Question 1

If a bank loan officer were considering a company's loan request, which of the following statements would you consider to be CORRECT?

Accepted Answer

A)  The lower the company's inventory turnover ratio, other things held constant, the lower the interest rate the bank would charge the firm. 
B)  Other things held constant, the higher the days sales outstanding ratio, the lower the interest rate the bank would charge. 
C)  Other things held constant, the lower the debt ratio, the lower the interest rate the bank would charge. 
D)  The lower the company's TIE ratio, other things held constant, the lower the interest rate the bank would charge. 
E)  Other things held constant, the lower the current ratio, the lower the interest rate the bank would charge the firm. 
A)  The lower the company's inventory turnover ratio, other things held constant, the lower the interest rate the bank would charge the firm. 
B)  Other things held constant, the higher the days sales outstanding ratio, the lower the interest rate the bank would charge. 
C)  Other things held constant, the lower the debt ratio, the lower the interest rate the bank would charge. 
D)  The lower the company's TIE ratio, other things held constant, the lower the interest rate the bank would charge. 
E)  Other things held constant, the lower the current ratio, the lower the interest rate the bank would charge the firm.

Question 2

In general, if investors regard a company as being relatively risky and/or having relatively poor growth prospects, then it will have relatively high P/E and M/B ratios.

Accepted Answer

A) True 
 B)False

Question 3

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 4

Which of the following statements is CORRECT?

Accepted Answer

A)  A reduction in inventories would have no effect on the current ratio. 
B)  An increase in inventories would have no effect on the current ratio. 
C)  If a firm increases its sales while holding its inventories constant, then, other things held constant, its inventory turnover ratio will increase. 
D)  A reduction in the inventory turnover ratio will generally lead to an increase in the ROE. 
E)  If a firm increases its sales while holding its inventories constant, then, other things held constant, its fixed assets turnover ratio will decline. 
A)  A reduction in inventories would have no effect on the current ratio. 
B)  An increase in inventories would have no effect on the current ratio. 
C)  If a firm increases its sales while holding its inventories constant, then, other things held constant, its inventory turnover ratio will increase. 
D)  A reduction in the inventory turnover ratio will generally lead to an increase in the ROE. 
E)  If a firm increases its sales while holding its inventories constant, then, other things held constant, its fixed assets turnover ratio will decline.

Question 5

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 6

The more conservative a firm's management is, the higher its debt ratio is likely to be.

Accepted Answer

A) True 
 B)False

Question 7

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 8

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.

If a bank loan officer were considering a company's loan request, which of the following statements would you consider to be CORRECT?

In general, if investors regard a company as being relatively risky and/or having relatively poor growth prospects, then it will have relatively high P/E and M/B ratios.

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

Which of the following statements is CORRECT?

The more conservative a firm's management is, the higher its debt ratio is likely to be.

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?

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

Real Options

Capital Structure

Dividends

Working Capital

Forecasting

Derivatives

Multinational

Hybrid Financing

Mergers

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Exam 4: Statement Analysis

If a bank loan officer were considering a company's loan request, which of the following statements would you consider to be CORRECT?

In general, if investors regard a company as being relatively risky and/or having relatively poor growth prospects, then it will have relatively high P/E and M/B ratios.

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

Which of the following statements is CORRECT?

The more conservative a firm's management is, the higher its debt ratio is likely to be.

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?

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

Real Options

Capital Structure

Dividends

Working Capital

Forecasting

Derivatives

Multinational

Hybrid Financing

Mergers

Filters