Question 1

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.F) A) and B)
G) B) and D)

Question 2

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 equity multiplier?

Accepted Answer

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

Question 3

Although a full liquidity analysis requires the use of a cash budget, the current and quick ratios provide fast and easy-to-use measures of a firm's liquidity position.

Accepted Answer

A) True 
 B)False

Question 4

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)   1.63F) A) and C)
G) B) and D)

Question 5

Suppose a firm wants to maintain a specific TIE ratio. It knows the amount of its debt, the interest rate on that debt, the applicable tax rate, and its operating costs. With this information, the firm can calculate the amount of sales required to achieve its target TIE ratio.

Accepted Answer

A) True 
 B)False

Question 6

The "apparent," but not the "true," financial position of a company whose sales are seasonal can differ dramatically, depending on the time of year when the financial statements are constructed.

Accepted Answer

A) True 
 B)False

Question 7

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) A) and D)
G) B) and E)

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

Heaton Corp. sells on terms that allow customers 45 days to pay for merchandise. Its sales last year were $425,000, and its year-end receivables were $60,000. If its DSO is less than the 45-day credit period, then customers are paying on time. Otherwise, they are paying late. By how much are customers paying early or late? Base your answer on this equation: DSO - Credit period = days early or late, and use a 365-day year when calculating the DSO. A positive answer indicates late payments, while a negative answer indicates early payments.

Accepted Answer

A)   6.20
B)   6.53
C)   6.86
D)   7.20
E)   7.56F) All of the above
G) A) and C)

Question 10

The inventory turnover ratio and days sales outstanding (DSO) are two ratios that are used to assess how effectively a firm is managing its assets.

Accepted Answer

A) True 
 B)False  True

Question 11

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)   $189,851F) A) and B)
G) B) and D)

Question 12

Firms A and B have the same current ratio, 0.75, the same amount of sales, and the same amount of current liabilities. However, Firm A has a higher inventory turnover ratio than B. Therefore, we can conclude that A's quick ratio must be smaller than B's.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following would, generally, indicate an improvement in a company's financial position, holding other things constant?

Accepted Answer

A)   The TIE declines.
B)   The DSO increases.
C)   The EBITDA coverage ratio increases.
D)   The current and quick ratios both decline.
E)   The total assets turnover decreases.F) B) and D)
G) A) and B)

Question 14

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 15

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 TIE?

Accepted Answer

A)   1.94
B)   2.15
C)   2.39
D)   2.66
E)   2.93F) B) and D)
G) C) and D)

Question 16

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 ROA?

Accepted Answer

A)   2.70%
B)   2.97%
C)   3.26%
D)   3.59%
E)   3.95%F) C) and D)
G) B) and D)

Question 17

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 EBITDA coverage?

Accepted Answer

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

Question 18

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)   2.48F) C) and E)
G) B) and C)

Question 19

Which of the following statements is CORRECT?

Accepted Answer

A)   If a security analyst saw that a firm's days' sales outstanding (DSO)  was higher than the industry average and was also increasing and trending still higher, this would be interpreted as a sign ofStrength.
B)   If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days' salesOutstanding (DSO)  will increase.
C)   There is no relationship between the days' sales outstanding (DSO)  and the average collection period (ACP) . These ratios measureEntirely different things.
D)   A reduction in accounts receivable would have no effect on theCurrent ratio, but it would lead to an increase in the quick ratio.
E)   If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days' sales outstanding will decline.F) D) and E)
G) All of the above E

Question 20

Which of the following statements is CORRECT?

Accepted Answer

A)   Suppose a firm's total assets turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin rises from 9% to 10% and its debt increases from 40% of total assets to 60%. Under theseConditions, the ROE will increase.
B)   Suppose a firm's total assets turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin rises from 9% to 10% and its debt increases from 40% of total assets to 60%. Without additionalInformation, we cannot tell what will happen to the ROE.
C)   The modified Du Pont equation provides information about how operations affect the ROE, but the equation does not include theEffects of debt on the ROE.
D)   Other things held constant, an increase in the debt ratio willResult in an increase in the profit margin on sales.
E)   Suppose a firm's total assets turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin rises from 9% to 10%, and its debt increases from 40% of total assets to 60%. Under these conditions, the ROE will decrease.F) C) and E)
G) B) and E)

Exam 3: Analysis of Financial Statements

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?

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 equity multiplier?

Correct Answer
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Although a full liquidity analysis requires the use of a cash budget, the current and quick ratios provide fast and easy-to-use measures of a firm's liquidity position.

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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Suppose a firm wants to maintain a specific TIE ratio. It knows the amount of its debt, the interest rate on that debt, the applicable tax rate, and its operating costs. With this information, the firm can calculate the amount of sales required to achieve its target TIE ratio.

Correct Answer
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The "apparent," but not the "true," financial position of a company whose sales are seasonal can differ dramatically, depending on the time of year when the financial statements are constructed.

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
verified

Correct Answer
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The inventory turnover ratio and days sales outstanding (DSO) are two ratios that are used to assess how effectively a firm is managing its assets.

Correct Answer
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True

Correct Answer
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Firms A and B have the same current ratio, 0.75, the same amount of sales, and the same amount of current liabilities. However, Firm A has a higher inventory turnover ratio than B. Therefore, we can conclude that A's quick ratio must be smaller than B's.

Correct Answer
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Which of the following would, generally, indicate an improvement in a company's financial position, holding other things constant?

Correct Answer
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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 TIE?

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 ROA?

Correct Answer
verified

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 EBITDA coverage?

Correct Answer
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C

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

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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E

Which of the following statements is CORRECT?

Correct Answer
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Exam 3: Analysis of Financial Statements

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?

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 equity multiplier?

Correct AnswerverifiedShow Answer

Although a full liquidity analysis requires the use of a cash budget, the current and quick ratios provide fast and easy-to-use measures of a firm's liquidity position.

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

Suppose a firm wants to maintain a specific TIE ratio. It knows the amount of its debt, the interest rate on that debt, the applicable tax rate, and its operating costs. With this information, the firm can calculate the amount of sales required to achieve its target TIE ratio.

Correct AnswerverifiedShow Answer

The "apparent," but not the "true," financial position of a company whose sales are seasonal can differ dramatically, depending on the time of year when the financial statements are constructed.

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

Correct AnswerverifiedShow Answer

The inventory turnover ratio and days sales outstanding (DSO) are two ratios that are used to assess how effectively a firm is managing its assets.

Correct AnswerverifiedTrue

Correct AnswerverifiedShow Answer

Firms A and B have the same current ratio, 0.75, the same amount of sales, and the same amount of current liabilities. However, Firm A has a higher inventory turnover ratio than B. Therefore, we can conclude that A's quick ratio must be smaller than B's.

Correct AnswerverifiedShow Answer

Which of the following would, generally, indicate an improvement in a company's financial position, holding other things constant?

Correct AnswerverifiedShow Answer

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 TIE?

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 ROA?

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 EBITDA coverage?

Correct AnswerverifiedC

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

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedE

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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True

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C

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E

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