Question 1

The operating margin measures operating income per dollar of assets.

Accepted Answer

A) True 
 B)False

Question 2

The more conservative a firm's management is, the higher its debt ratio is likely to be.

Accepted Answer

A) True 
 B)False

Question 3

Garcia Industries has sales of $200,000 and accounts receivable of $18,500, and it gives its customers 25 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)  $241.45 
B)  $254.16 
C)  $267.54 
D)  $281.62 
E)  $296.44 
A)  $241.45 
B)  $254.16 
C)  $267.54 
D)  $281.62 
E)  $296.44

Question 4

(The following information applies to Problems 110 through 127.)
The balance sheet and income statement shown below are for Koski 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)  2.20 
B)  2.45 
C)  2.72 
D)  3.02 
E)  3.33 
A)  2.20 
B)  2.45 
C)  2.72 
D)  3.02 
E)  3.33

Question 5

Beranek Corp has $720,000 of assets, and it uses no debt--it is financed only with common equity. The new CFO wants to employ enough debt to raise the debt/assets ratio to 40%, using the proceeds from 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)  $273,600 
B)  $288,000 
C)  $302,400 
D)  $317,520 
E)  $333,396 
A)  $273,600 
B)  $288,000 
C)  $302,400 
D)  $317,520 
E)  $333,396

Question 6

Suppose you are analyzing two firms in the same industry. Firm A has a profit margin of 10% versus a margin of 8% for Firm B. Firm A's debt ratio is 70% versus one of 20% for Firm B. Based only on these two facts, you cannot reach a conclusion as to which firm is better managed, because the difference in debt, not better management, could be the cause of Firm A's higher profit margin.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following statements is CORRECT?

Accepted Answer

A)  If one firm has a higher debt ratio than another, we can be certain that the firm with the higher debt ratio will have the lower TIE ratio, as that ratio depends entirely on the amount of debt a firm uses. 
B)  A firm's use of debt will have no effect on its profit margin. 
C)  If two firms differ only in their use of debt--i.e., they have identical assets, sales, operating costs, interest rates on their debt, and tax rates--but one firm has a higher debt ratio, the firm that uses more debt will have a lower profit margin on sales and a lower return on assets. 
D)  The debt ratio as it is generally calculated makes an adjustment for the use of assets leased under operating leases, so the debt ratios of firms that lease different percentages of their assets are still comparable. 
E)  If two firms differ only in their use of debt--i.e., they have identical assets, sales, operating costs, and tax rates--but one firm has a higher debt ratio, the firm that uses more debt will have a higher operating margin and return on assets. 
A)  If one firm has a higher debt ratio than another, we can be certain that the firm with the higher debt ratio will have the lower TIE ratio, as that ratio depends entirely on the amount of debt a firm uses. 
B)  A firm's use of debt will have no effect on its profit margin. 
C)  If two firms differ only in their use of debt--i.e., they have identical assets, sales, operating costs, interest rates on their debt, and tax rates--but one firm has a higher debt ratio, the firm that uses more debt will have a lower profit margin on sales and a lower return on assets. 
D)  The debt ratio as it is generally calculated makes an adjustment for the use of assets leased under operating leases, so the debt ratios of firms that lease different percentages of their assets are still comparable. 
E)  If two firms differ only in their use of debt--i.e., they have identical assets, sales, operating costs, and tax rates--but one firm has a higher debt ratio, the firm that uses more debt will have a higher operating margin and return on assets.

Question 8

The days sales outstanding tells us how long it takes, on average, to collect after a sale is made. The DSO can be compared with the firm's credit terms to get an idea of whether customers are paying on time.

Accepted Answer

A) True 
 B)False

Question 9

(The following information applies to Problems 110 through 127.)
The balance sheet and income statement shown below are for Koski 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 inventory turnover ratio?

