Question 1

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%

Question 2

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 3

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.

Question 4

(The following data apply to Problems 87 through 105.)
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.
Balance Sheet (Millions of $)
Assets 2010
Cash and securities $1,554.0
Accounts receivable 9,660.0
Inventories 13,440.0
Total current assets $24,654.0
Net plant and equipment 17,346.0
Total assets $42,000.0
Liabilities and Equity
Accounts payable $7,980.0
Notes payable 5,880.0
Accruals 4,620.0
Total current liabilities $18,480.0
Long-term bonds 10,920.0
Total debt $29,400.0
Common stock 3,360.0
Retained earnings 9,240.0
Total common equity $12,600.0
Total liabilities and equity $42,000.0
Income Statement (Millions of $) 2010
Net sales $58,800.00
Operating costs except depr'n $54,978.0
Depreciation $1,029.0
Earnings bef int and taxes (EBIT) $2,793.0
Less interest 1,050.0
Earnings before taxes (EBT) $1,743.0
Taxes $610.1
Net income $1,133.0
Other data:
Shares outstanding (millions) 175.00
Common dividends $509.83
Int rate on notes payable & L-T bonds 6.25%
Federal plus state income tax rate 35%
Year-end stock price $77.69
-What is the firm's total assets turnover?

Accepted Answer

A)  0.90 
B)  1.12 
C)  1.40 
D)  1.68 
E)  2.02

Question 5

Since the ROA measures the firm's effective utilization of assets (without considering how these assets are financed), two firms with the same EBIT must have the same ROA.

Accepted Answer

A) True 
 B)False

Question 6

(The following data apply to Problems 87 through 105.)
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.
Balance Sheet (Millions of $)
Assets 2010
Cash and securities $1,554.0
Accounts receivable 9,660.0
Inventories 13,440.0
Total current assets $24,654.0
Net plant and equipment 17,346.0
Total assets $42,000.0
Liabilities and Equity
Accounts payable $7,980.0
Notes payable 5,880.0
Accruals 4,620.0
Total current liabilities $18,480.0
Long-term bonds 10,920.0
Total debt $29,400.0
Common stock 3,360.0
Retained earnings 9,240.0
Total common equity $12,600.0
Total liabilities and equity $42,000.0
Income Statement (Millions of $) 2010
Net sales $58,800.00
Operating costs except depr'n $54,978.0
Depreciation $1,029.0
Earnings bef int and taxes (EBIT) $2,793.0
Less interest 1,050.0
Earnings before taxes (EBT) $1,743.0
Taxes $610.1
Net income $1,133.0
Other data:
Shares outstanding (millions) 175.00
Common dividends $509.83
Int rate on notes payable & L-T bonds 6.25%
Federal plus state income tax rate 35%
Year-end stock price $77.69
-What is the firm's EPS?

Accepted Answer

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

Question 7

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)  Holding bonds is better than holding stock for investors because income from bonds is taxed on a more favorable basis than income from stock. 
E)  All else equal, increasing the debt ratio will increase the ROA.

Question 8

(The following data apply to Problems 87 through 105.)
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.
Balance Sheet (Millions of $)
Assets 2010
Cash and securities $1,554.0
Accounts receivable 9,660.0
Inventories 13,440.0
Total current assets $24,654.0
Net plant and equipment 17,346.0
Total assets $42,000.0
Liabilities and Equity
Accounts payable $7,980.0
Notes payable 5,880.0
Accruals 4,620.0
Total current liabilities $18,480.0
Long-term bonds 10,920.0
Total debt $29,400.0
Common stock 3,360.0
Retained earnings 9,240.0
Total common equity $12,600.0
Total liabilities and equity $42,000.0
Income Statement (Millions of $) 2010
Net sales $58,800.00
Operating costs except depr'n $54,978.0
Depreciation $1,029.0
Earnings bef int and taxes (EBIT) $2,793.0
Less interest 1,050.0
Earnings before taxes (EBT) $1,743.0
Taxes $610.1
Net income $1,133.0
Other data:
Shares outstanding (millions) 175.00
Common dividends $509.83
Int rate on notes payable & L-T bonds 6.25%
Federal plus state income tax rate 35%
Year-end stock price $77.69
-What is the firm's TIE?

Accepted Answer

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

Question 9

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 Du Pont 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 net income as shown on the income statement.

Question 10

Other things held constant, which of the following alternatives would increase a company's cash flow for the current year?

Accepted Answer

A)  Increase the number of years over which fixed assets are depreciated for tax purposes. 
B)  Pay down the accounts payables. 
C)  Reduce the days' sales outstanding (DSO) without affecting sales or operating costs. 
D)  Pay workers more frequently to decrease the accrued wages balance. 
E)  Reduce the inventory turnover ratio without affecting sales or operating costs.

Question 11

Considered alone, which of the following would increase a company's current ratio?

Accepted Answer

A)  An increase in net fixed assets. 
B)  An increase in accrued liabilities. 
C)  An increase in notes payable. 
D)  An increase in accounts receivable. 
E)  An increase in accounts payable.

Question 12

Last year Central Chemicals had sales of $205,000, assets of $127,500, a profit margin of 5.3%, and an equity multiplier of 1.2. The CFO believes that the company could reduce its assets by $21,000 without affecting either sales or costs. Had it reduced its assets in this amount, and had the debt ratio, sales, and costs remained constant, by how much would the ROE have changed?

Accepted Answer

A)  1.81% 
B)  2.02% 
C)  2.22% 
D)  2.44% 
E)  2.68%

Question 13

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

Question 14

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

Question 15

Companies E and P each reported the same earnings per share (EPS), but Company E's stock trades at a higher price. Which of the following statements is CORRECT?

