Question 1

If a bank loan officer were considering a company's request for a loan,which of the following statements would you consider to be CORRECT?

Accepted Answer

A)  Other things held constant, the lower the current ratio, the lower the interest rate the bank would charge the firm.
B)  The lower the company's EBITDA coverage ratio, other things held constant, the lower the interest rate the bank would charge the firm.
C)  Other things held constant, the higher the debt ratio, the lower the interest rate the bank would charge the firm.
D)  Other things held constant, the lower the debt ratio, the lower the interest rate the bank would charge the firm.
E)  The lower the company's TIE ratio, other things held constant, the lower the interest rate the bank would charge the firm.F) C) and D)
G) B) and D)

Question 2

Exhibit 7.1
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. 
-Refer to Exhibit 7.1.What is the firm's dividends per share?

Accepted Answer

A)  $2.62
B)  $2.91
C)  $3.20
D)  $3.53
E)  $3.88F) A) and E)
G) C) and E)

Question 3

Chambliss Corp.'s total assets at the end of last year were $305,000 and its EBIT was 62,500.What was its basic earning power (BEP) ?

Accepted Answer

A)  18.49%
B)  19.47%
C)  20.49%
D)  21.52%
E)  22.59%F) C) and D)
G) A) and B)

Question 4

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

Question 5

Considered alone,which of the following would increase a company's current ratio?

Accepted Answer

A)  An increase in accounts payable.
B)  An increase in net fixed assets.
C)  An increase in accrued liabilities.
D)  An increase in notes payable.
E)  An increase in accounts receivable.F) A) and B)
G) C) and D)

Question 6

Amram Company's current ratio is 1.9.Considered alone,which of the following actions would reduce the company's current ratio?

Accepted Answer

A)  Use cash to reduce accounts payable.
B)  Borrow using short-term notes payable and use the proceeds to reduce accruals.
C)  Borrow using short-term notes payable and use the proceeds to reduce long-term debt.
D)  Use cash to reduce accruals.
E)  Use cash to reduce short-term notes payable.F) B) and C)
G) C) and D)

Question 7

You observe that a firm's ROE is above the industry average,but its profit margin and debt ratio are both below the industry average.Which of the following statements is CORRECT?

Accepted Answer

A)  Its total assets turnover must equal the industry average.
B)  Its total assets turnover must be above the industry average.
C)  Its return on assets must equal the industry average.
D)  Its TIE ratio must be below the industry average.
E)  Its total assets turnover must be below the industry average.F) A) and D)
G) A) and C)

Question 8

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.

Accepted Answer

A) True 
 B)False

Question 9

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)  Company Heidee has more net income.
B)  Company Heidee pays less in taxes.
C)  Company Heidee has a lower equity multiplier.
D)  Company Heidee has a higher ROA.
E)  Company Heidee has a higher times interest earned (TI
E)   ratio.F) B) and C)
G) B) and D)

Question 10

Last year Central Chemicals had sales of $205,000,assets of $127,500,a profit margin of 5.3%,and an equity multiplier of 1.2.The CFO believes that the company could reduce its assets by $21,000 without affecting either sales or costs.Had it reduced its assets in this amount,and had the debt-to-assets ratio,sales,and costs remained constant,by how much would the ROE have changed?

Accepted Answer

A)  1.81%
B)  2.02%
C)  2.22%
D)  2.44%
E)  2.68%F) A) and B)
G) None of the above

Question 11

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?

