Question 1

Vang Corp.'s stock price at the end of last year was $33.50 and its earnings per share for the year were $2.30. What was its P/E ratio?

Accepted Answer

A)  13.84 
B)  14.57 
C)  15.29 
D)  16.06 
E)  16.86 
A)  13.84 
B)  14.57 
C)  15.29 
D)  16.06 
E)  16.86

Question 2

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 ROE?

Accepted Answer

A)  8.54% 
B)  8.99% 
C)  9.44% 
D)  9.91% 
E)  10.41% 
A)  8.54% 
B)  8.99% 
C)  9.44% 
D)  9.91% 
E)  10.41%

Question 3

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 market-to-book ratio?

Accepted Answer

A)  0.56 
B)  0.66 
C)  0.78 
D)  0.92 
E)  1.08 
A)  0.56 
B)  0.66 
C)  0.78 
D)  0.92 
E)  1.08

Question 4

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 decrease. 
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 decrease. 
C)  The tax bill will increase. 
D)  Net income will decrease. 
E)  The times interest earned ratio will decrease.

Question 5

Last year Swensen Corp. had sales of $303,225, operating costs of
$267,500, and year-end assets of $195,000. The debt-to-total-assets ratio was 27%, the interest rate on the debt was 8.2%, and the firm's tax rate was 37%. The new CFO wants to see how the ROE would have been affected if the firm had used a 45% debt ratio. Assume that sales and total assets would not be affected, and that the interest rate and tax rate would both remain constant. By how much would the ROE change in response to the change in the capital structure?

Accepted Answer

A)  2.08% 
B)  2.32% 
C)  2.57% 
D)  2.86% 
E)  3.14% 
A)  2.08% 
B)  2.32% 
C)  2.57% 
D)  2.86% 
E)  3.14%

Question 6

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.)

Accepted Answer

A)  47.33% 
B)  49.82% 
C)  52.45% 
D)  55.21% 
E)  58.11% 
A)  47.33% 
B)  49.82% 
C)  52.45% 
D)  55.21% 
E)  58.11%

Question 7

A firm's new president wants to strengthen the company's financial position. Which of the following actions would make it financially stronger?

Accepted Answer

A)  Increase accounts receivable while holding sales constant. 
B)  Increase EBIT while holding sales constant. 
C)  Increase accounts payable while holding sales constant. 
D)  Increase notes payable while holding sales constant. 
E)  Increase inventories while holding sales constant. 
A)  Increase accounts receivable while holding sales constant. 
B)  Increase EBIT while holding sales constant. 
C)  Increase accounts payable while holding sales constant. 
D)  Increase notes payable while holding sales constant. 
E)  Increase inventories while holding sales constant.

Question 8

Determining whether a firm's financial position is improving or deteriorating requires analyzing more than the ratios for a given year. Trend analysis is one method of measuring changes in a firm's performance over time.

Accepted Answer

A) True 
 B)False

Question 9

Last year Altman Corp. had $205,000 of assets, $303,500 of sales, $18,250 of net income, and a debt-to-total-assets ratio of 41%. The new CFO believes the firm has excessive fixed assets and inventory that could be sold, enabling it to reduce its total assets to $152,500. Sales, costs, and net income would not be affected, and the firm would maintain the 41% debt ratio. By how much would the reduction in assets improve the ROE?

Accepted Answer

A)  4.69% 
B)  4.93% 
C)  5.19% 
D)  5.45% 
E)  5.73%
Hard: 
A)  4.69% 
B)  4.93% 
C)  5.19% 
D)  5.45% 
E)  5.73%
Hard:

Question 10

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 11

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 BEP?

Accepted Answer

A)  6.00% 
B)  6.32% 
C)  6.65% 
D)  6.98% 
E)  7.33% 
A)  6.00% 
B)  6.32% 
C)  6.65% 
D)  6.98% 
E)  7.33%

Question 12

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 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% 
A)  1.81% 
B)  2.02% 
C)  2.22% 
D)  2.44% 
E)  2.68%

Question 13

Ratio analysis involves analyzing financial statements in order to appraise a firm's financial position and strength.

Accepted Answer

A) True 
 B)False

Question 14

Other things held constant, which of the following alternatives would increase a company's cash flow for the current year?

Accepted Answer

A)  Increase the number of years over which fixed assets are depreciated for tax purposes. 
B)  Pay down the accounts payables. 
C)  Reduce the days' sales outstanding (DSO) without affecting sales or
Operating costs. 
D)  Pay workers more frequently to decrease the accrued wages balance. 
E)  Reduce the inventory turnover ratio without affecting sales or operating costs. 
A)  Increase the number of years over which fixed assets are depreciated for tax purposes. 
B)  Pay down the accounts payables. 
C)  Reduce the days' sales outstanding (DSO) without affecting sales or
Operating costs. 
D)  Pay workers more frequently to decrease the accrued wages balance. 
E)  Reduce the inventory turnover ratio without affecting sales or operating costs.

Question 15

Companies HD and LD have the same total assets, sales, operating costs, and tax rates, and they pay the same interest rate on their debt.
However, company HD has a higher debt ratio. Which of the following statements is CORRECT?

