Question 1

If a firm sold some inventory on credit, its current ratio would probably not change much, but its quick ratio would increase.

Accepted Answer

A) True 
 B)False

Question 2

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

Accepted Answer

A)  Given this information, LD must have the higher ROE. 
B)  Company LD has a higher basic earning power ratio (BEP). 
C)  Company HD has a higher basic earning power ratio (BEP). 
D)  If the interest rate the companies pay on their debt is more than their basic earning power (BEP), then Company HD will have the higher ROE. 
E)  If the interest rate the companies pay on their debt is less than their basic earning power (BEP), then Company HD will have the higher ROE. 
A)  Given this information, LD must have the higher ROE. 
B)  Company LD has a higher basic earning power ratio (BEP). 
C)  Company HD has a higher basic earning power ratio (BEP). 
D)  If the interest rate the companies pay on their debt is more than their basic earning power (BEP), then Company HD will have the higher ROE. 
E)  If the interest rate the companies pay on their debt is less than their basic earning power (BEP), then Company HD will have the higher ROE.

Question 3

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 4

Which of the following statements is CORRECT?

Accepted Answer

A)  If Firms X and Y have the same P/E ratios, then their market-to-book ratios must also be equal. 
B)  If Firms X and Y have the same net income, number of shares outstanding, and price per share, then their P/E ratios must also be the same. 
C)  If Firms X and Y have the same earnings per share and market-to-book ratio, they must have the same price/earnings ratio. 
D)  If Firm X's P/E ratio exceeds that of Firm Y, then Y is likely to be less risky and/or be expected to grow at a faster rate. 
E)  If Firms X and Y have the same net income, number of shares outstanding, and price per share, then their market-to-book ratios must also be the same. 
A)  If Firms X and Y have the same P/E ratios, then their market-to-book ratios must also be equal. 
B)  If Firms X and Y have the same net income, number of shares outstanding, and price per share, then their P/E ratios must also be the same. 
C)  If Firms X and Y have the same earnings per share and market-to-book ratio, they must have the same price/earnings ratio. 
D)  If Firm X's P/E ratio exceeds that of Firm Y, then Y is likely to be less risky and/or be expected to grow at a faster rate. 
E)  If Firms X and Y have the same net income, number of shares outstanding, and price per share, then their market-to-book ratios must also be the same.

Question 5

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 one of 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.

Accepted Answer

A) True 
 B)False

Question 6

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 7

Which of the following statements is CORRECT?

Accepted Answer

A)  A decline in a firm's inventory turnover ratio suggests that it is improving both its inventory management and its liquidity position, i.e., that it is becoming more liquid. 
B)  In general, it's better to have a low inventory turnover ratio than a high one, as a low one indicates that the firm has an adequate stock of inventory relative to sales and thus will not lose sales as a result of running out of stock. 
C)  If a firm's fixed assets turnover ratio is significantly lower than its industry average, this could indicate that it uses its fixed assets very efficiently or is operating at over capacity and should probably add fixed assets. 
D)  The more conservative a firm's management is, the higher its debt ratio is likely to be. 
E)  The days sales outstanding ratio tells us how long it takes, on average, to collect after a sale is made. The DSO can be compared with the firm's credit terms to get an idea of whether customers are paying on time. 
A)  A decline in a firm's inventory turnover ratio suggests that it is improving both its inventory management and its liquidity position, i.e., that it is becoming more liquid. 
B)  In general, it's better to have a low inventory turnover ratio than a high one, as a low one indicates that the firm has an adequate stock of inventory relative to sales and thus will not lose sales as a result of running out of stock. 
C)  If a firm's fixed assets turnover ratio is significantly lower than its industry average, this could indicate that it uses its fixed assets very efficiently or is operating at over capacity and should probably add fixed assets. 
D)  The more conservative a firm's management is, the higher its debt ratio is likely to be. 
E)  The days sales outstanding ratio tells us how long it takes, on average, to collect after a sale is made. The DSO can be compared with the firm's credit terms to get an idea of whether customers are paying on time.

Question 8

Determining whether a firm's financial position is improving or deteriorating requires analyzing more than the ratios for a given year. Trend analysis is one method of examining changes in a firm's performance over time.

Accepted Answer

A) True 
 B)False

Question 9

What is the firm's ROA?

Accepted Answer

A)  3.62% 
B)  3.98% 
C)  4.37% 
D)  4.81% 
E)  5.29% 
A)  3.62% 
B)  3.98% 
C)  4.37% 
D)  4.81% 
E)  5.29%

Question 10

Beranek Corp has $720,000 of assets, and it uses no debt--it is financed only with common equity. The new CFO wants to employ enough debt to raise the debt/assets ratio to 40%, using the proceeds from 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)  $273,600 
B)  $288,000 
C)  $302,400 
D)  $317,520 
E)  $333,396 
A)  $273,600 
B)  $288,000 
C)  $302,400 
D)  $317,520 
E)  $333,396

Question 11

Companies HD and LD have the same sales, tax rate, interest rate on their debt, 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 pays less in taxes. 
B)  Company HD has a lower equity multiplier. 
C)  Company HD has a higher ROA. 
D)  Company HD has a higher times-interest-earned (TI
E)  ratio. 
E)  Company HD has more net income. 
A)  Company HD pays less in taxes. 
B)  Company HD has a lower equity multiplier. 
C)  Company HD has a higher ROA. 
D)  Company HD has a higher times-interest-earned (TI
E)  ratio. 
E)  Company HD has more net income.

