Question 1

An estimate of the discounted value of future lease payments can be obtained in the following way(s):

Accepted Answer

A)  By discounting future lease payments at the firm's cost of debt or by discounting future lease payments at the firm's cost of capital. 
B)  By discounting future lease payments at the firm's cost of capital or by applying a multiple to forthcoming minimum lease payments. 
C)  By discounting future lease payments at the firm's cost of debt or by applying a multiple to forthcoming minimum lease payments. 
D)  By applying a multiple to forthcoming minimum lease payments. 
E)  None of the above. 
A)  By discounting future lease payments at the firm's cost of debt or by discounting future lease payments at the firm's cost of capital. 
B)  By discounting future lease payments at the firm's cost of capital or by applying a multiple to forthcoming minimum lease payments. 
C)  By discounting future lease payments at the firm's cost of debt or by applying a multiple to forthcoming minimum lease payments. 
D)  By applying a multiple to forthcoming minimum lease payments. 
E)  None of the above.

Question 2

Exhibit 19-1
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\begin{array}{c}
 \text { BMC CORPORATION INCOME STATEMENT } \
 \text {FISCAL YEAR ENDING 12/31/2009  } \
 \text {  (DOLLARS IN THOUSANDS') } \
\begin{array}{lr}
\text { Net Sales } &\quad\quad\quad\quad\quad\quad\quad \$ 1025 \
\text { Cost of Goods Sold } & \underline {682 }\
 \text { Gross Profit Margin } & 343 \
\text { Depreciation } & 31 \
\text { Operating Expense } & 103 \
\text { Administrative Expense } & \underline {127} \
\text { Operating Profit } & 82\
\text { Interest }\
 \text {Profit Before  Taxes}&\frac{27}{55}  \
 \text { Taxes } \
 \text {Net Income  }&\$\frac{17}{38} \
\end{array}\end{array}$ $\begin{array}{c}
 \text { BMC CORPORATION BALANCE SHEET } \
 \text { FISCAL YEAR ENDING 12/31/2009 } \
 \text { (DOLLARS IN THOUSANDS) } \
\begin{array}{lll}
\text { ASSETS }\
\hline\text { Cash } & \$ 61 \
\text { Accounts receivables } & 286 \
\text { Inventory } & \underline { 354} \
\text { Total current assets } & 701 \
\text { Net fixed assets } & \underline { 802} \
\
\
\
\

\text { Total assets }&  \$ 1503\
\end{array}
\begin{array}{lll}
\text { LIABILITIES }\
\hline\text { Notes payable } & \$ 223 \
\text { Accounts payable } & 152 \
\text { Accruals } & \underline { 32} \
  \text { Total current liabilities } & 407 \
\text { Long term debt } & 306 \
\text { Common stock ( } \$ 1.50 \text { par) } & 102 \
\text { Paid in surplus } & 226 \
\text { Retained earnings } & \underline { 462} \
\text { Total liabilities and } & \
\quad \text { Stockholders' equity } & \$ 1503
\end{array}
\end{array}$
-Refer to Exhibit 19-1. What was the financial leverage multiplier used in the BMC system?

Accepted Answer

A)  2.058 
B)  2.289 
C)  3.014 
D)  1.903 
E)  0.904 
A)  2.058 
B)  2.289 
C)  3.014 
D)  1.903 
E)  0.904

Question 3

Which of the following factors would be indicative of a high quality balance sheet?

Accepted Answer

A)  Book value is greater than market value. 
B)  The presence of off-balance sheet liabilities 
C)  Market value is greater than book value. 
D)  Very little unused borrowing capacity. 
E)  None of the above. 
A)  Book value is greater than market value. 
B)  The presence of off-balance sheet liabilities 
C)  Market value is greater than book value. 
D)  Very little unused borrowing capacity. 
E)  None of the above.

Question 4

Which of the following factors would be an indicative of high quality earnings?

Accepted Answer

A)  Earnings are close to cash. 
B)  Earnings are the result of repeat business. 
C)  Revenue recognition is based on the installment principle. 
D)  All of the above. 
E)  None of the above. 
A)  Earnings are close to cash. 
B)  Earnings are the result of repeat business. 
C)  Revenue recognition is based on the installment principle. 
D)  All of the above. 
E)  None of the above.

Question 5

Which of the following is not a component of return on equity (ROE)?

