Question 1

Northwest Lumber had a profit margin of 5.25%,a total assets turnover of 1.5,and an equity multiplier of 1.8.What was the firm's ROE?

Accepted Answer

A)  12.79% 
B)  13.47% 
C)  14.18% 
D)  14.88% 
E)  15.63% 
A)  12.79% 
B)  13.47% 
C)  14.18% 
D)  14.88% 
E)  15.63% C

Question 2

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

Accepted Answer

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

Question 3

Chambliss Corp.'s total assets at the end of last year were $305,000 and its EBIT was 62,500.What was its basic earning power (BEP)?

Accepted Answer

A)  18.49% 
B)  19.47% 
C)  20.49% 
D)  21.52% 
E)  22.59% 
A)  18.49% 
B)  19.47% 
C)  20.49% 
D)  21.52% 
E)  22.59% C

Question 4

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 5

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 6

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

Accepted Answer

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

Question 7

Exhibit 3.1
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.
  
-Refer to Exhibit 3.1.What is the firm's book value per share?

Accepted Answer

A)  $61.73 
B)  $64.98 
C)  $68.40 
D)  $72.00 
E)  $75.60 
A)  $61.73 
B)  $64.98 
C)  $68.40 
D)  $72.00 
E)  $75.60

Question 8

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

Accepted Answer

A)  Issue new common stock and use the proceeds to acquire additional fixed assets. 
B)  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. 
C)  Issue new common stock and use the proceeds to increase inventories. 
D)  Speed up the collection of receivables and use the cash generated to increase inventories. 
E)  Use some of its cash to purchase additional inventories. 
A)  Issue new common stock and use the proceeds to acquire additional fixed assets. 
B)  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. 
C)  Issue new common stock and use the proceeds to increase inventories. 
D)  Speed up the collection of receivables and use the cash generated to increase inventories. 
E)  Use some of its cash to purchase additional inventories.

Question 9

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

Question 10

Exhibit 3.1
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.
  
-Refer to Exhibit 3.1.What is the firm's inventory turnover ratio?

Accepted Answer

A)  4.17 
B)  4.38 
C)  4.59 
D)  5.82 
E)  5.07 
A)  4.17 
B)  4.38 
C)  4.59 
D)  5.82 
E)  5.07

Question 11

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

Accepted Answer

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

Question 12

Exhibit 3.1
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.
  
-Refer to Exhibit 3.1.What is the firm's EPS?

Accepted Answer

A)  $5.84 
B)  $6.15 
C)  $6.47 
D)  $6.80 
E)  $7.14 
A)  $5.84 
B)  $6.15 
C)  $6.47 
D)  $6.80 
E)  $7.14

Question 13

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 14

Which of the following statements is CORRECT?

Accepted Answer

A)  An increase in a firm's debt ratio, with no changes in its sales or operating costs, could be expected to lower the profit margin. 
B)  The ratio of long-term debt to total capital is more likely to experience seasonal fluctuations than is either the DSO or the inventory turnover ratio. 
C)  If two firms have the same ROA, the firm with the most debt can be expected to have the lower ROE. 
D)  An increase in the DSO, other things held constant, could be expected to increase the total assets turnover ratio. 
E)  An increase in the DSO, other things held constant, could be expected to increase the ROE. 
A)  An increase in a firm's debt ratio, with no changes in its sales or operating costs, could be expected to lower the profit margin. 
B)  The ratio of long-term debt to total capital is more likely to experience seasonal fluctuations than is either the DSO or the inventory turnover ratio. 
C)  If two firms have the same ROA, the firm with the most debt can be expected to have the lower ROE. 
D)  An increase in the DSO, other things held constant, could be expected to increase the total assets turnover ratio. 
E)  An increase in the DSO, other things held constant, could be expected to increase the ROE.

Question 15

Ratio analysis involves analyzing financial statements in order to appraise a firm's financial position and strength.

Accepted Answer

A) True 
 B)False

Question 16

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

Accepted Answer

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

Question 17

Exhibit 3.1
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.
  
-Refer to Exhibit 3.1.What is the firm's market-to-book ratio?

Accepted Answer

A)  0.56 
B)  0.66 
C)  0.78 
D)  0.92 
E)  1.08 
A)  0.56 
B)  0.66 
C)  0.78 
D)  0.92 
E)  1.08

Question 18

Bonner Corp.'s sales last year were $415,000,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.Bonner'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)  $164,330 
B)  $172,979 
C)  $182,083 
D)  $191,188 
E)  $200,747 
A)  $164,330 
B)  $172,979 
C)  $182,083 
D)  $191,188 
E)  $200,747

Question 19

If the CEO of a large,diversified,firm were filling out a fitness report on a division manager (i.e.,"grading" the manager),which of the following situations would be likely to cause the manager to receive a better grade? In all cases,assume that other things are held constant.

Accepted Answer

A)  The division's DSO (days' sales outstanding) is 40, whereas the average for its competitors is 30. 
B)  The division's basic earning power ratio is above the average of other firms in its industry. 
C)  The division's total assets turnover ratio is below the average for other firms in its industry. 
D)  The division's debt ratio is above the average for other firms in the industry. 
E)  The division's inventory turnover is 6, whereas the average for its competitors is 8. 
A)  The division's DSO (days' sales outstanding) is 40, whereas the average for its competitors is 30. 
B)  The division's basic earning power ratio is above the average of other firms in its industry. 
C)  The division's total assets turnover ratio is below the average for other firms in its industry. 
D)  The division's debt ratio is above the average for other firms in the industry. 
E)  The division's inventory turnover is 6, whereas the average for its competitors is 8.

Question 20

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

Exam 3: Analysis of Financial Statements

Northwest Lumber had a profit margin of 5.25%,a total assets turnover of 1.5,and an equity multiplier of 1.8.What was the firm's ROE?

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

Chambliss Corp.'s total assets at the end of last year were $305,000 and its EBIT was 62,500.What was its basic earning power (BEP)?

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.

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

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

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.

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

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

Which of the following statements is CORRECT?

Ratio analysis involves analyzing financial statements in order to appraise a firm's financial position and strength.

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

If the CEO of a large,diversified,firm were filling out a fitness report on a division manager (i.e.,"grading" the manager),which of the following situations would be likely to cause the manager to receive a better grade? In all cases,assume that other things are held constant.

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

Risk and Return

Valuation of Stocks and Corporations

Financial Options and Applications in Corporate Finance

The Cost of Capital

The Basics of Capital Budgeting: Evaluating Cash Flows

Cash Flow Estimation and Risk Analysis

Corporate Valuation and Financial Planning

Agency Conflicts and Corporate Governance

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Supply Chains and Working Capital Management

Multinational Financial Management

Public and Private Financing: Initial Offerings, seasoned Offerings, and Investment Banks

Extension 18 A: Rights Offerings

Lease Financing

Hybrid Financing: Preferred Stock, warrants, and Convertibles

Dynamic Capital Structures

Mergers and Corporate Control

Enterprise Risk Management

Bankruptcy, reorganization, and Liquidation

Portfolio Theory and Asset Pricing Models

Real Options

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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