Question 1

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 2

Vang Corp.'s stock price at the end of last year was $33.50 and its earnings per share for the year were $2.30.What was its P/E ratio?

Accepted Answer

A)  13.84 
B)  14.57 
C)  15.29 
D)  16.06 
E)  16.86 
A)  13.84 
B)  14.57 
C)  15.29 
D)  16.06 
E)  16.86

Question 3

The inventory turnover and current ratio are related.The combination of a high current ratio and a low inventory turnover ratio,relative to industry norms,suggests that the firm has an above-average inventory level and/or that part of the inventory is obsolete or damaged.

Accepted Answer

A) True 
 B)False

Question 4

If the CEO of a large,diversified,firm were filling out a fitness report on a division manager (i.e. ,"grading" the manager),which of the following situations would be likely to cause the manager to receive a better grade? In all cases,assume that other things are held constant.

Accepted Answer

A)  The division's DSO (days' sales outstanding)is 40,whereas the average for its competitors is 30. 
B)  The division's basic earning power ratio is above the average of other firms in its industry. 
C)  The division's total assets turnover ratio is below the average for other firms in its industry. 
D)  The division's debt ratio is above the average for other firms in the industry. 
E)  The division's inventory turnover is 6,whereas the average for its competitors is 8. 
A)  The division's DSO (days' sales outstanding)is 40,whereas the average for its competitors is 30. 
B)  The division's basic earning power ratio is above the average of other firms in its industry. 
C)  The division's total assets turnover ratio is below the average for other firms in its industry. 
D)  The division's debt ratio is above the average for other firms in the industry. 
E)  The division's inventory turnover is 6,whereas the average for its competitors is 8.

Question 5

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 6

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)?

Accepted Answer

A)  18.49% 
B)  19.47% 
C)  20.49% 
D)  21.52% 
E)  22.59% 
A)  18.49% 
B)  19.47% 
C)  20.49% 
D)  21.52% 
E)  22.59%

Question 7

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

Accepted Answer

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

Question 8

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 9

The times-interest-earned ratio is one,but not the only,indication of a firm's ability to meet its long-term and short-term debt obligations.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following statements is CORRECT?

Accepted Answer

A)  If a firm increases its sales and cost of goods sold while holding its inventories constant,then,other things held constant,its inventory turnover ratio will decrease. 
B)  A reduction in inventories held would have no effect on the current ratio. 
C)  An increase in inventories would have no effect on the current ratio. 
D)  If a firm increases its sales and cost of goods sold while holding its inventories constant,then,other things held constant,its inventory turnover ratio will increase. 
E)  A reduction in the inventory turnover ratio will generally lead to an increase in the ROE. 
A)  If a firm increases its sales and cost of goods sold while holding its inventories constant,then,other things held constant,its inventory turnover ratio will decrease. 
B)  A reduction in inventories held would have no effect on the current ratio. 
C)  An increase in inventories would have no effect on the current ratio. 
D)  If a firm increases its sales and cost of goods sold while holding its inventories constant,then,other things held constant,its inventory turnover ratio will increase. 
E)  A reduction in the inventory turnover ratio will generally lead to an increase in the ROE.

Question 11

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 12

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 13

Last year Vaughn Corp.had sales of $315,000 and a net income of $17,832,and its year-end assets were $210,000.The firm's total-debt-to-total-assets ratio was 42.5%.Based on the DuPont equation,what was Vaughn's ROE?

Accepted Answer

A)  14.77% 
B)  15.51% 
C)  16.28% 
D)  17.10% 
E)  17.95% 
A)  14.77% 
B)  15.51% 
C)  16.28% 
D)  17.10% 
E)  17.95%

Question 14

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 15

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 16

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 17

Market value ratios provide management with an indication of how investors view the firm's past performance and especially its future prospects.

Accepted Answer

A) True 
 B)False

Question 18

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 19

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?

Accepted Answer

A)  Other things held constant,the lower the current ratio,the lower the interest rate the bank would charge the firm. 
B)  The lower the company's EBITDA coverage ratio,other things held constant,the lower the interest rate the bank would charge the firm. 
C)  Other things held constant,the higher the debt ratio,the lower the interest rate the bank would charge the firm. 
D)  Other things held constant,the lower the debt ratio,the lower the interest rate the bank would charge the firm. 
E)  The lower the company's TIE ratio,other things held constant,the lower the interest rate the bank would charge the firm. 
A)  Other things held constant,the lower the current ratio,the lower the interest rate the bank would charge the firm. 
B)  The lower the company's EBITDA coverage ratio,other things held constant,the lower the interest rate the bank would charge the firm. 
C)  Other things held constant,the higher the debt ratio,the lower the interest rate the bank would charge the firm. 
D)  Other things held constant,the lower the debt ratio,the lower the interest rate the bank would charge the firm. 
E)  The lower the company's TIE ratio,other things held constant,the lower the interest rate the bank would charge the firm.

Question 20

Heaton Corp.sells on terms that allow customers 45 days to pay for merchandise.Its sales last year were $425,000,and its year-end receivables were $60,000.If its DSO is less than the 45-day credit period,then customers are paying on time.Otherwise,they are paying late.By how much are customers paying early or late? Base your answer on this equation: DSO − Credit period = days early or late,and use a 365-day year when calculating the DSO.A positive answer indicates late payments,while a negative answer indicates early payments.

Accepted Answer

A)  6.20 
B)  6.53 
C)  6.86 
D)  7.20 
E)  7.56 
A)  6.20 
B)  6.53 
C)  6.86 
D)  7.20 
E)  7.56

Exam 3: Analysis of Financial Statements

Which of the following statements is CORRECT?

Vang Corp.'s stock price at the end of last year was $33.50 and its earnings per share for the year were $2.30.What was its P/E ratio?

The inventory turnover and current ratio are related.The combination of a high current ratio and a low inventory turnover ratio,relative to industry norms,suggests that the firm has an above-average inventory level and/or that part of the inventory is obsolete or damaged.

If the CEO of a large,diversified,firm were filling out a fitness report on a division manager (i.e. ,"grading" the manager),which of the following situations would be likely to cause the manager to receive a better grade? In all cases,assume that other things are held constant.

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.

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)?

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

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

The times-interest-earned ratio is one,but not the only,indication of a firm's ability to meet its long-term and short-term debt obligations.

Which of the following statements is CORRECT?

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?

Last year Vaughn Corp.had sales of $315,000 and a net income of $17,832,and its year-end assets were $210,000.The firm's total-debt-to-total-assets ratio was 42.5%.Based on the DuPont equation,what was Vaughn's ROE?

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?

Market value ratios provide management with an indication of how investors view the firm's past performance and especially its future prospects.

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

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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