Question 1

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 2

Ziebart Corp.'s EBITDA last year was $390,000 ( = EBIT + depreciation + amortization),its interest charges were $9,500,it had to repay $26,000 of long-term debt,and it had to make a payment of $17,400 under a long-term lease.The firm had no amortization charges.What was the EBITDA coverage ratio?

Accepted Answer

A) 7.32 
B) 7.70 
C) 8.09 
D) 8.49 
E) 8.92 
A) 7.32 
B) 7.70 
C) 8.09 
D) 8.49 
E) 8.92

Question 3

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 4

Which of the following statements is CORRECT?

Accepted Answer

A) If Firms X and Y have the same net income, number of shares outstanding, and price per share, then their market-to-book ratios must also be the same. 
B) If Firms X and Y have the same P/E ratios, then their market-to-book ratios must also be the same. 
C) If Firms X and Y have the same net income, number of shares outstanding, and price per share, then their P/E ratios must also be the same. 
D) If Firms X and Y have the same earnings per share and market-to-book ratio, they must have the same price earnings ratio. 
E) If Firm X's P/E ratio exceeds that of Firm Y, then Y is likely to be less risky and also to be expected to grow at a faster rate. 
A) If Firms X and Y have the same net income, number of shares outstanding, and price per share, then their market-to-book ratios must also be the same. 
B) If Firms X and Y have the same P/E ratios, then their market-to-book ratios must also be the same. 
C) If Firms X and Y have the same net income, number of shares outstanding, and price per share, then their P/E ratios must also be the same. 
D) If Firms X and Y have the same earnings per share and market-to-book ratio, they must have the same price earnings ratio. 
E) If Firm X's P/E ratio exceeds that of Firm Y, then Y is likely to be less risky and also to be expected to grow at a faster rate.

Question 5

Branch Corp.'s total assets at the end of last year were $315,000 and its net income after taxes was $22,750.What was its return on total assets?

Accepted Answer

A) 7.22% 
B) 7.58% 
C) 7.96% 
D) 8.36% 
E) 8.78% 
A) 7.22% 
B) 7.58% 
C) 7.96% 
D) 8.36% 
E) 8.78%

Question 6

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 7

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 days sales outstanding? Assume a 360-day year for this calculation.

Accepted Answer

A) 48.17 
B) 50.71 
C) 53.38 
D) 56.19 
E) 59.14 
A) 48.17 
B) 50.71 
C) 53.38 
D) 56.19 
E) 59.14

Question 8

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 9

Lindley Corp.'s stock price at the end of last year was $33.50,and its book value per share was $25.00.What was its market/book ratio?

Accepted Answer

A) 1.34 
B) 1.41 
C) 1.48 
D) 1.55 
E) 1.63 
A) 1.34 
B) 1.41 
C) 1.48 
D) 1.55 
E) 1.63

Question 10

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 equity multiplier?

Accepted Answer

A) 3.33 
B) 3.50 
C) 3.68 
D) 3.86 
E) 4.05 
A) 3.33 
B) 3.50 
C) 3.68 
D) 3.86 
E) 4.05

Question 11

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 12

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 quick ratio?

Accepted Answer

A) 0.49 
B) 0.61 
C) 0.73 
D) 0.87 
E) 1.05 
A) 0.49 
B) 0.61 
C) 0.73 
D) 0.87 
E) 1.05

Question 13

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 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 14

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 15

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 EPS?

Accepted Answer

A) $5.84 
B) $6.15 
C) $6.47 
D) $6.80 
E) $7.14 
A) $5.84 
B) $6.15 
C) $6.47 
D) $6.80 
E) $7.14

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

One problem with ratio analysis is that relationships can be manipulated.For example,we know that if our current ratio is less than 1.0,then using some of our cash to pay off some of our current liabilities would cause the current ratio to increase and thus make the firm look stronger.

Accepted Answer

A) True 
 B)False

Question 18

Companies A and C each reported the same earnings per share (EPS),but Company A's stock trades at a higher price.Which of the following statements is CORRECT?

Accepted Answer

A) Company A trades at a higher P/E ratio. 
B) Company A probably has fewer growth opportunities. 
C) Company A is probably judged by investors to be riskier. 
D) Company A must have a higher market-to-book ratio. 
E) Company A must pay a lower dividend. 
A) Company A trades at a higher P/E ratio. 
B) Company A probably has fewer growth opportunities. 
C) Company A is probably judged by investors to be riskier. 
D) Company A must have a higher market-to-book ratio. 
E) Company A must pay a lower dividend.

Question 19

Bostian,Inc.has total assets of $625,000.Its total debt outstanding is $185,000.The Board of Directors has directed the CFO to move towards a debt-to-assets ratio of 55%.How much debt must the company add or subtract to achieve the target debt ratio?

Accepted Answer

A) $158,750 
B) $166,688 
C) $175,022 
D) $183,773 
E) $192,962 
A) $158,750 
B) $166,688 
C) $175,022 
D) $183,773 
E) $192,962

Question 20

Rappaport Corp.'s sales last year were $320,000,and its net income after taxes was $23,000.What was its profit margin on sales?

Accepted Answer

A) 6.49% 
B) 6.83% 
C) 7.19% 
D) 7.55% 
E) 7.92% 
A) 6.49% 
B) 6.83% 
C) 7.19% 
D) 7.55% 
E) 7.92%

Exam 7: Analysis of Financial Statements

Which of the following statements is CORRECT?

Ziebart Corp.'s EBITDA last year was $390,000 ( = EBIT + depreciation + amortization),its interest charges were $9,500,it had to repay $26,000 of long-term debt,and it had to make a payment of $17,400 under a long-term lease.The firm had no amortization charges.What was the EBITDA coverage ratio?

Which of the following statements is CORRECT?

Branch Corp.'s total assets at the end of last year were $315,000 and its net income after taxes was $22,750.What was its return on total assets?

Which of the following statements is CORRECT?

Lindley Corp.'s stock price at the end of last year was $33.50,and its book value per share was $25.00.What was its market/book ratio?

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.

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.

One problem with ratio analysis is that relationships can be manipulated.For example,we know that if our current ratio is less than 1.0,then using some of our cash to pay off some of our current liabilities would cause the current ratio to increase and thus make the firm look stronger.

Companies A and C each reported the same earnings per share (EPS),but Company A's stock trades at a higher price.Which of the following statements is CORRECT?

Bostian,Inc.has total assets of $625,000.Its total debt outstanding is $185,000.The Board of Directors has directed the CFO to move towards a debt-to-assets ratio of 55%.How much debt must the company add or subtract to achieve the target debt ratio?

Rappaport Corp.'s sales last year were $320,000,and its net income after taxes was $23,000.What was its profit margin on sales?

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

Filters