Question 1

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

Accepted Answer

A)  Issue new common stock and use the proceeds to acquire additional fixed assets. 
B)  Offer price reductions along with generous credit terms that would (1)enable the firm to sell some of its excess inventory and (2)lead to an increase in accounts receivable. 
C)  Issue new common stock and use the proceeds to increase inventories. 
D)  Speed up the collection of receivables and use the cash generated to increase inventories. 
E)  Use some of its cash to purchase additional inventories. 
A)  Issue new common stock and use the proceeds to acquire additional fixed assets. 
B)  Offer price reductions along with generous credit terms that would (1)enable the firm to sell some of its excess inventory and (2)lead to an increase in accounts receivable. 
C)  Issue new common stock and use the proceeds to increase inventories. 
D)  Speed up the collection of receivables and use the cash generated to increase inventories. 
E)  Use some of its cash to purchase additional inventories.

Question 2

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?

Accepted Answer

A)  Company Heidee has more net income. 
B)  Company Heidee pays less in taxes. 
C)  Company Heidee has a lower equity multiplier. 
D)  Company Heidee has a higher ROA. 
E)  Company Heidee has a higher times interest earned (TI
E) ratio. 
A)  Company Heidee has more net income. 
B)  Company Heidee pays less in taxes. 
C)  Company Heidee has a lower equity multiplier. 
D)  Company Heidee has a higher ROA. 
E)  Company Heidee has a higher times interest earned (TI
E) ratio.

Question 3

Last year Urbana Corp.had $197,500 of assets,$307,500 of sales,$19,575 of net income,and a debt-to-total-assets ratio of 37.5%.The new CFO believes a new computer program will enable it to reduce costs and thus raise net income to $33,000.Assets,sales,and the debt ratio would not be affected.By how much would the cost reduction improve the ROE?

Accepted Answer

A)  9.32% 
B)  9.82% 
C)  10.33% 
D)  10.88% 
E)  11.42% 
A)  9.32% 
B)  9.82% 
C)  10.33% 
D)  10.88% 
E)  11.42%

Question 4

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

Accepted Answer

A)  The current and quick ratios both increase. 
B)  The inventory and total assets turnover ratios both decline. 
C)  The debt ratio increases. 
D)  The profit margin declines. 
E)  The EBITDA coverage ratio declines. 
A)  The current and quick ratios both increase. 
B)  The inventory and total assets turnover ratios both decline. 
C)  The debt ratio increases. 
D)  The profit margin declines. 
E)  The EBITDA coverage ratio declines.

Question 5

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 6

Last year Altman Corp.had $205,000 of assets,$303,500 of sales,$18,250 of net income,and a debt-to-total-assets ratio of 41%.The new CFO believes the firm has excessive fixed assets and inventory that could be sold,enabling it to reduce its total assets to $152,500.Sales,costs,and net income would not be affected,and the firm would maintain the 41% debt ratio.By how much would the reduction in assets improve the ROE?

Accepted Answer

A)  4.69% 
B)  4.93% 
C)  5.19% 
D)  5.45% 
E)  5.73% 
A)  4.69% 
B)  4.93% 
C)  5.19% 
D)  5.45% 
E)  5.73%

Question 7

Which of the following statements is CORRECT?

Accepted Answer

A)  If two firms differ only in their use of debt⎯i.e. ,they have identical assets,sales,operating costs,and tax rates⎯but one firm has a higher debt ratio,the firm that uses more debt will have a higher profit margin on sales. 
B)  If one firm has a higher debt ratio than another,we can be certain that the firm with the higher debt ratio will have the lower TIE ratio,as that ratio depends entirely on the amount of debt a firm uses. 
C)  A firm's use of debt will have no effect on its profit margin on sales. 
D)  If two firms differ only in their use of debt⎯i.e. ,they have identical assets,sales,operating costs,interest rates on their debt,and tax rates⎯but one firm has a higher debt ratio,the firm that uses more debt will have a lower profit margin on sales. 
E)  The debt ratio as it is generally calculated makes an adjustment for the use of assets leased under operating leases,so the debt ratios of firms that lease different percentages of their assets are still comparable. 
A)  If two firms differ only in their use of debt⎯i.e. ,they have identical assets,sales,operating costs,and tax rates⎯but one firm has a higher debt ratio,the firm that uses more debt will have a higher profit margin on sales. 
B)  If one firm has a higher debt ratio than another,we can be certain that the firm with the higher debt ratio will have the lower TIE ratio,as that ratio depends entirely on the amount of debt a firm uses. 
C)  A firm's use of debt will have no effect on its profit margin on sales. 
D)  If two firms differ only in their use of debt⎯i.e. ,they have identical assets,sales,operating costs,interest rates on their debt,and tax rates⎯but one firm has a higher debt ratio,the firm that uses more debt will have a lower profit margin on sales. 
E)  The debt ratio as it is generally calculated makes an adjustment for the use of assets leased under operating leases,so the debt ratios of firms that lease different percentages of their assets are still comparable.

