Question 1

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 decrease. 
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%. Under these conditions, the ROE will increase. 
C) 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. 
D) The modified DuPont equation provides information about how operations affect the ROE, but the equation does not include the effects of debt on the ROE. 
E) Other things held constant, an increase in the debt ratio will result in an increase in the profit margin on sales. 
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 decrease. 
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%. Under these conditions, the ROE will increase. 
C) 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. 
D) The modified DuPont equation provides information about how operations affect the ROE, but the equation does not include the effects of debt on the ROE. 
E) Other things held constant, an increase in the debt ratio will result in an increase in the profit margin on sales.

Question 2

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 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

Cordelion Communications 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 Cordelion 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 times interest earned ratio will decrease. 
B) The ROA will decline. 
C) Taxable income will decrease. 
D) The tax bill will increase. 
E) Net income will decrease. 
A) The times interest earned ratio will decrease. 
B) The ROA will decline. 
C) Taxable income will decrease. 
D) The tax bill will increase. 
E) Net income will decrease.

Question 4

If a firm finances with only debt and common equity,and if its equity multiplier is 3.0,then its debt ratio must be 0.667.

Accepted Answer

A) True 
 B)False

Question 5

Suppose firms follow similar financing policies,face similar risks,have equal access to capital,and operate in competitive product and capital markets.Under these conditions,then firms that have high profit margins will tend to have high asset turnover ratios,and firms with low profit margins will tend to have low turnover ratios.

Accepted Answer

A) True 
 B)False

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

Bonner Corp.'s sales last year were $415,000,and its year-end total assets were $355,000.The average firm in the industry has a total assets turnover ratio (TATO)of 2.4.Bonner's new CFO believes the firm has excess assets that can be sold so as to bring the TATO down to the industry average without affecting sales.By how much must the assets be reduced to bring the TATO to the industry average,holding sales constant?

Accepted Answer

A) $164,330 
B) $172,979 
C) $182,083 
D) $191,188 
E) $200,747 
A) $164,330 
B) $172,979 
C) $182,083 
D) $191,188 
E) $200,747

Question 8

Even though Firm A's current ratio exceeds that of Firm B,Firm B's quick ratio might exceed that of A.However,if A's quick ratio exceeds B's,then we can be certain that A's current ratio is also larger than that of B.

Accepted Answer

A) True 
 B)False

Question 9

The "apparent," but not the "true," financial position of a company whose sales are seasonal can differ dramatically,depending on the time of year when the financial statements are constructed.

Accepted Answer

A) True 
 B)False

Question 10

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 11

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 12

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 13

For the coming year,Crane Inc.is considering two financial plans.Management expects sales to be $301,770,operating costs to be $266,545,assets to be $200,000,and its tax rate to be 35%.Under Plan A it would use 25% debt and 75% common equity.The interest rate on the debt would be 8.8%,but the TIE ratio would have to be kept at 4.00 or more.Under Plan B the maximum debt that met the TIE constraint would be employed.Assuming that sales,operating costs,assets,the interest rate,and the tax rate would all remain constant,by how much would the ROE change in response to the change in the capital structure?

Accepted Answer

A) 3.83% 
B) 4.02% 
C) 4.22% 
D) 4.43% 
E) 4.65% 
A) 3.83% 
B) 4.02% 
C) 4.22% 
D) 4.43% 
E) 4.65%

Question 14

Which of the following statements is CORRECT?

Accepted Answer

A) An increase in a firm's debt ratio, with no changes in its sales or operating costs, could be expected to lower the profit margin. 
B) The ratio of long-term debt to total capital is more likely to experience seasonal fluctuations than is either the DSO or the inventory turnover ratio. 
C) If two firms have the same ROA, the firm with the most debt can be expected to have the lower ROE. 
D) An increase in the DSO, other things held constant, could be expected to increase the total assets turnover ratio. 
E) An increase in the DSO, other things held constant, could be expected to increase the ROE. 
A) An increase in a firm's debt ratio, with no changes in its sales or operating costs, could be expected to lower the profit margin. 
B) The ratio of long-term debt to total capital is more likely to experience seasonal fluctuations than is either the DSO or the inventory turnover ratio. 
C) If two firms have the same ROA, the firm with the most debt can be expected to have the lower ROE. 
D) An increase in the DSO, other things held constant, could be expected to increase the total assets turnover ratio. 
E) An increase in the DSO, other things held constant, could be expected to increase the ROE.

