Question 1

Stewart Inc.'s latest EPS was $3.50, its book value per share was $22.75, it had 215,000 shares outstanding, and its debt-to-assets ratio was 46%.How much debt was outstanding?

Accepted Answer

A)  $3,393,738 
B)  $3,572,356 
C)  $3,760,375 
D)  $3,958,289 
E)  $4,166,620

Question 2

The inventory turnover and current ratio are related.The combination of a high current ratio and a low inventory turnover ratio, relative to industry norms, suggests that the firm has an above-average inventory level and/or that part of the inventory is obsolete or damaged.

Accepted Answer

A) True 
 B)False

Question 3

pettijohn Inc.
The balance sheet and income statement shown below are for Pettijohn Inc. Note that the firm hasno amortization charges, it does not lease any ass ets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over.

$\text { Balance Shet (Millions of } \$ \text { ) }$
\(\begin{array}{lr}
\text { Assets } & \underline{2016} \
\text { Cash and securities } & \$ 1,554.00 \
\text { Accounts receivable } & 9,660.00 \
\text { inventories } & 13,440.00 \
\text { Total current assets } & \$ 24,654.00 \
\text { Net plant and equipment } & 17,346.00 \
\text { Total assets } & \$ 42,000.00 \
\text { Liabilities and Equity } \
\text { Accounts payable } & \$ 7,980.00 \
\text { Notes payable } & 5,880.0 0\
\text { Accruals } & 4,620.00\
\text { Total current liabilities } & \$ 18,480.00 \
\text { Cong-term bonds } & 10,920.00 \
\text { Cotal liabilities } & \$ 29,400.0 0\
\text { Common stock } & 3,360.00 \
\text { Retained earnings } & 9,240.00 \
\text { Total common equity } & \$ 12,600.00 \
\text { Total liabilities and equity } & \$ 42,000.00
\\
\text { Income Statement (Millions of \$) } & 2016 \
\text { Net sales } & \$ 58,800.00 \
\text { Operating costs except depr'n } & \$ 55,274.00 \
\text { Depreciation } & \$ 1,029.00\
\text { Earnings bef int and taxes (EBIT) } & \$ 2,497.00 \
\text { Less interest } & 1,050.00 \
\text { Earnings before taxes (EBT) } & \$ 1,447.00 \
\text { Taxes } & \$ 314.00 \
\text { Net income } & \$ 1,133.00\
\text { Dther data: }\
\text { Shares outstanding (millions) } & 175.00 \
\text { Common dividends } & 509.83 \
\text { Int rate on notes payable \& L-T bonds } & 6.25 \% \
\text { Federal plus state income tax rate } & 21.7 \% \
\text { Year-end stock price } & \$ 77.69
\end{array}\)
-Refer to the data for Pettijohn Inc.What is the firm's current ratio?

Accepted Answer

A)  0.97 
B)  1.08 
C)  1.20 
D)  1.33 
E)  1.47

Question 4

Last year Altman Corp.had $205,000 of assets, $303,500 of sales, $18,250 of net income, and a debt-to-total-assets ratio of 41%.The new CFO believes the firm has excessive fixed assets and inventory that could be sold, enabling it to reduce its total assets to $152,500.Sales, costs, and net income would not be affected, and the firm would maintain the 41% debt ratio.By how much would the reduction in assets improve the ROE?

Accepted Answer

A)  4.69% 
B)  4.93% 
C)  5.19% 
D)  5.45% 
E)  5.73%

Question 5

Market value ratios provide management with an indication of how investors view the firm's past performance and especially its future prospects.

Accepted Answer

A) True 
 B)False

Question 6

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

Question 7

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 8

Last year Swensen Corp.had sales of $303,225, operating costs of $267,500, and year-end assets of $195,000.The debt-to-total-assets ratio was 27%, the interest rate on the debt was 8.2%, and the firm's tax rate was 25%.The new CFO wants to see how the ROE would have been affected if the firm had used a 45% debt ratio.Assume that sales and total assets would not be affected, and that the interest rate and tax rate would both remain constant.By how much would the ROE change in response to the change in the capital structure?

Accepted Answer

A)  2.48% 
B)  2.76% 
C)  3.06% 
D)  3.40% 
E)  3.74%

Question 9

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.

Question 10

Muscarella Inc.has the following balance sheet and income statement data: $\begin{array}{llll}
\text { Cash } & \$ 14,000& \text { Accounts payable } & \$ 42,000 \
\text { Receivables } & 70,000& \text { Other current liabilities } & 28,000\
\text { Inventories } & 210,000& \text { Total CL } & \$ 70,000 \
\text { Total CA } & \$ 294,000& \text { Long-term debt } & 70,000 \
\text { Net fixed assets } & 126,000& \text { Common equity } & 280,000 \
\text { Total assets } & \$ 420,000& \text { Total liab. and equity } & \$ 420,000\
\text { Sales } & \$ 280,000 \
\text { Net income } & \$ 21,000
\end{array}$ The new CFO thinks that inventories are excessive and could be lowered sufficiently to cause the current ratio to equal the industry average, 2.70, without affecting either sales or net income.Assuming that inventories are sold off and not replaced to get the current ratio to the target level, and that the funds generated are used to buy back common stock at book value, by how much would the ROE change?