Accepted Answer

A)  Net income/sales 
B)  Total assets/equity 
C)  Equity/sales 
D)  Sales/total assets 
E)  Net Profit Margin 
A)  Net income/sales 
B)  Total assets/equity 
C)  Equity/sales 
D)  Sales/total assets 
E)  Net Profit Margin

Question 6

Exhibit 19-5
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
You are provided with the following information about Albermarle Corp. $\begin{array}{lr}
 \text { Income Statement Data } &\
 \text { Sales } &542 \
 \text { Operating Income } &38 \
 \text { Depreciation } &3 \
 \text { Interest Expense } &3 \
 \text {Pretax Income  } &32 \
 \text {Income Taxes  } &13 \
 \text { Net Income after tax } &19\
\
 \text { Balance Sheet Data } &\
 \text { Fixed Assets } &41\
 \text { Total Assets } &245\
 \text {Working Capital  } &123\
 \text { Total Debt } &16\
 \text {  Equity } &159\
\end{array}$
-Refer to Exhibit 19-5. Calculate the interest expense rate.

Accepted Answer

A)  7% 
B)  0.5% 
C)  1.2% 
D)  5% 
E)  2.3% 
A)  7% 
B)  0.5% 
C)  1.2% 
D)  5% 
E)  2.3%

Question 7

The Canadian Institute of Chartered Accountants (CICA) recognizes that it would be improper for all companies to use identical and restrictive accounting principles.

Accepted Answer

A) True 
 B)False

Question 8

Financial ratios can be used to identify firms that might default on a loan or declare bankruptcy.

Accepted Answer

A) True 
 B)False

Question 9

Exhibit 19-1
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\begin{array}{c}
 \text { BMC CORPORATION INCOME STATEMENT } \
 \text {FISCAL YEAR ENDING 12/31/2009  } \
 \text {  (DOLLARS IN THOUSANDS') } \
\begin{array}{lr}
\text { Net Sales } &\quad\quad\quad\quad\quad\quad\quad \$ 1025 \
\text { Cost of Goods Sold } & \underline {682 }\
 \text { Gross Profit Margin } & 343 \
\text { Depreciation } & 31 \
\text { Operating Expense } & 103 \
\text { Administrative Expense } & \underline {127} \
\text { Operating Profit } & 82\
\text { Interest }\
 \text {Profit Before  Taxes}&\frac{27}{55}  \
 \text { Taxes } \
 \text {Net Income  }&\$\frac{17}{38} \
\end{array}\end{array}$ $\begin{array}{c}
 \text { BMC CORPORATION BALANCE SHEET } \
 \text { FISCAL YEAR ENDING 12/31/2009 } \
 \text { (DOLLARS IN THOUSANDS) } \
\begin{array}{lll}
\text { ASSETS }\
\hline\text { Cash } & \$ 61 \
\text { Accounts receivables } & 286 \
\text { Inventory } & \underline { 354} \
\text { Total current assets } & 701 \
\text { Net fixed assets } & \underline { 802} \
\
\
\
\

\text { Total assets }&  \$ 1503\
\end{array}
\begin{array}{lll}
\text { LIABILITIES }\
\hline\text { Notes payable } & \$ 223 \
\text { Accounts payable } & 152 \
\text { Accruals } & \underline { 32} \
  \text { Total current liabilities } & 407 \
\text { Long term debt } & 306 \
\text { Common stock ( } \$ 1.50 \text { par) } & 102 \
\text { Paid in surplus } & 226 \
\text { Retained earnings } & \underline { 462} \
\text { Total liabilities and } & \
\quad \text { Stockholders' equity } & \$ 1503
\end{array}
\end{array}$
-Refer to Exhibit 19-1. What is BMC's operating profit margin?

Accepted Answer

A)  0.800 
B)  0.054 
C)  0.080 
D)  0.540 
E)  5.480 
A)  0.800 
B)  0.054 
C)  0.080 
D)  0.540 
E)  5.480

Question 10

Exhibit 19-5
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
You are provided with the following information about Albermarle Corp. $\begin{array}{lr}
 \text { Income Statement Data } &\
 \text { Sales } &542 \
 \text { Operating Income } &38 \
 \text { Depreciation } &3 \
 \text { Interest Expense } &3 \
 \text {Pretax Income  } &32 \
 \text {Income Taxes  } &13 \
 \text { Net Income after tax } &19\
\
 \text { Balance Sheet Data } &\
 \text { Fixed Assets } &41\
 \text { Total Assets } &245\
 \text {Working Capital  } &123\
 \text { Total Debt } &16\
 \text {  Equity } &159\
\end{array}$
-Refer to Exhibit 19-5. Calculate the operating margin.

