Question 1

Which of the following statements is CORRECT?

Accepted Answer

A)  A reduction in inventories would have no effect on the current ratio. 
B)  An increase in inventories would have no effect on the current ratio. 
C)  If a firm increases its sales while holding its inventories constant, then, other things held constant, its inventory turnover ratio will increase. 
D)  A reduction in the inventory turnover ratio will generally lead to an increase in the ROE. 
E)  If a firm increases its sales while holding its inventories constant, then, other things held constant, its fixed assets turnover ratio will decline. 
A)  A reduction in inventories would have no effect on the current ratio. 
B)  An increase in inventories would have no effect on the current ratio. 
C)  If a firm increases its sales while holding its inventories constant, then, other things held constant, its inventory turnover ratio will increase. 
D)  A reduction in the inventory turnover ratio will generally lead to an increase in the ROE. 
E)  If a firm increases its sales while holding its inventories constant, then, other things held constant, its fixed assets turnover ratio will decline.

Question 2

High current and quick ratios always indicate that the firm is managing its liquidity position well.

Accepted Answer

A) True 
 B)False

Question 3

A new firm is developing its business plan. It will require $615,000 of assets, and it projects $450,000 of sales and $355,000 of operating costs for the first year. Management is reasonably 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.)

Accepted Answer

A)  41.94% 
B)  44.15% 
C)  46.47% 
D)  48.92% 
E)  51.49% 
A)  41.94% 
B)  44.15% 
C)  46.47% 
D)  48.92% 
E)  51.49%

Question 4

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 these conditions, 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 additional information, we cannot tell what will happen to the ROE. 
C)  The DuPont equation provides information about how operations affect the ROE, but the equation does not include the effects of debt on the ROE. 
D)  Other things held constant, an increase in the debt ratio will result in an increase in the profit margin. 
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. 
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 these conditions, 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 additional information, we cannot tell what will happen to the ROE. 
C)  The DuPont equation provides information about how operations affect the ROE, but the equation does not include the effects of debt on the ROE. 
D)  Other things held constant, an increase in the debt ratio will result in an increase in the profit margin. 
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.

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

What is the firm's operating margin?

Accepted Answer

A)  3.12% 
B)  3.46% 
C)  3.85% 
D)  4.28% 
E)  4.75% 
A)  3.12% 
B)  3.46% 
C)  3.85% 
D)  4.28% 
E)  4.75%

Question 7

Other things held constant, the more debt a firm uses, the lower its return on total assets will be.

Accepted Answer

A) True 
 B)False

Question 8

If the CEO of a large, diversified, firm were filling out a fitness report on a division manager (i.e., "grading" the manager), which of the following situations would be likely to cause the manager to receive a better grade? In all cases, assume that other things are held constant.

Accepted Answer

A)  The division's basic earning power ratio is above the average of other firms in its industry. 
B)  The division's total assets turnover ratio is below the average for other firms in its industry. 
C)  The division's debt ratio is above the average for other firms in the industry. 
D)  The division's inventory turnover is 6, whereas the average for its competitors is 8. 
E)  The division's DSO (days' sales outstanding) is 40, whereas the average for its competitors is 30. 
A)  The division's basic earning power ratio is above the average of other firms in its industry. 
B)  The division's total assets turnover ratio is below the average for other firms in its industry. 
C)  The division's debt ratio is above the average for other firms in the industry. 
D)  The division's inventory turnover is 6, whereas the average for its competitors is 8. 
E)  The division's DSO (days' sales outstanding) is 40, whereas the average for its competitors is 30.

Question 9

Which of the following statements is CORRECT?

Accepted Answer

A)  Other things held constant, the less debt a firm uses, the lower its return on total assets will be. 
B)  The advantage of the basic earning power ratio (BEP) over the return on total assets for judging a company's operating efficiency is that the BEP does not reflect the effects of debt and taxes. 
C)  The return on common equity (RO
E)  is generally regarded as being less significant, from a stockholder's viewpoint, than the return on total assets (RO
A) . 
D)  The price/earnings (P/
E)  ratio tells us how much investors are willing to pay for a dollar of current earnings. In general, investors regard companies with higher P/E ratios as being more risky and/or less likely to enjoy higher future growth. 
E)  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 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. 
A)  Other things held constant, the less debt a firm uses, the lower its return on total assets will be. 
B)  The advantage of the basic earning power ratio (BEP) over the return on total assets for judging a company's operating efficiency is that the BEP does not reflect the effects of debt and taxes. 
C)  The return on common equity (RO
E)  is generally regarded as being less significant, from a stockholder's viewpoint, than the return on total assets (RO
A) . 
D)  The price/earnings (P/
E)  ratio tells us how much investors are willing to pay for a dollar of current earnings. In general, investors regard companies with higher P/E ratios as being more risky and/or less likely to enjoy higher future growth. 
E)  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 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.

Question 10

Which of the following statements is CORRECT?

Accepted Answer

A)  If Firms X and Y have the same P/E ratios, then their market-to-book ratios must also be equal. 
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/or 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. 
A)  If Firms X and Y have the same P/E ratios, then their market-to-book ratios must also be equal. 
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/or 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.

Question 11

HD Corp and LD Corp have identical assets, sales, interest rates paid on their debt, tax rates, and EBIT. However, HD uses more debt than LD. Which of the following statements is CORRECT?

Accepted Answer

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

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

(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 quick ratio?

Accepted Answer

A)  0.51 
B)  0.64 
C)  0.76 
D)  0.92 
E)  1.10 
A)  0.51 
B)  0.64 
C)  0.76 
D)  0.92 
E)  1.10

Question 14

What is the firm's ROA?