Accepted Answer

A)  Company E probably has fewer growth opportunities. 
B)  Company E is probably judged by investors to be riskier. 
C)  Company E must have a higher market-to-book ratio. 
D)  Company E must pay a lower dividend. 
E)  Company E trades at a higher P/E ratio.

Question 16

(The following data apply to Problems 87 through 105.)
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.
Balance Sheet (Millions of $)
Assets 2010
Cash and securities $1,554.0
Accounts receivable 9,660.0
Inventories 13,440.0
Total current assets $24,654.0
Net plant and equipment 17,346.0
Total assets $42,000.0
Liabilities and Equity
Accounts payable $7,980.0
Notes payable 5,880.0
Accruals 4,620.0
Total current liabilities $18,480.0
Long-term bonds 10,920.0
Total debt $29,400.0
Common stock 3,360.0
Retained earnings 9,240.0
Total common equity $12,600.0
Total liabilities and equity $42,000.0
Income Statement (Millions of $) 2010
Net sales $58,800.00
Operating costs except depr'n $54,978.0
Depreciation $1,029.0
Earnings bef int and taxes (EBIT) $2,793.0
Less interest 1,050.0
Earnings before taxes (EBT) $1,743.0
Taxes $610.1
Net income $1,133.0
Other data:
Shares outstanding (millions) 175.00
Common dividends $509.83
Int rate on notes payable & L-T bonds 6.25%
Federal plus state income tax rate 35%
Year-end stock price $77.69
-What is the firm's inventory turnover ratio?

Accepted Answer

A)  4.38 
B)  4.59 
C)  4.82 
D)  5.06 
E)  5.32

Question 17

(The following data apply to Problems 87 through 105.)
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.
Balance Sheet (Millions of $)
Assets 2010
Cash and securities $1,554.0
Accounts receivable 9,660.0
Inventories 13,440.0
Total current assets $24,654.0
Net plant and equipment 17,346.0
Total assets $42,000.0
Liabilities and Equity
Accounts payable $7,980.0
Notes payable 5,880.0
Accruals 4,620.0
Total current liabilities $18,480.0
Long-term bonds 10,920.0
Total debt $29,400.0
Common stock 3,360.0
Retained earnings 9,240.0
Total common equity $12,600.0
Total liabilities and equity $42,000.0
Income Statement (Millions of $) 2010
Net sales $58,800.00
Operating costs except depr'n $54,978.0
Depreciation $1,029.0
Earnings bef int and taxes (EBIT) $2,793.0
Less interest 1,050.0
Earnings before taxes (EBT) $1,743.0
Taxes $610.1
Net income $1,133.0
Other data:
Shares outstanding (millions) 175.00
Common dividends $509.83
Int rate on notes payable & L-T bonds 6.25%
Federal plus state income tax rate 35%
Year-end stock price $77.69
-What is the firm's P/E ratio?

Accepted Answer

A)  12.0 
B)  12.6 
C)  13.2 
D)  13.9 
E)  14.6

Question 18

Last year Mason Inc. had a total assets turnover of 1.33 and an equity multiplier of 1.75. Its sales were $195,000 and its net income was $10,549. The CFO believes that the company could have operated more efficiently, lowered its costs, and increased its net income by $5,250 without changing its sales, assets, or capital structure. Had it cut costs and increased its net income in this amount, by how much would the ROE have changed?

Accepted Answer

A)  5.66% 
B)  5.95% 
C)  6.27% 
D)  6.58% 
E)  6.91%

Question 19

Debt management ratios show the extent to which a firm's managers are attempting to magnify returns on owners' capital through the use of financial leverage.

Accepted Answer

A) True 
 B)False

Question 20

(The following data apply to Problems 87 through 105.)
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.
Balance Sheet (Millions of $)
Assets 2010
Cash and securities $1,554.0
Accounts receivable 9,660.0
Inventories 13,440.0
Total current assets $24,654.0
Net plant and equipment 17,346.0
Total assets $42,000.0
Liabilities and Equity
Accounts payable $7,980.0
Notes payable 5,880.0
Accruals 4,620.0
Total current liabilities $18,480.0
Long-term bonds 10,920.0
Total debt $29,400.0
Common stock 3,360.0
Retained earnings 9,240.0
Total common equity $12,600.0
Total liabilities and equity $42,000.0
Income Statement (Millions of $) 2010
Net sales $58,800.00
Operating costs except depr'n $54,978.0
Depreciation $1,029.0
Earnings bef int and taxes (EBIT) $2,793.0
Less interest 1,050.0
Earnings before taxes (EBT) $1,743.0
Taxes $610.1
Net income $1,133.0
Other data:
Shares outstanding (millions) 175.00
Common dividends $509.83
Int rate on notes payable & L-T bonds 6.25%
Federal plus state income tax rate 35%
Year-end stock price $77.69
-What is the firm's cash flow per share?

Accepted Answer

A)  $10.06 
B)  $10.59 
C)  $11.15 
D)  $11.74 
E)  $12.35

Exam 3: Analysis of Financial Statements Part 2 Fixed Income Securities

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) ?

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?

Since the ROA measures the firm's effective utilization of assets (without considering how these assets are financed), two firms with the same EBIT must have the same ROA.

Which of the following statements is CORRECT?

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?

Other things held constant, which of the following alternatives would increase a company's cash flow for the current year?

Considered alone, which of the following would increase a company's current ratio?

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?

Companies E and P each reported the same earnings per share (EPS) , but Company E's stock trades at a higher price. Which of the following statements is CORRECT?

Debt management ratios show the extent to which a firm's managers are attempting to magnify returns on owners' capital through the use of financial leverage.