Accepted Answer

A)  15.5% 
B)  5.6% 
C)  8.6% 
D)  10.6% 
E)  6.5% 
A)  15.5% 
B)  5.6% 
C)  8.6% 
D)  10.6% 
E)  6.5%

Question 11

According to the DuPont system ROE (return on equity) can be decomposed into the profit margin ratio and the total asset turnover ratio.

Accepted Answer

A) True 
 B)False

Question 12

Some factors that determine financial risk include interest coverage and cash flow coverage.

Accepted Answer

A) True 
 B)False

Question 13

Exhibit 19-2
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\begin{array}{c}
 \text { STAR CORPORATION INCOME STATEMENT} \
 \text {FISCAL YEAR ENDING 12/31/2009  } \
 \text {  (DOLLARS IN THOUSANDS') } \
\begin{array}{lr}
\text { Net Sales } &\quad\quad\quad\quad\quad\quad\quad \$ 1075 \
\text { Cost of Goods Sold } & \underline {706 }\
 \text { Gross Profit Margin } & 369 \
\text { Depreciation } & 30 \
\text { Operating Expense } & 109 \
\text { Administrative Expense } & \underline {129} \
\text { Operating Profit } &101\
\text { Interest }\
 \text {Profit Before  Taxes}&\frac{29}{72}  \
 \text { Taxes } \
 \text {Net Income  }&\$\frac{21}{51} \
\end{array}\end{array}$ $\begin{array}{c}
 \text {  STAR CORPORATION BALANCE SHEET } \
 \text { FISCAL YEAR ENDING 12/31/2009 } \
 \text { (DOLLARS IN THOUSANDS) } \
\begin{array}{lll}
\text { ASSETS }\
\hline\text { Cash } & \$ 69 \
\text { Accounts receivables } & 233 \
\text { Inventory } & \underline { 348} \
\text { Total current assets } &650 \
\text { Net fixed assets } & \underline { 886} \
\
\
\
\

\text { Total assets }&  \$ 1536\
\end{array}
\begin{array}{lll}
\text { LIABILITIES }\
\hline\text { Notes payable } & \$ 231 \
\text { Accounts payable } & 146 \
\text { Accruals } & \underline { 31} \
  \text { Total current liabilities } & 408 \
\text { Long term debt } & 318\
\text { Common stock ( } \$ 1.50 \text { par) } & 111\
\text { Paid in surplus } & 190 \
\text { Retained earnings } & \underline { 509} \
\text { Total liabilities and } & \
\quad \text { Stockholders' equity } & \$ 1536
\end{array}
\end{array}$
-Refer to Exhibit 19-2. What is Star's operating profit margin?

Accepted Answer

A)  0.104 
B)  0.094 
C)  0.084 
D)  0.067 
E)  0.047 
A)  0.104 
B)  0.094 
C)  0.084 
D)  0.067 
E)  0.047

Question 14

Financial ratios can be used to estimate systematic risk.

Accepted Answer

A) True 
 B)False

Question 15

Exhibit 19-5
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
You are provided with the following information about Albermarle Corp. $\begin{array}{lr}
 \text { Income Statement Data } &\
 \text { Sales } &542 \
 \text { Operating Income } &38 \
 \text { Depreciation } &3 \
 \text { Interest Expense } &3 \
 \text {Pretax Income  } &32 \
 \text {Income Taxes  } &13 \
 \text { Net Income after tax } &19\
\
 \text { Balance Sheet Data } &\
 \text { Fixed Assets } &41\
 \text { Total Assets } &245\
 \text {Working Capital  } &123\
 \text { Total Debt } &16\
 \text {  Equity } &159\
\end{array}$
-Refer to Exhibit 19-5. Calculate the financial leverage.

Accepted Answer

A)  1.05 
B)  5.32 
C)  2.15 
D)  1.54 
E)  2.31 
A)  1.05 
B)  5.32 
C)  2.15 
D)  1.54 
E)  2.31

Question 16

Inventory turnover, net fixed asst turnover and equity turnover are measures of operating efficiency.

Accepted Answer

A) True 
 B)False

Question 17

It is important to compare a firm's performance relative to: the aggregate economy, its industry, its major competitors and its past performance.

