Question 1

Which of the following statements is CORRECT?

Accepted Answer

A)   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.
B)   If two firms have the same ROA, the firm with the most debt can be expected to have the lower ROE.
C)   An increase in the DSO, other things held constant, could be expected to increase the total assets turnover ratio.
D)   An increase in the DSO, other things held constant, could be expected to increase the ROE.
E)   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.F) D) and E)
G) B) and D)

Question 2

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 3

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)   $200,747F) A) and B)
G) A) and C)

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

(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 debt ratio?

Accepted Answer

A)   45.93%
B)   51.03%
C)   56.70%
D)   63.00%
E)   70.00%F) A) and D)
G) B) and E)

Question 6

Determining whether a firm's financial position is improving or deteriorating requires analyzing more than the ratios for a given year. Trend analysis is one method of measuring changes in a firm's performance over time.

Accepted Answer

A) True 
 B)False

Question 7

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 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 EBITDA coverage?

Accepted Answer

A)   3.29
B)   3.46
C)   3.64
D)   3.82
E)   4.01F) B) and C)
G) D) and E)

Question 9

Pace Corp.'s assets are $625,000, and its total debt outstanding is $185,000. The new CFO wants to employ a debt ratio of 55%. How much debt must the company add or subtract to achieve the target debt ratio?

Accepted Answer

A)   $158,750
B)   $166,688
C)   $175,022
D)   $183,773
E)   $192,962F) D) and E)
G) A) and D)

Question 10

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 11

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%F) A) and B)
G) None of the above

Question 12

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%F) A) and C)
G) C) and D)

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

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)   $328.22F) C) and D)
G) B) and E)

Question 16

Which of the following statements is CORRECT?

Accepted Answer

A)   If a firm has the highest price/earnings ratio of any firm in its industry, then, other things held constant, this suggests that the board of directors should fire the president.
B)   If a firm has the highest market/book ratio of any firm in its industry, then, other things held constant, this suggests that the board of directors should fire the president.
C)   Other things held constant, the higher a firm's expected future growth rate, the lower its P/E ratio is likely to be.
D)   The higher the market/book ratio, then, other things held constant, the higher one would expect to find the Market Value Added (MV
A)  .
E)   If a firm has a history of high Economic Value Added (EV
A)   numbers each year, and if investors expect this situation to continue, then its market/book ratio and MVA are both likely to be below average.F) None of the above
G) B) and C)

Question 17

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 18

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

Accepted Answer

A)   Reduce the company's days' sales outstanding to the industry average and use the resulting cash savings to purchase plant and equipment.
B)   Use cash to repurchase some of the company's own stock.
C)   Borrow using short-term debt and use the proceeds to repay debt that has a maturity of more than one year.
D)   Issue new stock and then use some of the proceeds to purchase additional inventory and hold the remainder as cash.
E)   Use cash to increase inventory holdings.F) B) and D)
G) None of the above

Question 19

(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 equity multiplier?

Accepted Answer

A)   3.33
B)   3.50
C)   3.68
D)   3.86
E)   4.05F) A) and B)
G) C) and E)

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 quick ratio?

Accepted Answer

A)   0.49
B)   0.61
C)   0.73
D)   0.87
E)   1.05F) All of the above
G) A) and B)

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

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.

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

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

Correct Answer
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Correct Answer
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Correct Answer
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Which of the following statements is CORRECT?

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

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

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

Correct Answer
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Determining whether a firm's financial position is improving or deteriorating requires analyzing more than the ratios for a given year. Trend analysis is one method of measuring changes in a firm's performance over time.

Correct Answer
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Correct Answer
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Correct Answer
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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.

Correct Answer
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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?

Correct Answer
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Correct Answer
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Pace Corp.'s assets are $625,000, and its total debt outstanding is $185,000. The new CFO wants to employ a debt ratio of 55%. How much debt must the company add or subtract to achieve the target debt ratio?

Correct Answer
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Correct Answer
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Which of the following statements is CORRECT?

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

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.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Determining whether a firm's financial position is improving or deteriorating requires analyzing more than the ratios for a given year. Trend analysis is one method of measuring changes in a firm's performance over time.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Pace Corp.'s assets are $625,000, and its total debt outstanding is $185,000. The new CFO wants to employ a debt ratio of 55%. How much debt must the company add or subtract to achieve the target debt ratio?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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