FiltersDone

Question type

Essay

Multiple Choice

Short Answer

True False

Matching

Exam 3: Analysis of Financial Statements

Show Answer

Share

---

All types

Filters

Study FlashcardsPractice ExamLearn

Question 31

Multiple Choice

Review LaterAdd Note

Review Later

Which of the following statements is CORRECT?

A) If Firms X and Y have the same P/E ratios, then their market-to- book ratios must also be the same.
B) If Firms X and Y have the same net income, number of shares outstanding, and price per share, then their P/E ratios must also
Be the same.
C) If Firms X and Y have the same earnings per share and market-to-
Book ratio, they must have the same price earnings ratio.
D) If Firm X's P/E ratio exceeds that of Firm Y, then Y is likely to
Be less risky and also to be expected to grow at a faster rate.
E) If Firms X and Y have the same net income, number of shares outstanding, and price per share, then their market-to-book ratios must also be the same.

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

Correct Answer

verified

Show Answer

Question 32

Multiple Choice

Review LaterAdd Note

Review Later

Nikko Corp.'s total common equity at the end of last year was $305,000 and its net income after taxes was $60,000. What was its ROE?

A) 16.87%
B) 17.75%
C) 18.69%
D) 19.67%
E) 20.66%

F) B) and D)
G) None of the above

Correct Answer

verified

Show Answer

Question 33

True/False

Review LaterAdd Note

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.

Last year Rosenberg Corp. had $195,000 of assets, $18,775 of net income, and a debt-to-total-assets ratio of 32%. Now suppose the new CFO convinces the president to increase the debt ratio to 48%. Sales and total assets will not be affected, but interest expenses would increase. However, the CFO believes that better cost controls would be sufficient to offset the higher interest expense and thus keep net income unchanged. By how much would the change in the capital structure improve the ROE?

A good bit of relatively simple arithmetic is involved in some of these problems, and although the calculations are simple, it will take students time to set up the problems and do the arithmetic. We allow for this when assigning problems for a timed test. Also, note that students must know the definitions of a number of ratios to answer the questions. We provide our students with a formula sheet on exams, using the relevant sections of Appendix D at the end of the text. The difficulty of the problems depends on (1) whether or not students are provided with a formula sheet and (2) the amount of time they have to work the problems. Our difficulty assessments assume that they have a formula sheet and a "reasonable" amount of time for the test. Note that some problems are trivially easy if students have formula sheets. To work some of the problems, students must transpose equations and solve for items that are normally inputs. For example, the equation for the profit margin is given as Profit margin = Net income/Sales. We might have a problem where sales and the profit margin are given and then require students to find the firm's net income. We explain to students in class before the exam that they will have to transpose terms in the formulas to work some problems. Problems 57 to 86 are all stand-alone problems with individualized data, but problems 87 through 105 are all based on a common set of data, and they require students to calculate ratios and find items like EPS, TIE, and the like using this data set. The statements can be changed algorithmically, and this changes the calculated ratios and other items. -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?

A new firm is developing its business plan. It will require $565,000 of assets, and it projects $452,800 of sales and $354,300 of operating costs for the first year. Management is quite sure of these numbers because of contracts with its customers and suppliers. It can borrow at a rate of 7.5%, but the bank requires it to have a TIE of at least 4.0, and if the TIE falls below this level the bank will call in the loan and the firm will go bankrupt. What is the maximum debt ratio the firm can use? (Hint: Find the maximum dollars of interest, then the debt that produces that interest, and then the related debt ratio.)

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?

A good bit of relatively simple arithmetic is involved in some of these problems, and although the calculations are simple, it will take students time to set up the problems and do the arithmetic. We allow for this when assigning problems for a timed test. Also, note that students must know the definitions of a number of ratios to answer the questions. We provide our students with a formula sheet on exams, using the relevant sections of Appendix D at the end of the text. The difficulty of the problems depends on (1) whether or not students are provided with a formula sheet and (2) the amount of time they have to work the problems. Our difficulty assessments assume that they have a formula sheet and a "reasonable" amount of time for the test. Note that some problems are trivially easy if students have formula sheets. To work some of the problems, students must transpose equations and solve for items that are normally inputs. For example, the equation for the profit margin is given as Profit margin = Net income/Sales. We might have a problem where sales and the profit margin are given and then require students to find the firm's net income. We explain to students in class before the exam that they will have to transpose terms in the formulas to work some problems. Problems 57 to 86 are all stand-alone problems with individualized data, but problems 87 through 105 are all based on a common set of data, and they require students to calculate ratios and find items like EPS, TIE, and the like using this data set. The statements can be changed algorithmically, and this changes the calculated ratios and other items. -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.

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?

Companies HD and LD are both profitable, and they have the same total assets (TA) , Sales (S) , return on assets (ROA) , and profit margin (PM) . However, Company HD has the higher debt ratio. Which of the following statements is CORRECT?

(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. -What is the firm's ROA?

(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. -What is the firm's book value per share?

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.

Muscarella Inc. has the following balance sheet and income statement data: 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?

One problem with ratio analysis is that relationships can be manipulated. For example, if our current ratio is greater than 1.5, then borrowing on a short-term basis and using the funds to build up our cash account would cause the current ratio to increase.

(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. -What is the firm's debt ratio?

Last year Vaughn Corp. had sales of $315,000 and a net income of $17,832, and its year-end assets were $210,000. The firm's total-debt-to-total- assets ratio was 42.5%. Based on the Du Pont equation, what was Vaughn's ROE?

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

Rappaport Corp.'s sales last year were $320,000, and its net income after taxes was $23,000. What was its profit margin on sales?