Question 1

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 2

Which of the following statements is CORRECT?

Accepted Answer

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

Question 3

Which of the following would,generally,indicate an improvement in a company's financial position,holding other things constant?

Accepted Answer

A)  The total assets turnover decreases. 
B)  The TIE declines. 
C)  The DSO increases. 
D)  The EBITDA coverage ratio increases. 
E)  The current and quick ratios both decline. 
A)  The total assets turnover decreases. 
B)  The TIE declines. 
C)  The DSO increases. 
D)  The EBITDA coverage ratio increases. 
E)  The current and quick ratios both decline.

Question 4

Since the ROA measures the firm's effective utilization of assets (without considering how these assets are financed),two firms with the same EBIT must have the same ROA.

Accepted Answer

A) True 
 B)False

Question 5

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 6

Muscarella Inc.has the following balance sheet and income statement data:  
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% 
A)  4.28% 
B)  4.50% 
C)  4.73% 
D)  4.96% 
E)  5.21%

Question 7

Exhibit 3.1
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 3.1.What is the firm's current ratio?

Accepted Answer

A)  0.97 
B)  1.08 
C)  1.20 
D)  1.33 
E)  1.47 
A)  0.97 
B)  1.08 
C)  1.20 
D)  1.33 
E)  1.47

Question 8

Exhibit 3.1
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 3.1.What is the firm's P/E ratio?

Accepted Answer

A)  12.0 
B)  12.6 
C)  13.2 
D)  13.9 
E)  14.6 
A)  12.0 
B)  12.6 
C)  13.2 
D)  13.9 
E)  14.6

Question 9

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. 
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.

Question 10

Aziz Industries has sales of $100,000 and accounts receivable of $11,500,and it gives its customers 30 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)  $267.34 
B)  $281.41 
C)  $296.22 
D)  $311.81 
E)  $328.22 
A)  $267.34 
B)  $281.41 
C)  $296.22 
D)  $311.81 
E)  $328.22

Question 11

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% 
A)  5.66% 
B)  5.95% 
C)  6.27% 
D)  6.58% 
E)  6.91%

Question 12

Exhibit 3.1
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 3.1.What is the firm's debt-to-assets ratio?

Accepted Answer

A)  45.93% 
B)  51.03% 
C)  56.70% 
D)  63.00% 
E)  70.00% 
A)  45.93% 
B)  51.03% 
C)  56.70% 
D)  63.00% 
E)  70.00%

Question 13

Which of the following statements is CORRECT?

Accepted Answer

A)  If a firm has the highest price/earnings ratio of any firm in its industry, then, other things held constant, this suggests that the board of directors should fire the president. 
B)  If a firm has the highest market/book ratio of any firm in its industry, then, other things held constant, this suggests that the board of directors should fire the president. 
C)  Other things held constant, the higher a firm's expected future growth rate, the lower its P/E ratio is likely to be. 
D)  The higher the market/book ratio, then, other things held constant, the higher one would expect to find the Market Value Added (MV
A) . 
E)  If a firm has a history of high Economic Value Added (EV
A)  numbers each year, and if investors expect this situation to continue, then its market/book ratio and MVA are both likely to be below average. 
A)  If a firm has the highest price/earnings ratio of any firm in its industry, then, other things held constant, this suggests that the board of directors should fire the president. 
B)  If a firm has the highest market/book ratio of any firm in its industry, then, other things held constant, this suggests that the board of directors should fire the president. 
C)  Other things held constant, the higher a firm's expected future growth rate, the lower its P/E ratio is likely to be. 
D)  The higher the market/book ratio, then, other things held constant, the higher one would expect to find the Market Value Added (MV
A) . 
E)  If a firm has a history of high Economic Value Added (EV
A)  numbers each year, and if investors expect this situation to continue, then its market/book ratio and MVA are both likely to be below average.

