Question 1

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% C

Question 2

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%.
Multiple Choice: Problems
A good bit of relatively simple algebra is involved in these problems, and although the calculations are simple, it will take students some time to set up the problems and do the arithmetic. We allow for this when assigning problems for a timed test. Also, note that students must know the definitions of a number of ratios to answer the questions. We provide our students with a formula sheet on exams, using the relevant sections of 
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%.
Multiple Choice: Problems
A good bit of relatively simple algebra is involved in these problems, and although the calculations are simple, it will take students some time to set up the problems and do the arithmetic. We allow for this when assigning problems for a timed test. Also, note that students must know the definitions of a number of ratios to answer the questions. We provide our students with a formula sheet on exams, using the relevant sections of B

Question 3

Although a full liquidity analysis requires the use of a cash budget, the current and quick ratios provide fast and easy-to-use estimates of a firm's liquidity position.

Accepted Answer

A) True 
 B)False  True

Question 4

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.

Accepted Answer

A) True 
 B)False

Question 5

Jordan 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, 2.75, 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?

Accepted Answer

A)  11.26% 
B)  11.85% 
C)  12.45% 
D)  13.07% 
E)  13.72% 
A)  11.26% 
B)  11.85% 
C)  12.45% 
D)  13.07% 
E)  13.72%

Question 6

Which of the following statements is CORRECT?

Accepted Answer

A)  If a firm has high current and quick ratios, this always indicate that the firm is managing its liquidity position well. 
B)  If a firm sold some inventory for cash and left the funds in its bank account, its current ratio would probably not change much, but its quick ratio would decline. 
C)  If a firm sold some inventory on credit, its current ratio would probably not change much, but its quick ratio would decline. 
D)  If a firm sold some inventory on credit as opposed to cash, there is no reason to think that either its current or quick ratio would change. 
E)  The inventory turnover ratio and days sales outstanding (DSO) are two ratios that are used to assess how effectively a firm is managing its current assets. 
A)  If a firm has high current and quick ratios, this always indicate that the firm is managing its liquidity position well. 
B)  If a firm sold some inventory for cash and left the funds in its bank account, its current ratio would probably not change much, but its quick ratio would decline. 
C)  If a firm sold some inventory on credit, its current ratio would probably not change much, but its quick ratio would decline. 
D)  If a firm sold some inventory on credit as opposed to cash, there is no reason to think that either its current or quick ratio would change. 
E)  The inventory turnover ratio and days sales outstanding (DSO) are two ratios that are used to assess how effectively a firm is managing its current assets.

Question 7

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

Accepted Answer

A)  The inventory and total assets turnover ratios both decline. 
B)  The debt ratio increases. 
C)  The profit margin declines. 
D)  The times-interest-earned ratio declines. 
E)  The current and quick ratios both increase. 
A)  The inventory and total assets turnover ratios both decline. 
B)  The debt ratio increases. 
C)  The profit margin declines. 
D)  The times-interest-earned ratio declines. 
E)  The current and quick ratios both increase.

Question 8

What is the firm's dividends per share?

Accepted Answer

A)  $1.14 
B)  $1.27 
C)  $1.39 
D)  $1.53 
E)  $1.68 
A)  $1.14 
B)  $1.27 
C)  $1.39 
D)  $1.53 
E)  $1.68

Question 9

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 10

What is the firm's operating margin?

Accepted Answer

A)  3.12% 
B)  3.46% 
C)  3.85% 
D)  4.28% 
E)  4.75% 
A)  3.12% 
B)  3.46% 
C)  3.85% 
D)  4.28% 
E)  4.75%

Question 11

Last year Jandik Corp. had $295,000 of assets, $18,750 of net income, and a debt-to-total-assets ratio of 37%. 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)  2.13% 
B)  2.35% 
C)  2.58% 
D)  2.84% 
E)  3.12% 
A)  2.13% 
B)  2.35% 
C)  2.58% 
D)  2.84% 
E)  3.12%

Question 12

Market value ratios provide management with an indication of how investors view the firm's past performance and especially its future prospects.

Accepted Answer

A) True 
 B)False

Question 13

Ajax 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)  5.80 
A)  4.72 
B)  4.97 
C)  5.23 
D)  5.51 
E)  5.80

Question 14

What is the firm's inventory turnover ratio?