Question 15

Lincoln Industries' current ratio is 0.5.Considered alone,which of the following actions would increase the company's current ratio?

Accepted Answer

A) Use cash to reduce long-term bonds outstanding. 
B) Borrow using short-term notes payable and use the cash to increase inventories. 
C) Use cash to reduce accruals. 
D) Use cash to reduce accounts payable. 
E) Use cash to reduce short-term notes payable. 
A) Use cash to reduce long-term bonds outstanding. 
B) Borrow using short-term notes payable and use the cash to increase inventories. 
C) Use cash to reduce accruals. 
D) Use cash to reduce accounts payable. 
E) Use cash to reduce short-term notes payable.

Question 16

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

Accepted Answer

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

Question 17

It is appropriate to use the fixed assets turnover ratio to appraise firms' effectiveness in managing their fixed assets if and only if all the firms being compared have the same proportion of fixed assets to total assets.

Accepted Answer

A) True 
 B)False

Question 18

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 inventories while holding sales and cost of goods sold constant. 
B) Increase accounts receivable while holding sales constant. 
C) Increase EBIT while holding sales constant. 
D) Increase accounts payable while holding sales constant. 
E) Increase notes payable while holding sales constant. 
A) Increase inventories while holding sales and cost of goods sold constant. 
B) Increase accounts receivable while holding sales constant. 
C) Increase EBIT while holding sales constant. 
D) Increase accounts payable while holding sales constant. 
E) Increase notes payable while holding sales constant.

Question 19

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 TIE?

Accepted Answer

A) 1.94 
B) 2.15 
C) 2.39 
D) 2.66 
E) 2.93 
A) 1.94 
B) 2.15 
C) 2.39 
D) 2.66 
E) 2.93

Question 20

Suppose a firm wants to maintain a specific TIE ratio.It knows the amount of its debt,the interest rate on that debt,the applicable tax rate,and its operating costs.With this information,the firm can calculate the amount of sales required to achieve its target TIE ratio.

Accepted Answer

A) True 
 B)False

Exam 7: Analysis of Financial Statements

Which of the following statements is CORRECT?

If a firm finances with only debt and common equity,and if its equity multiplier is 3.0,then its debt ratio must be 0.667.

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

Even though Firm A's current ratio exceeds that of Firm B,Firm B's quick ratio might exceed that of A.However,if A's quick ratio exceeds B's,then we can be certain that A's current ratio is also larger than that of B.

The "apparent," but not the "true," financial position of a company whose sales are seasonal can differ dramatically,depending on the time of year when the financial statements are constructed.

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

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.

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

Which of the following statements is CORRECT?

Lincoln Industries' current ratio is 0.5.Considered alone,which of the following actions would increase the company's current ratio?

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

It is appropriate to use the fixed assets turnover ratio to appraise firms' effectiveness in managing their fixed assets if and only if all the firms being compared have the same proportion of fixed assets to total assets.

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

Suppose a firm wants to maintain a specific TIE ratio.It knows the amount of its debt,the interest rate on that debt,the applicable tax rate,and its operating costs.With this information,the firm can calculate the amount of sales required to achieve its target TIE ratio.

An Overview of Financial Management and the Financial Environment

Risk and Return: Part I

Risk and Return: Part Ii

Bond Valuation

Financial Options

Accounting for Financial Management

Basic Stock Valuation

Corporate Valuation and Financial Planning

Corporate Governance

Determining the Cost of Capital

Capital Budgeting: Decision Rules

Cash Flow Estimation and Risk Analysis

Real Options

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Dynamic Capital Structures and Corporate Valuation

Initial Public Offerings, investment Banking, and Financial Restructuring

Lease Financing

Hybrid Financing: Preferred Stock, Warrants, and Convertibles

Supply Chains and Working Capital Management

Providing and Obtaining Credit

Advanced Issues in Cash Management and Inventory Control

Enterprise Risk Management

Bankruptcy, reorganization, and Liquidation

Mergers and Corporate Control

Multinational Financial Management

Time Value of Money

Basic Financial Tools: a Review

Pension Plan Management

Financial Management in Not-For-Profit Businesses

a Values of the Areas Under the Standard Normal

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