Exam 7: Analysis of Financial Statements

Last year Rosenberg Corp.had $195,000 of assets,$18,775 of net income,and a debt-to-total-assets ratio of 32%.Now suppose the new CFO convinces the president to increase the debt ratio to 48%.Sales and total assets will not be affected,but interest expenses would increase.However,the CFO believes that better cost controls would be sufficient to offset the higher interest expense and thus keep net income unchanged.By how much would the change in the capital structure improve the ROE?

Lofland's has $20 million in current assets and $10 million in current liabilities,while Smaland's current assets are $10 million versus $20 million of current liabilities.Both firms would like to "window dress" their end-of-year financial statements,and to do so each plans to borrow $10 million on a short-term basis and to then hold the borrowed funds in their cash accounts.Which of the statements below best describes the results of these transactions?

Last year Vaughn Corp.had sales of $315,000 and a net income of $17,832,and its year-end assets were $210,000.The firm's total-debt-to-total-assets ratio was 42.5%.Based on the DuPont equation,what was Vaughn's ROE?

Exhibit 7.1 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 7.1.What is the firm's P/E ratio?

Exhibit 7.1 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 7.1.What is the firm's ROA?

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

Which of the following statements is CORRECT?

Northwest Lumber had a profit margin of 5.25%,a total assets turnover of 1.5,and an equity multiplier of 1.8.What was the firm's ROE?

The basic earning power ratio (BEP)reflects the earning power of a firm's assets after giving consideration to financial leverage and tax effects.

Companies Heidee and Leaudy have the same tax rate,sales,total assets,and basic earning power.Both companies have positive net incomes.Company Heidee has a higher debt ratio and,therefore,a higher interest expense.Which of the following statements is CORRECT?

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?

Profitability ratios show the combined effects of liquidity,asset management,and debt management on operating results.

Hutchinson Corporation has zero debt⎯it is financed only with common equity.Its total assets are $410,000.The new CFO wants to employ enough debt to bring the debt/assets ratio to 40%,using the proceeds from the borrowing to buy back common stock at its book value.How much must the firm borrow to achieve the target debt ratio?

Exhibit 7.1 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 7.1.What is the firm's inventory turnover ratio?

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?

Exhibit 7.1 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 7.1.What is the firm's debt-to-assets ratio?

Exhibit 7.1 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 7.1.What is the firm's market-to-book ratio?

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?

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