Question 1

An investor is considering starting a new business. The company would require $475,000 of assets, and it would be financed entirely with common stock. The investor 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)   $54,979
B)   $57,873
C)   $60,919
D)   $64,125E) All of the above
F) A) and D)

Question 2

Casey Communications 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 current ratio increased.
B)   The company's times-interest-earned ratio decreased.
C)   The company's basic earning power ratio increased.
D)   The company's equity multiplier increased.E) A) and B)
F) A) and C)

Question 3

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)   1.55E) None of the above
F) A) and C)

Question 4

Companies HD and LD have the same tax rate, sales, 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 has a lower equity multiplier.
B)   Company HD has more net income.
C)   Company HD pays more in taxes.
D)   Company HD has a lower times-interest-earned (TI
E)   ratio.E) C) and D)
F) B) and C)

Question 5

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

Accepted Answer

A)   Company LD has a higher basic earning power ratio (BEP) .
B)   Company HD has a higher basic earning power ratio (BEP) .
C)   If the interest rate the companies pay on their debt is MORE THAN their basic earning power (BEP) , then Company HD will have the higher ROE.
D)   If the interest rate the companies pay on their debt is LESS THAN their basic earning power (BEP) , then Company HD will have the higher ROE.E) B) and C)
F) A) and D)

Question 6

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. 
-What is the firm's total assets turnover?

Accepted Answer

A)   0.90
B)   1.12
C)   1.40
D)   1.68E) A) and B)
F) A) and C)

Question 7

Safeco's current assets total to $20 million versus $10 million of current liabilities, while Risco's current assets are $10 million versus $20 million of current liabilities. Both firms would like to "window dress" their end-of-year financial statements, and to do so they tentatively plan to borrow $10 million on a short-term basis and to then hold the borrowed funds in their cash accounts. Which of the statements below best describes the results of these transactions?

Accepted Answer

A)   The transactions would raise Safeco's financial strength as measured by its current ratio but lower Risco's current ratio.
B)   The transactions would lower Safeco's financial strength as measured by its current ratio but raise Risco's current ratio.
C)   The transaction would lower both firms' financial strength as measured by their current ratios.
D)   The transaction would improve both firms' financial strength as measured by their current ratios.E) None of the above
F) B) and C)

Question 8

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

Exam 3: Analysis of Financial Statements

Correct Answer
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Casey Communications 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?

Correct Answer
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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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Companies HD and LD have the same tax rate, sales, 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?

Correct Answer
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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?

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

Correct Answer
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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. -What is the firm's total assets turnover?

Correct Answer
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Exam 3: Analysis of Financial Statements

Correct AnswerverifiedShow Answer

Casey Communications 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?

Correct AnswerverifiedShow Answer

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

Companies HD and LD have the same tax rate, sales, 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?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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. -What is the firm's total assets turnover?

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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