Accepted Answer

A)  4.28% 
B)  4.50% 
C)  4.73% 
D)  4.96% 
E)  5.21%

Question 11

For the coming year, Crane Inc.is considering two financial plans.Management expects sales to be $301,770, operating costs to be $266,545, assets to be $200,000, and its tax rate to be 25%.Under Plan A it would use 25% debt and 75% common equity.The interest rate on the debt would be 8.8%, but the TIE ratio would have to be kept at 4.00 or more.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)  4.42% 
B)  4.64% 
C)  4.87% 
D)  5.11% 
E)  5.37%

Question 12

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

Accepted Answer

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

Question 13

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

Question 14

Companies Heidee and Leaudy have the same sales, tax rate, interest rate on their debt, 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)  Heidee has more net income than Leaudy. 
B)  Heidee pays less in taxes than Leaudy. 
C)  Heidee has a lower equity multiplier than Leaudy. 
D)  Heidee has a higher ROA than Leaudy. 
E)  Heidee has a higher times interest earned (TI
E)  ratio than Leaudy.

Question 15

The Cavendish Company recently issued new common stock and used the proceeds to pay off some of its short-term notes payable.This action had no effect on the company's total assets or operating income.Which of the following effects would occur as a result of this action?

Accepted Answer

A)  The company's debt ratio increased. 
B)  The company's current ratio increased. 
C)  The company's times interest earned ratio decreased. 
D)  The company's basic earning power ratio increased. 
E)  The company's equity multiplier increased.

Question 16

One problem with ratio analysis is that relationships can be manipulated.For example, we know that if our current ratio is less than 1.0, then using some of our cash to pay off some of our current liabilities would cause the current ratio to increase and thus make the firm look stronger.

Accepted Answer

A) True 
 B)False

Question 17

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.

Question 18

pettijohn Inc.
The balance sheet and income statement shown below are for Pettijohn Inc. Note that the firm hasno amortization charges, it does not lease any ass ets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over.

$\text { Balance Shet (Millions of } \$ \text { ) }$
\(\begin{array}{lr}
\text { Assets } & \underline{2016} \
\text { Cash and securities } & \$ 1,554.00 \
\text { Accounts receivable } & 9,660.00 \
\text { inventories } & 13,440.00 \
\text { Total current assets } & \$ 24,654.00 \
\text { Net plant and equipment } & 17,346.00 \
\text { Total assets } & \$ 42,000.00 \
\text { Liabilities and Equity } \
\text { Accounts payable } & \$ 7,980.00 \
\text { Notes payable } & 5,880.0 0\
\text { Accruals } & 4,620.00\
\text { Total current liabilities } & \$ 18,480.00 \
\text { Cong-term bonds } & 10,920.00 \
\text { Cotal liabilities } & \$ 29,400.0 0\
\text { Common stock } & 3,360.00 \
\text { Retained earnings } & 9,240.00 \
\text { Total common equity } & \$ 12,600.00 \
\text { Total liabilities and equity } & \$ 42,000.00
\\
\text { Income Statement (Millions of \$) } & 2016 \
\text { Net sales } & \$ 58,800.00 \
\text { Operating costs except depr'n } & \$ 55,274.00 \
\text { Depreciation } & \$ 1,029.00\
\text { Earnings bef int and taxes (EBIT) } & \$ 2,497.00 \
\text { Less interest } & 1,050.00 \
\text { Earnings before taxes (EBT) } & \$ 1,447.00 \
\text { Taxes } & \$ 314.00 \
\text { Net income } & \$ 1,133.00\
\text { Dther data: }\
\text { Shares outstanding (millions) } & 175.00 \
\text { Common dividends } & 509.83 \
\text { Int rate on notes payable \& L-T bonds } & 6.25 \% \
\text { Federal plus state income tax rate } & 21.7 \% \
\text { Year-end stock price } & \$ 77.69
\end{array}\)
-Refer to the data for Pettijohn Inc.What is the firm's quick ratio?

Accepted Answer

A)  0.49 
B)  0.61 
C)  0.73 
D)  0.87 
E)  1.05

Question 19

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 20

Branch Corp.'s total assets at the end of last year were $315,000 and its net income after taxes was $22,750.What was its return on total assets?

Accepted Answer

A)  7.22% 
B)  7.58% 
C)  7.96% 
D)  8.36% 
E)  8.78%

Exam 3: Analysis of Financial Statements

Stewart Inc.'s latest EPS was $3.50, its book value per share was $22.75, it had 215,000 shares outstanding, and its debt-to-assets ratio was 46%.How much debt was outstanding?

The inventory turnover and current ratio are related.The combination of a high current ratio and a low inventory turnover ratio, relative to industry norms, suggests that the firm has an above-average inventory level and/or that part of the inventory is obsolete or damaged.

Market value ratios provide management with an indication of how investors view the firm's past performance and especially its future prospects.

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

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.

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

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

Companies Heidee and Leaudy have the same sales, tax rate, interest rate on their debt, 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?

The Cavendish Company recently issued new common stock and used the proceeds to pay off some of its short-term notes payable.This action had no effect on the company's total assets or operating income.Which of the following effects would occur as a result of this action?

One problem with ratio analysis is that relationships can be manipulated.For example, we know that if our current ratio is less than 1.0, then using some of our cash to pay off some of our current liabilities would cause the current ratio to increase and thus make the firm look stronger.

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.

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.

Branch Corp.'s total assets at the end of last year were $315,000 and its net income after taxes was $22,750.What was its return on total assets?