Question 8

A new firm is developing its business plan.It will require $565,000 of assets,and it projects $452,800 of sales and $354,300 of operating costs for the first year.Management is quite sure of these numbers because of contracts with its customers and suppliers.It can borrow at a rate of 7.5%,but the bank requires it to have a TIE of at least 4.0,and if the TIE falls below this level the bank will call in the loan and the firm will go bankrupt.What is the maximum debt-to-assets ratio the firm can use? (Hint: Find the maximum dollars of interest,then the debt that produces that interest,and then the related debt ratio. )

Accepted Answer

A)  47.33% 
B)  49.82% 
C)  52.45% 
D)  55.21% 
E)  58.11% 
A)  47.33% 
B)  49.82% 
C)  52.45% 
D)  55.21% 
E)  58.11%

Question 9

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 10

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?

Accepted Answer

A)  $267.34 
B)  $281.41 
C)  $296.22 
D)  $311.81 
E)  $328.22 
A)  $267.34 
B)  $281.41 
C)  $296.22 
D)  $311.81 
E)  $328.22

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

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?

Accepted Answer

A)  $155,800 
B)  $164,000 
C)  $172,200 
D)  $180,810 
E)  $189,851 
A)  $155,800 
B)  $164,000 
C)  $172,200 
D)  $180,810 
E)  $189,851

Question 13

Muscarella Inc.has the following balance sheet and income statement data:
Cash
$ 14,000
Accounts payable
$ 42,000
Receivables
70,000
Other 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?

Accepted Answer

A)  4.28% 
B)  4.50% 
C)  4.73% 
D)  4.96% 
E)  5.21% 
A)  4.28% 
B)  4.50% 
C)  4.73% 
D)  4.96% 
E)  5.21%

Question 14

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

Accepted Answer

A)  2.03 
B)  2.13 
C)  2.25 
D)  2.36 
E)  2.48 
A)  2.03 
B)  2.13 
C)  2.25 
D)  2.36 
E)  2.48

Question 15

Companies Heidee and Leaudy have the same total assets,sales,operating costs,and tax rates,and they pay the same interest rate on their debt.However,company Heidee has a higher debt ratio.Which of the following statements is CORRECT?

Accepted Answer

A)  If the interest rate the companies pay on their debt is less than their basic earning power (BEP),then Company Heidee will have the higher ROE. 
B)  Given this information,Leaudy must have the higher ROE. 
C)  Company Leaudy has a higher basic earning power ratio (BEP). 
D)  Company Heidee has a higher basic earning power ratio (BEP). 
E)  If the interest rate the companies pay on their debt is more than their basic earning power (BEP),then Company Heidee will have the higher ROE. 
A)  If the interest rate the companies pay on their debt is less than their basic earning power (BEP),then Company Heidee will have the higher ROE. 
B)  Given this information,Leaudy must have the higher ROE. 
C)  Company Leaudy has a higher basic earning power ratio (BEP). 
D)  Company Heidee has a higher basic earning power ratio (BEP). 
E)  If the interest rate the companies pay on their debt is more than their basic earning power (BEP),then Company Heidee will have the higher ROE.

Question 16

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?

Accepted Answer

A)  5.66% 
B)  5.95% 
C)  6.27% 
D)  6.58% 
E)  6.91% 
A)  5.66% 
B)  5.95% 
C)  6.27% 
D)  6.58% 
E)  6.91%

Question 17

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 18

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 19

High current and quick ratios always indicate that a firm is managing its liquidity position well.

Accepted Answer

A) True 
 B)False

Question 20

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?

Accepted Answer

A)  Company Heidee has a lower times interest earned (TI
E) ratio. 
B)  Company Heidee has a lower equity multiplier. 
C)  Company Heidee has more net income. 
D)  Company Heidee pays more in taxes. 
E)  Company Heidee has a lower ROE. 
A)  Company Heidee has a lower times interest earned (TI
E) ratio. 
B)  Company Heidee has a lower equity multiplier. 
C)  Company Heidee has more net income. 
D)  Company Heidee pays more in taxes. 
E)  Company Heidee has a lower ROE.

Exam 3: Analysis of Financial Statements

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

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 would indicate an improvement in a company's financial position,holding other things constant?

Which of the following statements is CORRECT?

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.

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.

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

Companies Heidee and Leaudy have the same total assets,sales,operating costs,and tax rates,and they pay the same interest rate on their debt.However,company Heidee has a higher debt 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 would,generally,indicate an improvement in a company's financial position,holding other things constant?

High current and quick ratios always indicate that a firm is managing its liquidity position well.

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?

An Overview of Financial Management and the Financial Environment

Financial Statements, Cash Flow, and Taxes

Time Value of Money

Bonds, Bond Valuation, and Interest Rates

Risk and Return

Corporate Valuation and Stock Valuation

Financial Options and Applications in Corporate Finance

The Cost of Capital

The Basics of Capital Budgeting: Evaluating Cash Flows

Cash Flow Estimation and Risk Analysis

Financial Planning and Applications to Corporate Valuation

Corporate Governance

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Supply Chains and Working Capital Management

Multinational Financial Management

Public and Private Financing: Initial Offerings, Seasoned Offerings, and Investment Banks

Lease Financing

Hybrid Financing: Preferred Stock, Warrants, and Convertibles

Dynamic Capital Structures and Corporate Valuation

Mergers and Corporate Control

Enterprise Risk Management

Bankruptcy, Reorganization, and Liquidation

Portfolio Theory and Asset Pricing Models

Real Options

Providing and Obtaining Credit

Advanced Issues in Cash Management and Inventory Control

Pension Plan Management

Financial Management in Not-For-Profit Businesses

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