Accepted Answer

A)  Given this information, LD must have the higher ROE. 
B)  Company LD has a higher basic earning power ratio (BEP). 
C)  Company HD has a higher basic earning power ratio (BEP). 
D)  If the interest rate the companies pay on their debt is more than their basic earning power (BEP), then Company HD will have the
Higher ROE. 
E)  If the interest rate the companies pay on their debt is less than their basic earning power (BEP), then Company HD will have the
Higher ROE. 
A)  Given this information, LD must have the higher ROE. 
B)  Company LD has a higher basic earning power ratio (BEP). 
C)  Company HD has a higher basic earning power ratio (BEP). 
D)  If the interest rate the companies pay on their debt is more than their basic earning power (BEP), then Company HD will have the
Higher ROE. 
E)  If the interest rate the companies pay on their debt is less than their basic earning power (BEP), then Company HD will have the
Higher ROE.

Question 16

LeCompte Corp. has $312,900 of assets, and it uses only common equity capital (zero debt). Its sales for the last year were $620,000, and its net income after taxes was $24,655. Stockholders recently voted in a new management team that has promised to lower costs and get the return on equity up to 15%. What profit margin would LeCompte need in order to achieve the 15% ROE, holding everything else constant?

Accepted Answer

A)  7.57% 
B)  7.95% 
C)  8.35% 
D)  8.76% 
E)  9.20% 
A)  7.57% 
B)  7.95% 
C)  8.35% 
D)  8.76% 
E)  9.20%

Question 17

Debt management ratios show the extent to which a firm's managers are attempting to magnify returns on owners' capital through the use of financial leverage.

Accepted Answer

A) True 
 B)False

Question 18

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 19

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

Accepted Answer

A)  Reduce the company's days' sales outstanding to the industry average and use the resulting cash savings to purchase plant and
Equipment. 
B)  Use cash to repurchase some of the company's own stock. 
C)  Borrow using short-term debt and use the proceeds to repay debt
That has a maturity of more than one year. 
D)  Issue new stock and then use some of the proceeds to purchase
Additional inventory and hold the remainder as cash. 
E)  Use cash to increase inventory holdings. 
A)  Reduce the company's days' sales outstanding to the industry average and use the resulting cash savings to purchase plant and
Equipment. 
B)  Use cash to repurchase some of the company's own stock. 
C)  Borrow using short-term debt and use the proceeds to repay debt
That has a maturity of more than one year. 
D)  Issue new stock and then use some of the proceeds to purchase
Additional inventory and hold the remainder as cash. 
E)  Use cash to increase inventory holdings.

Question 20

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 inventory turnover ratio?

Accepted Answer

A)  4.38 
B)  4.59 
C)  4.82 
D)  5.06 
E)  5.32 
A)  4.38 
B)  4.59 
C)  4.82 
D)  5.06 
E)  5.32

Exam 3: Analysis of Financial Statements

Vang Corp.'s stock price at the end of last year was $33.50 and its earnings per share for the year were $2.30. What was its P/E ratio?

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 ROE?

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 market-to-book ratio?

A firm's new president wants to strengthen the company's financial position. Which of the following actions would make it financially stronger?

Determining whether a firm's financial position is improving or deteriorating requires analyzing more than the ratios for a given year. Trend analysis is one method of measuring changes in a firm's performance over time.

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.

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 BEP?

Ratio analysis involves analyzing financial statements in order to appraise a firm's financial position and strength.

Other things held constant, which of the following alternatives would increase a company's cash flow for the current year?

Companies HD and LD have the same total assets, sales, operating costs, and tax rates, and they pay the same interest rate on their debt. However, company HD has a higher debt ratio. Which of the following statements is CORRECT?

Debt management ratios show the extent to which a firm's managers are attempting to magnify returns on owners' capital through the use of financial leverage.

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

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

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 inventory turnover ratio?

An Overview of Financial Management and the Financial Environment

Financial Statements, Cash Flow, and Taxes

Time Value of Money

Bonds, Bond Valuation, and Interest Rates

Risks and Rates of Return

Stocks and Their Valuation

Financial Options and Applications in Corporate Finance

The Cost of Capital

The Basics of Capital Budgeting

Cash Flow Estimation and Risk Analysis

Financial Planning and Forecasting Financial Statements

Corporate Valuation, Value-Based Management, and Corporate Governance

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Working Capital Management

Multinational Financial Management

Lease Financing

Hybrid Financing: Preferred Stock, Warrants, and Convertibles

Initial Public Offerings, Investment Banking, and Financial Restructuring

Mergers, Lbos, Divestitures, and Holding Companies

Bankruptcy, Reorganization, and Liquidation

Derivatives and Risk Management

Portfolio Theory, Asset Pricing Models, and Behavioral Finance

Real Options

Analysis of Capital Structure Theory

Providing and Obtaining Credit

Advanced Issues in Cash Management and Inventory Control

Pension Plan Management

Financial Management in Not-For-Profit Businesses

Filters