Accepted Answer

A)  5.47 
B)  5.74 
C)  6.03 
D)  6.33 
E)  6.65 
A)  5.47 
B)  5.74 
C)  6.03 
D)  6.33 
E)  6.65

Question 15

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 16

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 17

Which of the following statements is CORRECT?

Accepted Answer

A)  Borrowing by using short-term notes payable and then using the proceeds to retire long-term debt is an example of "window dressing." Offering discounts to customers who pay with cash rather than buy on credit and then using the funds that come in quicker to purchase additional inventories is another example of "window dressing." 
B)  Borrowing on a long-term basis and using the proceeds to retire short-term debt would improve the current ratio and thus could be considered to be an example of "window dressing." 
C)  Offering discounts to customers who pay with cash rather than buy on credit and then using the funds that come in quicker to purchase fixed assets is an example of "window dressing." 
D)  Using some of the firm's cash to reduce long-term debt is an example of "window dressing." 
E)  "Window dressing" is any action that does not improve a firm's fundamental long-run position and thus increases its intrinsic value. 
A)  Borrowing by using short-term notes payable and then using the proceeds to retire long-term debt is an example of "window dressing." Offering discounts to customers who pay with cash rather than buy on credit and then using the funds that come in quicker to purchase additional inventories is another example of "window dressing." 
B)  Borrowing on a long-term basis and using the proceeds to retire short-term debt would improve the current ratio and thus could be considered to be an example of "window dressing." 
C)  Offering discounts to customers who pay with cash rather than buy on credit and then using the funds that come in quicker to purchase fixed assets is an example of "window dressing." 
D)  Using some of the firm's cash to reduce long-term debt is an example of "window dressing." 
E)  "Window dressing" is any action that does not improve a firm's fundamental long-run position and thus increases its intrinsic value.

Question 18

What is the firm's current ratio?

Accepted Answer

A)  0.99 
B)  1.10 
C)  1.23 
D)  1.36 
E)  1.50 
A)  0.99 
B)  1.10 
C)  1.23 
D)  1.36 
E)  1.50

Question 19

Last year Ann Arbor Corp had $155,000 of assets, $305,000 of sales, $20,000 of net income, and a debt-to-total-assets ratio of 37.5%. The new CFO believes a new computer program will enable it to reduce costs and thus raise net income to $33,000. Assets, sales, and the debt ratio would not be affected. By how much would the cost reduction improve the ROE?

Accepted Answer

A)  11.51% 
B)  12.11% 
C)  12.75% 
D)  13.42% 
E)  14.09% 
A)  11.51% 
B)  12.11% 
C)  12.75% 
D)  13.42% 
E)  14.09%

Question 20

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

Accepted Answer

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

What is the firm's BEP?

Which of the following statements is CORRECT?

Although a full liquidity analysis requires the use of a cash budget, the current and quick ratios provide fast and easy-to-use estimates of a firm's liquidity position.

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.

Which of the following statements is CORRECT?

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

What is the firm's dividends per share?

What is the firm's P/E ratio?

What is the firm's operating margin?

Market value ratios provide management with an indication of how investors view the firm's past performance and especially its future prospects.

Ajax 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?

What is the firm's inventory turnover ratio?

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?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

What is the firm's current ratio?

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

Overview

Financial Markets

Financial Statements

Time Value of Money

Interest Rates

Bonds

Risk and Return

Stocks

Cost of Capital

Capital Budgeting

Cash Flow and Risk

Capital Structure

Dividends

Working Capital

Forecasting

Multinational

Stock Equilibrium and Project Evaluation

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Exam 4: Statement Analysis

What is the firm's BEP?

Which of the following statements is CORRECT?

Although a full liquidity analysis requires the use of a cash budget, the current and quick ratios provide fast and easy-to-use estimates of a firm's liquidity position.

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.

Which of the following statements is CORRECT?

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

What is the firm's dividends per share?

What is the firm's P/E ratio?

What is the firm's operating margin?

Market value ratios provide management with an indication of how investors view the firm's past performance and especially its future prospects.

Ajax 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?

What is the firm's inventory turnover ratio?

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?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

What is the firm's current ratio?

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

Overview

Financial Markets

Financial Statements

Time Value of Money

Interest Rates

Bonds

Risk and Return

Stocks

Cost of Capital

Capital Budgeting

Cash Flow and Risk

Capital Structure

Dividends

Working Capital

Forecasting

Multinational

Stock Equilibrium and Project Evaluation

Filters