Accepted Answer

A)  5.47 
B)  5.74 
C)  6.03 
D)  6.33 
E)  6.65 
A)  5.47 
B)  5.74 
C)  6.03 
D)  6.33 
E)  6.65

Question 10

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 increasing and trending still higher, this would be interpreted as a sign of strength. 
B)  A high average DSO indicates that none of its customers are paying on time. In addition, it makes no sense to evaluate the firm's DSO with the firm's credit terms. 
C)  There is no relationship between the days' sales outstanding (DSO) and the average collection period (ACP). These ratios measure entirely different things. 
D)  A reduction in accounts receivable would have no effect on the current 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. 
A)  If a security analyst saw that a firm's days' sales outstanding (DSO) was higher than the industry average, and was increasing and trending still higher, this would be interpreted as a sign of strength. 
B)  A high average DSO indicates that none of its customers are paying on time. In addition, it makes no sense to evaluate the firm's DSO with the firm's credit terms. 
C)  There is no relationship between the days' sales outstanding (DSO) and the average collection period (ACP). These ratios measure entirely different things. 
D)  A reduction in accounts receivable would have no effect on the current 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.

Question 11

Market value ratios provide management with an indication of how investors view the firm's past performance and especially its future prospects.

Accepted Answer

A) True 
 B)False

Question 12

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. 
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.

Question 13

In general, if investors regard a company as being relatively risky and/or having relatively poor growth prospects, then it will have relatively high P/E and M/B ratios.

Accepted Answer

A) True 
 B)False

Question 14

(The following information applies to Problems 110 through 127.)
The balance sheet and income statement shown below are for Koski 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 current ratio?

Accepted Answer

A)  0.99 
B)  1.10 
C)  1.23 
D)  1.36 
E)  1.50 
A)  0.99 
B)  1.10 
C)  1.23 
D)  1.36 
E)  1.50

Question 15

Last year Blease Inc had a total assets turnover of 1.33 and an equity multiplier of 1.75. Its sales were $295,000 and its net income was $10,600. The CFO believes that the company could have operated more efficiently, lowered its costs, and increased its net income by $10,250 without changing its sales, assets, or capital structure. Had it cut costs and increased its net income by this amount, how much would the ROE have changed?

Accepted Answer

A)  6.55% 
B)  7.28% 
C)  8.09% 
D)  8.90% 
E)  9.79% 
A)  6.55% 
B)  7.28% 
C)  8.09% 
D)  8.90% 
E)  9.79%

Question 16

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.

Accepted Answer

A) True 
 B)False

Question 17

What is the firm's market-to-book ratio?

Accepted Answer

A)  0.87 
B)  1.02 
C)  1.21 
D)  1.42 
E)  1.67 
A)  0.87 
B)  1.02 
C)  1.21 
D)  1.42 
E)  1.67

Question 18

Which of the following statements is CORRECT?

Accepted Answer

A)  The ratio of long-term debt to total capital is more likely to experience seasonal fluctuations than is either the DSO or the inventory turnover ratio. 
B)  If two firms have the same ROA, the firm with the most debt can be expected to have the lower ROE. 
C)  An increase in the DSO, other things held constant, could be expected to increase the total assets turnover ratio. 
D)  An increase in the DSO, other things held constant, could be expected to increase the ROE. 
E)  An increase in a firm's debt ratio, with no changes in its sales or operating costs, could be expected to lower its profit margin. 
A)  The ratio of long-term debt to total capital is more likely to experience seasonal fluctuations than is either the DSO or the inventory turnover ratio. 
B)  If two firms have the same ROA, the firm with the most debt can be expected to have the lower ROE. 
C)  An increase in the DSO, other things held constant, could be expected to increase the total assets turnover ratio. 
D)  An increase in the DSO, other things held constant, could be expected to increase the ROE. 
E)  An increase in a firm's debt ratio, with no changes in its sales or operating costs, could be expected to lower its profit margin.

Question 19

By how much would the reduction in assets improve the ROE?