Question 14

Significant variations in accounting methods among firms make meaningful ratio comparisons between firms more difficult than if all firms used similar accounting methods.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following statements is CORRECT?

Accepted Answer

A)  All else equal, increasing the debt ratio will increase the ROA. 
B)  The use of debt financing will tend to lower the basic earning power ratio, other things held constant. 
C)  A firm that employs financial leverage will have a higher equity multiplier than an otherwise identical firm that has no debt in its capital structure. 
D)  If two firms have identical sales, interest rates paid, operating costs, and assets, but differ in the way they are financed, the firm with less debt will generally have the higher expected ROE. 
E)  Holding bonds is better than holding stock for investors because income from bonds is taxed on a more favorable basis than income from stock. 
A)  All else equal, increasing the debt ratio will increase the ROA. 
B)  The use of debt financing will tend to lower the basic earning power ratio, other things held constant. 
C)  A firm that employs financial leverage will have a higher equity multiplier than an otherwise identical firm that has no debt in its capital structure. 
D)  If two firms have identical sales, interest rates paid, operating costs, and assets, but differ in the way they are financed, the firm with less debt will generally have the higher expected ROE. 
E)  Holding bonds is better than holding stock for investors because income from bonds is taxed on a more favorable basis than income from stock.

Question 16

Exhibit 3.1
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 3.1.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 17

Orono Corp.'s sales last year were $435,000,its operating costs were $362,500,and its interest charges were $12,500.What was the firm's times interest earned (TIE)ratio?

Accepted Answer

A)  4.72 
B)  4.97 
C)  5.23 
D)  5.51 
E)  5.80 
A)  4.72 
B)  4.97 
C)  5.23 
D)  5.51 
E)  5.80

Question 18

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 19

Harper Corp.'s sales last year were $395,000,and its year-end receivables were $42,500.Harper sells on terms that call for customers to pay 30 days after the purchase,but many delay payment beyond Day 30.On average,how many days late do customers pay? Base your answer on this equation: DSO-Allowed credit period = Average days late,and use a 365-day year when calculating the DSO.

Accepted Answer

A)  7.95 
B)  8.37 
C)  8.81 
D)  9.27 
E)  9.74 
A)  7.95 
B)  8.37 
C)  8.81 
D)  9.27 
E)  9.74

Question 20

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

Exam 3: Analysis of Financial Statements

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

Which of the following statements is CORRECT?

Which of the following would,generally,indicate an improvement in a company's financial position,holding other things constant?

Since the ROA measures the firm's effective utilization of assets (without considering how these assets are financed),two firms with the same EBIT must have the same ROA.

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?

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?

Which of the following statements is CORRECT?

Significant variations in accounting methods among firms make meaningful ratio comparisons between firms more difficult than if all firms used similar accounting methods.

Which of the following statements is CORRECT?

Orono Corp.'s sales last year were $435,000,its operating costs were $362,500,and its interest charges were $12,500.What was the firm's times interest earned (TIE)ratio?

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

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

Risk and Return

Valuation of Stocks and Corporations

Financial Options and Applications in Corporate Finance

The Cost of Capital

The Basics of Capital Budgeting: Evaluating Cash Flows

Cash Flow Estimation and Risk Analysis

Corporate Valuation and Financial Planning

Agency Conflicts and Corporate Governance

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Supply Chains and Working Capital Management

Multinational Financial Management

Public and Private Financing: Initial Offerings, seasoned Offerings, and Investment Banks

Extension 18 A: Rights Offerings

Lease Financing

Hybrid Financing: Preferred Stock, warrants, and Convertibles

Dynamic Capital Structures

Mergers and Corporate Control

Enterprise Risk Management

Bankruptcy, reorganization, and Liquidation

Portfolio Theory and Asset Pricing Models

Real Options

Providing and Obtaining Credit

Advanced Issues in Cash Management and Inventory Control

Pension Plan Management

Financial Management in Not For Profit Businesses

Filters