Question 1

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 also increasing and trending still higher, this would be interpreted as a sign of
Strength. 
B)  If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days' sales
Outstanding (DSO) will increase. 
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 also increasing and trending still higher, this would be interpreted as a sign of
Strength. 
B)  If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days' sales
Outstanding (DSO) will increase. 
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. E

Question 2

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.
  
-What is the firm's EBITDA coverage?

Accepted Answer

A)  3.29 
B)  3.46 
C)  3.64 
D)  3.82 
E)  4.01 
A)  3.29 
B)  3.46 
C)  3.64 
D)  3.82 
E)  4.01 C

Question 3

The inventory turnover ratio and days sales outstanding (DSO) are two ratios that are used to assess how effectively a firm is managing its assets.

Accepted Answer

A) True 
 B)False  True

Question 4

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.
  
-What is the firm's TIE?

Accepted Answer

A)  1.94 
B)  2.15 
C)  2.39 
D)  2.66 
E)  2.93 
A)  1.94 
B)  2.15 
C)  2.39 
D)  2.66 
E)  2.93

Question 5

Arshadi Corp.'s sales last year were $52,000, and its total assets were
$22,000. What was its total assets turnover ratio (TATO)?

Accepted Answer

A)  2.03 
B)  2.13 
C)  2.25 
D)  2.36 
E)  2.48 
A)  2.03 
B)  2.13 
C)  2.25 
D)  2.36 
E)  2.48

Question 6

Firms A and B have the same current ratio, 0.75, the same amount of sales, and the same amount of current liabilities. However, Firm A has a higher inventory turnover ratio than B. Therefore, we can conclude that A's quick ratio must be smaller than B's.

Accepted Answer

A) True 
 B)False

Question 7

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 8

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 9

Aziz Industries has sales of $100,000 and accounts receivable of $11,500, and it gives its customers 30 days to pay. The industry average DSO is 27 days, based on a 365-day year. If the company changes its credit and collection policy sufficiently to cause its DSO to fall to the industry average, and if it earns 8.0% on any cash freed-up by this change, how would that affect its net income, assuming other things are held constant?

Accepted Answer

A)  $267.34 
B)  $281.41 
C)  $296.22 
D)  $311.81 
E)  $328.22 
A)  $267.34 
B)  $281.41 
C)  $296.22 
D)  $311.81 
E)  $328.22

Question 10

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 modified Du Pont 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 on sales. 
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 modified Du Pont 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 on sales. 
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 11

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.
  
-What is the firm's equity multiplier?

Accepted Answer

A)  3.33 
B)  3.50 
C)  3.68 
D)  3.86 
E)  4.05 
A)  3.33 
B)  3.50 
C)  3.68 
D)  3.86 
E)  4.05

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

Heaton Corp. sells on terms that allow customers 45 days to pay for merchandise. Its sales last year were $425,000, 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)  6.20 
B)  6.53 
C)  6.86 
D)  7.20 
E)  7.56 
A)  6.20 
B)  6.53 
C)  6.86 
D)  7.20 
E)  7.56

Question 14

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.
  
-What is the firm's ROA?

Accepted Answer

A)  2.70% 
B)  2.97% 
C)  3.26% 
D)  3.59% 
E)  3.95% 
A)  2.70% 
B)  2.97% 
C)  3.26% 
D)  3.59% 
E)  3.95%

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 EBITDA coverage ratio increases. 
D)  The current and quick ratios both decline. 
E)  The total assets turnover decreases. 
A)  The TIE declines. 
B)  The DSO increases. 
C)  The EBITDA coverage ratio increases. 
D)  The current and quick ratios both decline. 
E)  The total assets turnover decreases.

Question 16

The current ratio and inventory turnover ratios both help us measure the firm's liquidity. The current ratio measures the relationship of a firm's current assets to its current liabilities, while the inventory turnover ratio gives us an indication of how long it takes the firm to convert its inventory into cash.

Accepted Answer

A) True 
 B)False

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

The "apparent," but not the "true," financial position of a company whose sales are seasonal can differ dramatically, depending on the time of year when the financial statements are constructed.

Accepted Answer

A) True 
 B)False

Question 19

Lindley Corp.'s stock price at the end of last year was $33.50, and its book value per share was $25.00. What was its market/book ratio?

Accepted Answer

A)  1.34 
B)  1.41 
C)  1.48 
D)  1.55 
E)  1.63 
A)  1.34 
B)  1.41 
C)  1.48 
D)  1.55 
E)  1.63

Question 20

Beranek Corp. has $410,000 of assets, and it uses no debt--it is financed only with common equity. The new CFO wants to employ enough debt to bring the debt/assets ratio to 40%, using the proceeds from the 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)  $155,800 
B)  $164,000 
C)  $172,200 
D)  $180,810 
E)  $189,851 
A)  $155,800 
B)  $164,000 
C)  $172,200 
D)  $180,810 
E)  $189,851

Exam 3: Analysis of Financial Statements

Which of the following statements is CORRECT?

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. -What is the firm's EBITDA coverage?

The inventory turnover ratio and days sales outstanding (DSO) are two ratios that are used to assess how effectively a firm is managing its assets.

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. -What is the firm's TIE?

Arshadi Corp.'s sales last year were $52,000, and its total assets were $22,000. What was its total assets turnover ratio (TATO)?

Firms A and B have the same current ratio, 0.75, the same amount of sales, and the same amount of current liabilities. However, Firm A has a higher inventory turnover ratio than B. Therefore, we can conclude that A's quick ratio must be smaller than B's.

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.

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?

Which of the following statements is CORRECT?

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. -What is the firm's equity multiplier?

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

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. -What is the firm's ROA?

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

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

The "apparent," but not the "true," financial position of a company whose sales are seasonal can differ dramatically, depending on the time of year when the financial statements are constructed.

Lindley Corp.'s stock price at the end of last year was $33.50, and its book value per share was $25.00. What was its market/book ratio?

An Overview of Financial Management and the Financial Environment

Financial Statements, Cash Flow, and Taxes

Time Value of Money

Bonds, Bond Valuation, and Interest Rates

Risks and Rates of Return

Stocks and Their Valuation

Financial Options and Applications in Corporate Finance

The Cost of Capital

The Basics of Capital Budgeting

Cash Flow Estimation and Risk Analysis

Financial Planning and Forecasting Financial Statements

Corporate Valuation, Value-Based Management, and Corporate Governance

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Working Capital Management

Multinational Financial Management

Lease Financing

Hybrid Financing: Preferred Stock, Warrants, and Convertibles

Initial Public Offerings, Investment Banking, and Financial Restructuring

Mergers, Lbos, Divestitures, and Holding Companies

Bankruptcy, Reorganization, and Liquidation

Derivatives and Risk Management

Portfolio Theory, Asset Pricing Models, and Behavioral Finance

Real Options

Analysis of Capital Structure Theory

Providing and Obtaining Credit

Advanced Issues in Cash Management and Inventory Control

Pension Plan Management

Financial Management in Not-For-Profit Businesses

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