Question 12

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 13

Which of the following statements is CORRECT?

Accepted Answer

A)  The use of debt financing will tend to lower the basic earning power ratio, other things held constant. 
B)  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. 
C)  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. 
D)  The numerator used in the TIE ratio is earnings before taxes (EBT). EBT is used because interest is paid with post-tax dollars, so the firm's ability to pay current interest is affected by taxes. 
E)  All else equal, increasing the debt ratio will increase the ROA. 
A)  The use of debt financing will tend to lower the basic earning power ratio, other things held constant. 
B)  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. 
C)  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. 
D)  The numerator used in the TIE ratio is earnings before taxes (EBT). EBT is used because interest is paid with post-tax dollars, so the firm's ability to pay current interest is affected by taxes. 
E)  All else equal, increasing the debt ratio will increase the ROA.

Question 14

Which of the following statements is CORRECT?

Accepted Answer

A)  If a security analyst saw that a firm's days' sales outstanding (DSO) was higher than the industry average, and was increasing and trending still higher, this would be interpreted as a sign of strength. 
B)  A high average DSO indicates that none of its customers are paying on time. In addition, it makes no sense to evaluate the firm's DSO with the firm's credit terms. 
C)  There is no relationship between the days' sales outstanding (DSO) and the average collection period (ACP). These ratios measure entirely different things. 
D)  A reduction in accounts receivable would have no effect on the current ratio, but it would lead to an increase in the quick ratio. 
E)  If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days' sales outstanding will decline. 
A)  If a security analyst saw that a firm's days' sales outstanding (DSO) was higher than the industry average, and was increasing and trending still higher, this would be interpreted as a sign of strength. 
B)  A high average DSO indicates that none of its customers are paying on time. In addition, it makes no sense to evaluate the firm's DSO with the firm's credit terms. 
C)  There is no relationship between the days' sales outstanding (DSO) and the average collection period (ACP). These ratios measure entirely different things. 
D)  A reduction in accounts receivable would have no effect on the current ratio, but it would lead to an increase in the quick ratio. 
E)  If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days' sales outstanding will decline.

Question 15

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 16

Chang Corp. has $375,000 of assets, and it uses only common equity capital (zero debt). Its sales for the last year were $595,000, and its net income was $25,000. Stockholders recently voted in a new management team that has promised to lower costs and get the return on equity up to 15.0%. What profit margin would the firm need in order to achieve the 15% ROE, holding everything else constant?

Accepted Answer

A)  9.45% 
B)  9.93% 
C)  10.42% 
D)  10.94% 
E)  11.49% 
A)  9.45% 
B)  9.93% 
C)  10.42% 
D)  10.94% 
E)  11.49%

Question 17

Helmuth Inc's latest net income was $1,250,000, and it had 225,000 shares outstanding. The company wants to pay out 45% of its income. What dividend per share should it declare?

Accepted Answer

A)  $2.14 
B)  $2.26 
C)  $2.38 
D)  $2.50 
E)  $2.63 
A)  $2.14 
B)  $2.26 
C)  $2.38 
D)  $2.50 
E)  $2.63

Question 18

Last year Rennie Industries had sales of $305,000, assets of $175,000, a profit margin of 5.3%, and an equity multiplier of 1.2. The CFO believes that the company could reduce its assets by $51,000 without affecting either sales or costs. Had it reduced its assets by this amount, and had the debt/assets ratio, sales, and costs remained constant, how much would the ROE have changed?

Accepted Answer

A)  4.10% 
B)  4.56% 
C)  5.01% 
D)  5.52% 
E)  6.07% 
A)  4.10% 
B)  4.56% 
C)  5.01% 
D)  5.52% 
E)  6.07%

Question 19

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.

Accepted Answer

A) True 
 B)False

Question 20

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 be a good move, as it would increase the ROE from 7.5% to 13.5%.

Accepted Answer

A) True 
 B)False

If a firm sold some inventory on credit, its current ratio would probably not change much, but its quick ratio would increase.

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

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.

Which of the following statements is CORRECT?

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

Which of the following statements is CORRECT?

Determining whether a firm's financial position is improving or deteriorating requires analyzing more than the ratios for a given year. Trend analysis is one method of examining changes in a firm's performance over time.

What is the firm's ROA?

Companies HD and LD have the same sales, tax rate, interest rate on their debt, 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?

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.

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?

Helmuth Inc's latest net income was $1,250,000, and it had 225,000 shares outstanding. The company wants to pay out 45% of its income. What dividend per share should it declare?

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

Exam 4: Statement Analysis

If a firm sold some inventory on credit, its current ratio would probably not change much, but its quick ratio would increase.

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

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.

Which of the following statements is CORRECT?

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

Which of the following statements is CORRECT?

Determining whether a firm's financial position is improving or deteriorating requires analyzing more than the ratios for a given year. Trend analysis is one method of examining changes in a firm's performance over time.

What is the firm's ROA?

Companies HD and LD have the same sales, tax rate, interest rate on their debt, 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?

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.

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?

Helmuth Inc's latest net income was $1,250,000, and it had 225,000 shares outstanding. The company wants to pay out 45% of its income. What dividend per share should it declare?

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