Exam 7: Analysis of Financial Statements

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 EBITDA coverage?

The current ratio and inventory turnover ratios both help us measure the firm's liquidity.The current ratio measures the relationship of a firm's current assets to its current liabilities,while the inventory turnover ratio gives us an indication of how long it takes the firm to convert its inventory into cash.

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?

Suppose Firms A and B have the same amount of assets,pay the same interest rate on their debt,have the same basic earning power (BEP),and have the same tax rate.However,Firm A has a higher debt ratio.If BEP is greater than the interest rate on debt,Firm A will have a higher ROE as a result of its higher debt ratio.

You observe that a firm's ROE is above the industry average,but its profit margin and debt ratio are both below the industry average.Which of the following statements is CORRECT?

Arshadi Corp.'s sales last year were $52,000,and its total assets were $22,000.What was its total assets turnover ratio (TATO)?

Amram Company's current ratio is 1.9.Considered alone,which of the following actions would reduce the company's current ratio?

If a bank loan officer were considering a company's request for a loan,which of the following statements would you consider to be CORRECT?

Muscarella Inc.has the following balance sheet and income statement data: Cash \ 14,000 Accounts payable \ 2,000 Receivables 70,0000 ther current liabilities 28,000 Inventories 210,000 Total CL 70,000 Total CA \ 294,000 Long-term debt 70,000 Net fixed assets 126,000 Common equity 280,000 Total assets \ 420,000 Total liab. and equity \ \ 420,000 Sales \ 280,000 Net income \ 21,000 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?

Considered alone,which of the following would increase a company's current ratio?

Stewart Inc.'s latest EPS was $3.50,its book value per share was $22.75,it had 215,000 shares outstanding,and its debt-to-assets ratio was 46%.How much debt was outstanding?

Companies Heidee and Leaudy have the same sales,tax rate,interest rate on their debt,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?

Which of the following statements is CORRECT?

Nikko Corp.'s total common equity at the end of last year was $305,000 and its net income after taxes was $60,000.What was its ROE?

Chambliss Corp.'s total assets at the end of last year were $305,000 and its EBIT was 62,500.What was its basic earning power (BEP)?

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

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?

One problem with ratio analysis is that relationships can be manipulated.For example,if our current ratio is greater than 1.5,then borrowing on a short-term basis and using the funds to build up our cash account would cause the current ratio to increase.

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 dividends per share?

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-to-assets ratio,sales,and costs remained constant,by how much would the ROE have changed?