Exam 3: Analysis of Financial Statements

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

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?

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?

Emerson Inc.'s would like to undertake a policy of paying out 45% of its income.Its latest net income was $1,250,000,and it had 225,000 shares outstanding.What dividend per share should it declare?

Which of the following statements is CORRECT?

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?

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?

An investor is considering starting a new business.The company would require $475,000 of assets,and it would be financed entirely with common stock.The investor will go forward only if she thinks the firm can provide a 13.5% return on the invested capital,which means that the firm must have an ROE of 13.5%.How much net income must be expected to warrant starting the business?

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?

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?

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?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

The Cavendish Company recently issued new common stock and used the proceeds to pay off some of its short-term notes payable.This action had no effect on the company's total assets or operating income.Which of the following effects would occur as a result of this action?

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?

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.

A decline in a firm's inventory turnover ratio suggests that it is managing its inventory more efficiently and also that its liquidity position is improving,i.e. ,it is becoming more liquid.

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

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.

Which of the following statements is CORRECT?