Question 1

The inventory turnover ratio and days sales outstanding (DSO) are two ratios that are used to assess how effectively a firm is managing its assets.

Accepted Answer

A) True 
 B)False

Question 2

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 payσ 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 3

A firm's new president wants to strengthen the company's financial position. Which of the following actions would make it financially stronger?

Accepted Answer

A)  increase inventories while holding sales and cost of goods sold constant. 
B)  increase accounts receivable while holding sales constant. 
C)  increase ebit while holding sales constant. 
D)  increase accounts payable while holding sales constant. 
E)  increase notes payable while holding sales constant. 
A)  increase inventories while holding sales and cost of goods sold constant. 
B)  increase accounts receivable while holding sales constant. 
C)  increase ebit while holding sales constant. 
D)  increase accounts payable while holding sales constant. 
E)  increase notes payable while holding sales constant.

Question 4

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 5

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 6

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 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 BEP?

Accepted Answer

A)  6.00% 
B)  6.32% 
C)  6.65% 
D)  6.98% 
E)  7.33% 
A)  6.00% 
B)  6.32% 
C)  6.65% 
D)  6.98% 
E)  7.33%

Question 8

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 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 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 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 debt ratio (i.e., debt-to-assets ratio)?

Accepted Answer

A)  33.87% 
B)  35.00% 
C)  36.40% 
D)  38.00% 
E)  40.00% 
A)  33.87% 
B)  35.00% 
C)  36.40% 
D)  38.00% 
E)  40.00%

Question 11

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?

Accepted Answer

A)  16.87% 
B)  17.75% 
C)  18.69% 
D)  19.67% 
E)  20.66% 
A)  16.87% 
B)  17.75% 
C)  18.69% 
D)  19.67% 
E)  20.66%

Question 12

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 13

Suppose a firm wants to maintain a specific TIE ratio. It knows the amount of its debt, the interest rate on that debt, the applicable tax rate, and its operating costs. With this information, the firm can calculate the amount of sales required to achieve its target TIE ratio.

Accepted Answer

A) True 
 B)False

Question 14

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 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 15

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 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 TIE?

Accepted Answer

A)  1.94 
B)  2.15 
C)  2.39 
D)  2.66 
E)  2.93 
A)  1.94 
B)  2.15 
C)  2.39 
D)  2.66 
E)  2.93

Question 17

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 profit margin?

Accepted Answer

A)  1.40% 
B)  1.56% 
C)  1.73% 
D)  1.93% 
E)  2.12% 
A)  1.40% 
B)  1.56% 
C)  1.73% 
D)  1.93% 
E)  2.12%

Question 18

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   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 19

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 lateσ 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

Question 20

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 (mva). 
E)  if a firm has a history of high economic value added (eva) 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 (mva). 
E)  if a firm has a history of high economic value added (eva) 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.

Exam 7: Analysis of Financial Statements

The inventory turnover ratio and days sales outstanding (DSO) are two ratios that are used to assess how effectively a firm is managing its assets.

A firm's new president wants to strengthen the company's financial position. Which of the following actions would make it financially stronger?

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.

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?

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.

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?

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?

Suppose a firm wants to maintain a specific TIE ratio. It knows the amount of its debt, the interest rate on that debt, the applicable tax rate, and its operating costs. With this information, the firm can calculate the amount of sales required to achieve its target TIE ratio.

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?

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

Filters