Accepted Answer

A)  3.62% 
B)  3.98% 
C)  4.37% 
D)  4.81% 
E)  5.29% 
A)  3.62% 
B)  3.98% 
C)  4.37% 
D)  4.81% 
E)  5.29%

Question 15

Hoagland 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)  1.63 
A)  1.34 
B)  1.41 
C)  1.48 
D)  1.55 
E)  1.63

Question 16

Companies HD and LD have the same tax rate, sales, 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 has a lower equity multiplier. 
B)  Company HD has more net income. 
C)  Company HD pays more in taxes. 
D)  Company HD has a lower ROE. 
E)  Company HD has a lower times-interest-earned (TI
E)  ratio. 
A)  Company HD has a lower equity multiplier. 
B)  Company HD has more net income. 
C)  Company HD pays more in taxes. 
D)  Company HD has a lower ROE. 
E)  Company HD has a lower times-interest-earned (TI
E)  ratio.

Question 17

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?

Accepted Answer

A)  Company HD has a lower total assets turnover than Company LD. 
B)  Company HD has a lower equity multiplier than Company LD. 
C)  Company HD has a higher fixed assets turnover than Company LD. 
D)  Company HD has a higher ROE than Company LD. 
E)  Company HD has a lower operating income (EBIT) than Company LD. 
A)  Company HD has a lower total assets turnover than Company LD. 
B)  Company HD has a lower equity multiplier than Company LD. 
C)  Company HD has a higher fixed assets turnover than Company LD. 
D)  Company HD has a higher ROE than Company LD. 
E)  Company HD has a lower operating income (EBIT) than Company LD.

Question 18

River Corp's total assets at the end of last year were $415,000 and its net income was $32,750. What was its return on total assets?

Accepted Answer

A)  7.89% 
B)  8.29% 
C)  8.70% 
D)  9.14% 
E)  9.59% 
A)  7.89% 
B)  8.29% 
C)  8.70% 
D)  9.14% 
E)  9.59%

Question 19

A firm wants to strengthen its financial position. Which of the following actions would increase its quick ratio?

Accepted Answer

A)  Offer price reductions along with generous credit terms that would (1) enable the firm to sell some of its excess inventory and (2) lead to an increase in accounts receivable. 
B)  Issue new common stock and use the proceeds to increase inventories. 
C)  Speed up the collection of receivables and use the cash generated to increase inventories. 
D)  Use some of its cash to purchase additional inventories. 
E)  Issue new common stock and use the proceeds to acquire additional fixed assets. 
A)  Offer price reductions along with generous credit terms that would (1) enable the firm to sell some of its excess inventory and (2) lead to an increase in accounts receivable. 
B)  Issue new common stock and use the proceeds to increase inventories. 
C)  Speed up the collection of receivables and use the cash generated to increase inventories. 
D)  Use some of its cash to purchase additional inventories. 
E)  Issue new common stock and use the proceeds to acquire additional fixed assets.

Question 20

X-1 Corp's total assets at the end of last year were $405,000 and its EBIT was 52,500. What was its basic earning power (BEP) ratio?

Accepted Answer

A)  11.70% 
B)  12.31% 
C)  12.96% 
D)  13.61% 
E)  14.29% 
A)  11.70% 
B)  12.31% 
C)  12.96% 
D)  13.61% 
E)  14.29%

Which of the following statements is CORRECT?

High current and quick ratios always indicate that the firm is managing its liquidity position well.

Which of the following statements is CORRECT?

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

What is the firm's operating margin?

Other things held constant, the more debt a firm uses, the lower its return on total assets will be.

If the CEO of a large, diversified, firm were filling out a fitness report on a division manager (i.e., "grading" the manager), which of the following situations would be likely to cause the manager to receive a better grade? In all cases, assume that other things are held constant.

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

HD Corp and LD Corp have identical assets, sales, interest rates paid on their debt, tax rates, and EBIT. However, HD uses more debt than LD. Which of the following statements is CORRECT?

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

What is the firm's ROA?

Hoagland 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?

Companies HD and LD have the same tax rate, sales, 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?

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?

River Corp's total assets at the end of last year were $415,000 and its net income was $32,750. What was its return on total assets?

A firm wants to strengthen its financial position. Which of the following actions would increase its quick ratio?

X-1 Corp's total assets at the end of last year were $405,000 and its EBIT was 52,500. What was its basic earning power (BEP) ratio?

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

Which of the following statements is CORRECT?

High current and quick ratios always indicate that the firm is managing its liquidity position well.

Which of the following statements is CORRECT?

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

What is the firm's operating margin?

Other things held constant, the more debt a firm uses, the lower its return on total assets will be.

If the CEO of a large, diversified, firm were filling out a fitness report on a division manager (i.e., "grading" the manager), which of the following situations would be likely to cause the manager to receive a better grade? In all cases, assume that other things are held constant.

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

HD Corp and LD Corp have identical assets, sales, interest rates paid on their debt, tax rates, and EBIT. However, HD uses more debt than LD. Which of the following statements is CORRECT?

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

What is the firm's ROA?

Hoagland 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?

Companies HD and LD have the same tax rate, sales, 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?

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?

River Corp's total assets at the end of last year were $415,000 and its net income was $32,750. What was its return on total assets?

A firm wants to strengthen its financial position. Which of the following actions would increase its quick ratio?

X-1 Corp's total assets at the end of last year were $405,000 and its EBIT was 52,500. What was its basic earning power (BEP) ratio?

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