Accepted Answer

A)  2.85% 
B)  3.00% 
C)  3.16% 
D)  3.31% 
E)  3.48% 
A)  2.85% 
B)  3.00% 
C)  3.16% 
D)  3.31% 
E)  3.48%

Question 20

Taggart Technologies is considering issuing new common stock and using the proceeds to reduce its outstanding debt. The stock issue would have no effect on total assets, the interest rate Taggart pays, EBIT, or the tax rate. Which of the following is likely to occur if the company goes ahead with the stock issue?

Accepted Answer

A)  The ROA will decline. 
B)  Taxable income will decline. 
C)  The tax bill will increase. 
D)  Net income will decrease. 
E)  The times-interest-earned ratio will decrease. 
A)  The ROA will decline. 
B)  Taxable income will decline. 
C)  The tax bill will increase. 
D)  Net income will decrease. 
E)  The times-interest-earned ratio will decrease.

The operating margin measures operating income per dollar of assets.

The more conservative a firm's management is, the higher its debt ratio is likely to be.

Which of the following statements is CORRECT?

The days sales outstanding tells us how long it takes, on average, to collect after a sale is made. The DSO can be compared with the firm's credit terms to get an idea of whether customers are paying on time.

Which of the following statements is CORRECT?

Market value ratios provide management with an indication of how investors view the firm's past performance and especially its future prospects.

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?

In general, if investors regard a company as being relatively risky and/or having relatively poor growth prospects, then it will have relatively high P/E and M/B ratios.

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.

What is the firm's market-to-book ratio?

Which of the following statements is CORRECT?

By how much would the reduction in assets improve the ROE?

An Overview of Financial Management

Financial Markets and Institutions

Financial Statements, Cash Flow, and Taxes

Time Value of Money

Bonds and Their Valuation

Bonds and Their Valuation

Risk and Rates of Return

Stocks and Their Valuation

The Cost of Capital

The Basics of Capital Budgeting

Cash Flow Estimation and Risk Analysis

Real Options and Other Topics in Capital Budgeting

Capital Structure and Leverage

Distributions to Shareholders: Dividends and

Working Capital Management

Financial Planning and Forecasting

Derivatives and Risk Management

Multinational Financial Management

Hybrid Financing: Preferred Stock, Leasing, Warrants, and Convertibles

Mergers and Acquisitions

Financial Management and Stock Equilibrium

Filters

Exam 4: Analysis of Financial Statements

The operating margin measures operating income per dollar of assets.

The more conservative a firm's management is, the higher its debt ratio is likely to be.

Which of the following statements is CORRECT?

The days sales outstanding tells us how long it takes, on average, to collect after a sale is made. The DSO can be compared with the firm's credit terms to get an idea of whether customers are paying on time.

Which of the following statements is CORRECT?

Market value ratios provide management with an indication of how investors view the firm's past performance and especially its future prospects.

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?

In general, if investors regard a company as being relatively risky and/or having relatively poor growth prospects, then it will have relatively high P/E and M/B ratios.

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.

What is the firm's market-to-book ratio?

Which of the following statements is CORRECT?

By how much would the reduction in assets improve the ROE?

An Overview of Financial Management

Financial Markets and Institutions

Financial Statements, Cash Flow, and Taxes

Time Value of Money

Bonds and Their Valuation

Bonds and Their Valuation

Risk and Rates of Return

Stocks and Their Valuation

The Cost of Capital

The Basics of Capital Budgeting

Cash Flow Estimation and Risk Analysis

Real Options and Other Topics in Capital Budgeting

Capital Structure and Leverage

Distributions to Shareholders: Dividends and

Working Capital Management

Financial Planning and Forecasting

Derivatives and Risk Management

Multinational Financial Management

Hybrid Financing: Preferred Stock, Leasing, Warrants, and Convertibles

Mergers and Acquisitions

Financial Management and Stock Equilibrium

Filters