Accepted Answer

A)  16.87%
B)  17.75%
C)  18.69%
D)  19.67%
E)  20.66%F) A) and B)
G) None of the above

Question 12

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 13

Muscarella Inc.has the following balance sheet and income statement data:   Cash $14,000 Accounts payable $2,000 Receivables 70,0000 ther current liabilities 28,000 Inventories 210,000 Total CL 70,000 Total CA $294,000 Long-term debt 70,000 Net fixed assets 126,000 Common equity 280,000 Total assets $420,000 Total liab. and equity $$420,000 Sales $280,000 Net income $21,000\begin{array} { l c r } 	ext { Cash } & \$ 14,000 	ext { Accounts payable } & \$ 2,000 \	ext { Receivables } & 70,0000 	ext { ther current liabilities } & 28,000 \	ext { Inventories } & 210,000 	ext { Total CL } & 70,000 \	ext { Total CA } & \$ 294,000 	ext { Long-term debt } & 70,000 \	ext { Net fixed assets } & 126,000 	ext { Common equity } & 280,000 \	ext { Total assets } & \$ 420,000 	ext { Total liab. and equity } & \$ \$ 420,000 \	ext { Sales } & \$ 280,000 & \	ext { Net income } & \$ 21,000 &\end{array} Cash  Receivables  Inventories  Total CA  Net fixed assets  Total assets  Sales  Net income ​$14,000 Accounts payable 70,0000 ther current liabilities 210,000 Total CL $294,000 Long-term debt 126,000 Common equity $420,000 Total liab. and equity $280,000$21,000​$2,00028,00070,00070,000280,000$$420,000​  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% F) A) and E)
G) None of the above

Question 14

Last year Mason Inc.had a total assets turnover of 1.33 and an equity multiplier of 1.75.Its sales were $195,000 and its net income was $10,549.The CFO believes that the company could have operated more efficiently,lowered its costs,and increased its net income by $5,250 without changing its sales,assets,or capital structure.Had it cut costs and increased its net income in this amount,by how much would the ROE have changed?

Accepted Answer

A)  5.66%
B)  5.95%
C)  6.27%
D)  6.58%
E)  6.91%F) All of the above
G) A) and B)

Question 15

Which of the following statements is CORRECT?

Accepted Answer

A)  If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days' sales outstanding will decline.
B)  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 of strength.
C)  If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days' sales outstanding (DSO)  will increase.
D)  There is no relationship between the days' sales outstanding (DSO)  and the average collection period (ACP) . These ratios measure entirely different things.
E)  A reduction in accounts receivable would have no effect on the current ratio, but it would lead to an increase in the quick ratio.F) B) and E)
G) A) and B)

Question 16

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

Question 17

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)  $4,166,620F) None of the above
G) B) and C)

Question 18

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 19

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

Question 20

Exhibit 7.1
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. 
-Refer to Exhibit 7.1.What is the firm's EBITDA coverage?

Accepted Answer

A)  3.29
B)  3.46
C)  3.64
D)  3.82
E)  4.01F) None of the above
G) A) and C)

Exam 7: Analysis of Financial Statements

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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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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Amram Company's current ratio is 1.9.Considered alone,which of the following actions would reduce the company's current ratio?

Correct Answer
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If a bank loan officer were considering a company's request for a loan,which of the following statements would you consider to be CORRECT?

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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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.

Correct Answer
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Correct Answer
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Correct Answer
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Chambliss Corp.'s total assets at the end of last year were $305,000 and its EBIT was 62,500.What was its basic earning power (BEP) ?

Correct Answer
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Correct Answer
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Considered alone,which of the following would increase a company's current ratio?

Correct Answer
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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?

Correct Answer
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You observe that a firm's ROE is above the industry average,but its profit margin and debt ratio are both below the industry average.Which of the following statements is CORRECT?

Correct Answer
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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?

Correct Answer
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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?

Correct Answer
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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?

Correct Answer
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Exam 7: Analysis of Financial Statements

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 AnswerverifiedShow Answer

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

Amram Company's current ratio is 1.9.Considered alone,which of the following actions would reduce the company's current ratio?

Correct AnswerverifiedShow Answer

If a bank loan officer were considering a company's request for a loan,which of the following statements would you consider to be CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Chambliss Corp.'s total assets at the end of last year were $305,000 and its EBIT was 62,500.What was its basic earning power (BEP) ?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Considered alone,which of the following would increase a company's current ratio?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

You observe that a firm's ROE is above the industry average,but its profit margin and debt ratio are both below the industry average.Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

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