Question 1

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.

Accepted Answer

A) True 
 B)False

Question 2

Amram Company's current ratio is 2.0. Considered alone, which of the following actions would lower the current ratio?

Accepted Answer

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

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

The return on common equity (ROE) is generally regarded as being less significant, from a stockholder's viewpoint, than the return on total assets (ROA).

Accepted Answer

A) True 
 B)False

Question 5

Last year Hamdi Corp. had sales of $500,000, operating costs of $450,000, and year-end assets of $395,000. The debt-to-total-assets ratio was 17%, the interest rate on the debt was 7.5%, and the firm's tax rate was 35%. The new CFO wants to see how the ROE would have been affected if the firm had used a 50% debt ratio. Assume that sales, operating costs, total assets, and the tax rate would not be affected, but the interest rate would rise to 8.0%. By how much would the ROE change in response to the change in the capital structure?

Accepted Answer

A)  1.71% 
B)  1.90% 
C)  2.11% 
D)  2.34% 
E)  2.58%

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

High current and quick ratios always indicate that the firm is managing its liquidity position well.

Accepted Answer

A) True 
 B)False

Question 8

The advantage of the basic earning power ratio (BEP) over the return on total assets for judging a company's operating efficiency is that the BEP does not reflect the effects of debt and taxes.

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%

Question 10

In general, it's better to have a low inventory turnover ratio than a high one, as a low ratio 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.

Accepted Answer

A) True 
 B)False

Question 11

Other things held constant, the more debt a firm uses, the lower its profit margin will be.

Accepted Answer

A) True 
 B)False

Question 12

What is the firm's equity multiplier?

Accepted Answer

A)  3.85 
B)  4.04 
C)  4.24 
D)  4.45 
E)  4.68

Question 13

River Corp's total assets at the end of last year were $415,000 and its net income was $32,750. What was its return on total assets?

Accepted Answer

A)  7.89% 
B)  8.29% 
C)  8.70% 
D)  9.14% 
E)  9.59%

Question 14

Your sister is thinking about starting a new business. The company would require $375,000 of assets, and it would be financed entirely with common stock. She will go forward only if she thinks the firm can provide a 13.5% return on the invested capital, which means that the firm must have an ROE of 13.5%. How much net income must be expected to warrant starting the business?

Accepted Answer

A)  $41,234 
B)  $43,405 
C)  $45,689 
D)  $48,094 
E)  $50,625

Question 15

Han Corp's sales last year were $425,000, and its year-end receivables were $52,500. The firm sells on terms that call for customers to pay 30 days after the purchase, but some delay payment beyond Day 30. On average, how many days late do customers pay? Base your answer on this equation: DSO - Allowed credit period = Average days late, and use a 365-day year when calculating the DSO.

Accepted Answer

A)  12.94 
B)  13.62 
C)  14.33 
D)  15.09 
E)  15.84

Question 16

Quigley Inc. is considering two financial plans for the coming year. Management expects sales to be $300,000, operating costs to be $265,000, assets (capital) to be $200,000, and its tax rate to be 35%. Under Plan A it would use 25% debt and 75% common equity. The interest rate on the debt would be 8.8%, but under a contract with existing bondholders the TIE ratio would have to be maintained at or above 4.0. Under Plan B, the maximum debt that met the TIE constraint would be employed. Assuming that sales, operating costs, assets, the interest rate, and the tax rate would all remain constant, by how much would the ROE change in response to the change in the capital structure?

Accepted Answer

A)  3.71% 
B)  4.08% 
C)  4.48% 
D)  4.93% 
E)  5.18%

Question 17

If a firm finances with only debt and common equity, and if its equity multiplier is 3.0, then its debt ratio must be 0.667.

Accepted Answer

A) True 
 B)False

Question 18

The profit margin measures net income per dollar of sales.

Accepted Answer

A) True 
 B)False

Question 19

HD Corp and LD Corp have identical assets, sales, interest rates paid on their debt, tax rates, and EBIT. However, HD uses more debt than LD. Which of the following statements is CORRECT?

Accepted Answer

A)  Without more information, we cannot tell if HD or LD would have a higher or lower net income. 
B)  HD would have the lower equity multiplier for use in the DuPont equation. 
C)  HD would have to pay more in income taxes. 
D)  HD would have the lower net income as shown on the income statement. 
E)  HD would have the higher operating margin.

Question 20

What is the firm's profit margin?

Accepted Answer

A)  1.51% 
B)  1.67% 
C)  1.86% 
D)  2.07% 
E)  2.27%

Exam 4: Statement Analysis

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.

Amram Company's current ratio is 2.0. Considered alone, which of the following actions would lower the current ratio?

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.

The return on common equity (ROE) is generally regarded as being less significant, from a stockholder's viewpoint, than the return on total assets (ROA).

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

High current and quick ratios always indicate that the firm is managing its liquidity position well.

The advantage of the basic earning power ratio (BEP) over the return on total assets for judging a company's operating efficiency is that the BEP does not reflect the effects of debt and taxes.

What is the firm's ROA?

In general, it's better to have a low inventory turnover ratio than a high one, as a low ratio 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.

Other things held constant, the more debt a firm uses, the lower its profit margin will be.

What is the firm's equity multiplier?

River Corp's total assets at the end of last year were $415,000 and its net income was $32,750. What was its return on total assets?

If a firm finances with only debt and common equity, and if its equity multiplier is 3.0, then its debt ratio must be 0.667.

The profit margin measures net income per dollar of sales.

HD Corp and LD Corp have identical assets, sales, interest rates paid on their debt, tax rates, and EBIT. However, HD uses more debt than LD. Which of the following statements is CORRECT?

What is the firm's profit margin?