Accepted Answer

A) True 
 B)False

Question 18

A common-size income statement expresses all income statement items

Accepted Answer

A)  As a percentage of Current Assets. 
B)  As a percentage of Fixed Assets. 
C)  As a percentage of Total Assets. 
D)  As a percentage of Net Income. 
E)  As a percentage of Sales 
A)  As a percentage of Current Assets. 
B)  As a percentage of Fixed Assets. 
C)  As a percentage of Total Assets. 
D)  As a percentage of Net Income. 
E)  As a percentage of Sales

Question 19

Exhibit 19-4
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
You are provided with the following information about MaxCorp. $\begin{array}{lr}
\text { Net sales } & 5000 \
\text { Total Assets } & 3000 \
\text { Depreciation } & 260 \
\text { Net Income } & 600 \
\text { Long term Debt } & 2000 \
\text { Equity } & 2160 \
\text { Dividends } & 160
\end{array}$
-Refer to Exhibit 19-4. Calculate the return on equity (ROE).

Accepted Answer

A)  20.4% 
B)  17.8% 
C)  22.4% 
D)  27.8% 
E)  30.4% 
A)  20.4% 
B)  17.8% 
C)  22.4% 
D)  27.8% 
E)  30.4%

Question 20

Free cash flow = Cash flow from operations - Capital expenditures + Disposition of property and equipment.

Accepted Answer

A) True 
 B)False

An estimate of the discounted value of future lease payments can be obtained in the following way(s):

Which of the following factors would be indicative of a high quality balance sheet?

Which of the following factors would be an indicative of high quality earnings?

Which of the following is not a component of return on equity (ROE)?

The Canadian Institute of Chartered Accountants (CICA) recognizes that it would be improper for all companies to use identical and restrictive accounting principles.

Financial ratios can be used to identify firms that might default on a loan or declare bankruptcy.

According to the DuPont system ROE (return on equity) can be decomposed into the profit margin ratio and the total asset turnover ratio.

Some factors that determine financial risk include interest coverage and cash flow coverage.

Financial ratios can be used to estimate systematic risk.

Inventory turnover, net fixed asst turnover and equity turnover are measures of operating efficiency.

It is important to compare a firm's performance relative to: the aggregate economy, its industry, its major competitors and its past performance.

A common-size income statement expresses all income statement items

Free cash flow = Cash flow from operations - Capital expenditures + Disposition of property and equipment.

The Investment Setting

The Asset Allocation Decision

Selecting Investments in a Global Market

Securities Markets and the Economy

Efficient Capital Markets

An Introduction to Portfolio Management

Asset Pricing Models: Capm and Apt

Economic and Industry Analysis

Company Analysis and Stock Valuation

Technical Analysis

Bond Fundamentals

The Analysis and Valuation of Bonds

An Introduction to Derivative Markets and Securities

Derivatives: Analysis and Valuation

Equity Portfolio Management Strategies

Bond Portfolio Management Strategies

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

An Introduction to Security Valuation

Web Appendix: A Review of Statistics and the Security Market Line

Web Appendix: A Review of Statistics and the Security Market Line

Appendix: Objectives and Constraints of Institutional Investors

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Exam 19: Analysis of Financial Statements

An estimate of the discounted value of future lease payments can be obtained in the following way(s):

Which of the following factors would be indicative of a high quality balance sheet?

Which of the following factors would be an indicative of high quality earnings?

Which of the following is not a component of return on equity (ROE)?

The Canadian Institute of Chartered Accountants (CICA) recognizes that it would be improper for all companies to use identical and restrictive accounting principles.

Financial ratios can be used to identify firms that might default on a loan or declare bankruptcy.

According to the DuPont system ROE (return on equity) can be decomposed into the profit margin ratio and the total asset turnover ratio.

Some factors that determine financial risk include interest coverage and cash flow coverage.

Financial ratios can be used to estimate systematic risk.

Inventory turnover, net fixed asst turnover and equity turnover are measures of operating efficiency.

It is important to compare a firm's performance relative to: the aggregate economy, its industry, its major competitors and its past performance.

A common-size income statement expresses all income statement items

Free cash flow = Cash flow from operations - Capital expenditures + Disposition of property and equipment.

The Investment Setting

The Asset Allocation Decision

Selecting Investments in a Global Market

Securities Markets and the Economy

Efficient Capital Markets

An Introduction to Portfolio Management

Asset Pricing Models: Capm and Apt

Economic and Industry Analysis

Company Analysis and Stock Valuation

Technical Analysis

Bond Fundamentals

The Analysis and Valuation of Bonds

An Introduction to Derivative Markets and Securities

Derivatives: Analysis and Valuation

Equity Portfolio Management Strategies

Bond Portfolio Management Strategies

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

An Introduction to Security Valuation

Web Appendix: A Review of Statistics and the Security Market Line

Web Appendix: A Review of Statistics and the Security Market Line

Appendix: Objectives and Constraints of Institutional Investors

Filters