises from 9% to 10% and its debt increases from 40% of total assets to 60%. Without additional information, we cannot tell what will happen to the ROE. 
C)  The DuPont equation provides information about how operations affect the ROE, but the equation does not include the effects of debt on the ROE. 
D)  Other things held constant, an increase in the debt ratio will result in an increase in the profit margin. 
E)  Suppose a firm's total assets turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin rises from 9% to 10%, and its debt increases from 40% of total assets to 60%. Under these conditions, the ROE will decrease.

Question 19

Suppose a firm wants to maintain a specific TIE ratio. It knows the amount of its debt, the interest rate on that debt, the applicable tax rate, and its operating costs. With this information, the firm can calculate the amount of sales required to achieve its target TIE ratio.

Accepted Answer

A) True 
 B)False

Question 20

Meyer Inc's assets are $625,000, and its total debt outstanding is $185,000. The new CFO wants to establish a debt/assets ratio of 55%. The size of the firm does not change. How much debt must the company add or subtract to achieve the target debt ratio?

Accepted Answer

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

Which of the following statements is CORRECT?

What is the firm's quick ratio?

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

Companies HD and LD are both profitable, and they have the same total assets (TA), Sales (S), return on assets (ROA), and profit margin (PM). However, Company HD has the higher debt ratio. Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following would, generally, indicate an improvement in a company's financial position, holding other things constant?

A firm wants to strengthen its financial position. Which of the following actions would increase its quick ratio?

What is the firm's BEP?

What is the firm's market-to-book ratio?

One problem with ratio analysis is that relationships can sometimes be manipulated. For example, if our current ratio is greater than 1.5, then borrowing on a short-term basis and using the funds to build up our cash account would cause the current ratio to INCREASE.

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

What is the firm's P/E ratio?

Which of the following statements is CORRECT?

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.

Song Corp's stock price at the end of last year was $23.50 and its earnings per share for the year were $1.30. What was its P/E ratio?

Which of the following statements is CORRECT?

Suppose a firm wants to maintain a specific TIE ratio. It knows the amount of its debt, the interest rate on that debt, the applicable tax rate, and its operating costs. With this information, the firm can calculate the amount of sales required to achieve its target TIE ratio.

Meyer Inc's assets are $625,000, and its total debt outstanding is $185,000. The new CFO wants to establish a debt/assets ratio of 55%. The size of the firm does not change. How much debt must the company add or subtract to achieve the target debt ratio?

Overview

Financial Markets

Financial Statements

Time Value of Money

Forecasting

Interest Rates

Risk and Return

Bonds

Stocks

Cost of Capital

Capital Budgeting Mc Problems

Cash Flow and Risk

Real Options

Capital Structure

Dividends

Working Capital

Derivatives

Multinational

Hybrid Financing

Mergers

Filters

Exam 4: Statement Analysis

Which of the following statements is CORRECT?

What is the firm's quick ratio?

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

Companies HD and LD are both profitable, and they have the same total assets (TA), Sales (S), return on assets (ROA), and profit margin (PM). However, Company HD has the higher debt ratio. Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following would, generally, indicate an improvement in a company's financial position, holding other things constant?

A firm wants to strengthen its financial position. Which of the following actions would increase its quick ratio?

What is the firm's BEP?

What is the firm's market-to-book ratio?

One problem with ratio analysis is that relationships can sometimes be manipulated. For example, if our current ratio is greater than 1.5, then borrowing on a short-term basis and using the funds to build up our cash account would cause the current ratio to INCREASE.

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

What is the firm's P/E ratio?

Which of the following statements is CORRECT?

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.

Song Corp's stock price at the end of last year was $23.50 and its earnings per share for the year were $1.30. What was its P/E ratio?

Which of the following statements is CORRECT?

Suppose a firm wants to maintain a specific TIE ratio. It knows the amount of its debt, the interest rate on that debt, the applicable tax rate, and its operating costs. With this information, the firm can calculate the amount of sales required to achieve its target TIE ratio.

Meyer Inc's assets are $625,000, and its total debt outstanding is $185,000. The new CFO wants to establish a debt/assets ratio of 55%. The size of the firm does not change. How much debt must the company add or subtract to achieve the target debt ratio?

Overview

Financial Markets

Financial Statements

Time Value of Money

Forecasting

Interest Rates

Risk and Return

Bonds

Stocks

Cost of Capital

Capital Budgeting Mc Problems

Cash Flow and Risk

Real Options

Capital Structure

Dividends

Working Capital

Derivatives

Multinational

Hybrid Financing

Mergers

Filters