Exam 8: Analysis of Financial Statements

If the current ratio of Firm A is greater than the current ratio of Firm B, we cannot be sure that the quick ratio of Firm A is greater than that of Firm B. However, if the quick ratio of Firm A exceeds that of Firm B, we can be assured that Firm A's current ratio also exceeds B's current ratio.

Other things held constant, which of the following will not affect the current ratio, assuming an initial current ratio greater than 1.0?

Devon Inc. has a higher ROE than Berwyn Inc. (17 percent compared to 14 percent), but it has a lower EVA than Berwyn. Which of the following factors could explain the relative performance of these two companies?

Which of the following statements is most correct?

Southeast Packaging's ROE last year was only 5 percent, but its management has developed a new operating plan designed to improve things. The new plan calls for a total debt ratio of 60 percent, which will result in interest charges of $8,000 per year. Management projects an EBIT of $26,000 on sales of $240,000, and it expects to have a total assets turnover ratio of 2.0. Under these conditions, the average tax rate will be 40 percent. If the changes are made, what return on equity will Southeast earn?

Reeves Corporation forecasts that its operating income (EBIT) and total assets will remain the same as last year, but that the company's debt ratio will increase this year. What can you conclude about the company's financial ratios? (Assume that there will be no change in the company's tax rate.)

Vance Motors has current assets of $1.2 million. The company's current ratio is 1.2, its quick ratio is 0.7, and its inventory turnover ratio is 4. The company would like to increase its inventory turnover ratio to the industry average, which is 5, without reducing its sales. Any reductions in inventory will be used to reduce the company's current liabilities. What will be the company's current ratio, assuming that it is successful in improving its inventory turnover ratio to 5?

Which of the following statements is most correct?

If a firm has high current and quick ratios, this is always a good indication that a firm is managing its liquidity position well.

Cleveland Corporation has 100,000 shares of common stock outstanding. The company's net income is $750,000 and its P/E is 8. What is the company's stock price?

Which of the following actions can a firm take to increase its current ratio?

Generally, firms with high profit margins have high asset turnover rates, and firms with low profit margins have low turnover rates; this result is exactly as predicted by the extended Du Pont equation.

Lombardi Trucking Company has the following data: Assets: $10,000; Profit margin: 3.0%; Tax rate: 40%; Debt ratio: 60.0%; Interest rate: 10.0%; and Total assets turnover: 2.0. What is Lombardi's TIE ratio?

Other things held constant, which of the following will not affect the quick ratio? (Assume that current assets equal current liabilities.)

Which of the following actions will increase a company's quick ratio?

Culver Inc. has earnings after interest but before taxes of $300. The company's before-tax times-interest-earned ratio is 7.00. Calculate the company's interest charges.

Variations in accounting methods among firms can invalidate financial comparisons between firms.

Last year Thatcher Industries had a current ratio of 1.2, a quick ratio of 0.8, and current liabilities of $500,000. Which of the following statements is most correct?

Dean Brothers Inc. recently reported net income of $1,500,000. The company has 300,000 shares of common stock. The stock currently trades at $60 a share. The company continues to expand and anticipates that one year from now its net income will be $2,500,000. Over the next year the company also anticipates issuing an additional 100,000 shares of stock, so that one year from now the company will have 400,000 shares of common stock. Assuming the company's price/earnings ratio remains at its current level, what will be the company's stock price one year from now?

Lone Star Plastics has the following data: Assets: $100,000; Profit margin: 6.0%; Tax rate: 40%; Debt ratio: 40.0%; Interest rate: 8.0%: Total assets turnover: 3.0. What is Lone Star's EBIT?