Question 1

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 2

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 3

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 4

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 5

Companies Heidee and Leaudy are virtually identical in that they are both profitable, and they have the same total assets (TA), Sales (S), return on assets (ROA), and profit margin (PM). However, Company Heidee has the higher debt ratio. Which of the following statements is CORRECT?

Accepted Answer

A)  company heidee has a lower operating income (ebit) than company ld. 
B)  company heidee has a lower total assets turnover than company leaudy. 
C)  company heidee has a lower equity multiplier than company leaudy. 
D)  company heidee has a higher fixed assets turnover than company leaudy. 
E)  company heidee has a higher roe than company leaudy. 
A)  company heidee has a lower operating income (ebit) than company ld. 
B)  company heidee has a lower total assets turnover than company leaudy. 
C)  company heidee has a lower equity multiplier than company leaudy. 
D)  company heidee has a higher fixed assets turnover than company leaudy. 
E)  company heidee has a higher roe than company leaudy.

Question 6

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 7

Pettijohn Inc.
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 the data for Pettijohn Inc.What is the firm's total assets turnover?

Accepted Answer

A)  0.90 
B)  1.12 
C)  1.40 
D)  1.68 
E)  2.02 
A)  0.90 
B)  1.12 
C)  1.40 
D)  1.68 
E)  2.02

Question 8

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 9

Pettijohn Inc.
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 the data for Pettijohn Inc.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 10

Pettijohn Inc.
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 the data for Pettijohn Inc.What is the firm's cash flow per share?

Accepted Answer

A)  $10.06 
B)  $10.59 
C)  $11.15 
D)  $11.74 
E)  $12.35 
A)  $10.06 
B)  $10.59 
C)  $11.15 
D)  $11.74 
E)  $12.35

Question 11

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?

Accepted Answer

A)  its total assets turnover must equal the industry average. 
B)  its total assets turnover must be above the industry average. 
C)  its return on assets must equal the industry average. 
D)  its tie ratio must be below the industry average. 
E)  its total assets turnover must be below the industry average. 
A)  its total assets turnover must equal the industry average. 
B)  its total assets turnover must be above the industry average. 
C)  its return on assets must equal the industry average. 
D)  its tie ratio must be below the industry average. 
E)  its total assets turnover must be below the industry average.

Question 12

Suppose Firms A and B have the same amount of assets, pay the same interest rate on their debt, have the same basic earning power (BEP), and have the same tax rate. However, Firm A has a higher debt ratio. If BEP is greater than the interest rate on debt, Firm A will have a higher ROE as a result of its higher debt ratio.

Accepted Answer

A) True 
 B)False

Question 13

The basic earning power ratio (BEP) reflects the earning power of a firm's assets after giving consideration to financial leverage and tax effects.

Accepted Answer

A) True 
 B)False

Question 14

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%

Question 15

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 16

Pettijohn Inc.
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 the data for Pettijohn Inc.What is the firm's market-to-book ratio?

Accepted Answer

A)  0.56 
B)  0.66 
C)  0.78 
D)  0.92 
E)  1.08 
A)  0.56 
B)  0.66 
C)  0.78 
D)  0.92 
E)  1.08

Question 17

Firms A and B have the same current ratio, 0.75, the same amount of sales and cost of goods sold, and the same amount of current liabilities. However, Firm A has a higher inventory turnover ratio than B. Therefore, we can conclude that A's quick ratio must be smaller than B's.

Accepted Answer

A) True 
 B)False

Question 18

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 (tie) 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 (tie) ratio.

Question 19

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 20

Pettijohn Inc.
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 the data for Pettijohn Inc.What is the firm's EBITDA coverage?

Accepted Answer

A)  3.29 
B)  3.46 
C)  3.64 
D)  3.82 
E)  4.01 
A)  3.29 
B)  3.46 
C)  3.64 
D)  3.82 
E)  4.01

Exam 7: Analysis of Financial Statements

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?

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?

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)?

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

Companies Heidee and Leaudy are virtually identical in that they are both profitable, and they have the same total assets (TA), Sales (S), return on assets (ROA), and profit margin (PM). However, Company Heidee has the higher debt ratio. 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?

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

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?

The basic earning power ratio (BEP) reflects the earning power of a firm's assets after giving consideration to financial leverage and tax effects.

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?

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

Firms A and B have the same current ratio, 0.75, the same amount of sales and cost of goods sold, and the same amount of current liabilities. However, Firm A has a higher inventory turnover ratio than B. Therefore, we can conclude that A's quick ratio must be smaller than B's.

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?

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 Criteria

Capital Budgeting-Estimating Cash Flows and Analyzing Risk

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

Other Topics in Working Capital Management

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

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