Question 1

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  True

Question 2

Profitability ratios show the combined effects of liquidity, asset management, and debt management on operating results.

Accepted Answer

A) True 
 B)False  True

Question 3

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% C

Question 4

Exhibit 3.1
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 Exhibit 3.1.What is the firm's debt-to-assets ratio?

Accepted Answer

A)  45.93% 
B)  51.03% 
C)  56.70% 
D)  63.00% 
E)  70.00% 
A)  45.93% 
B)  51.03% 
C)  56.70% 
D)  63.00% 
E)  70.00%

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

Exhibit 3.1
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 Exhibit 3.1.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 7

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 8

Exhibit 3.1
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 Exhibit 3.1.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 9

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 10

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 11

Which of the following statements is CORRECT?

Accepted Answer

A)  An increase in a firm's debt ratio, with no changes in its sales or operating costs, could be expected to lower the profit margin. 
B)  The ratio of long-term debt to total capital is more likely to experience seasonal fluctuations than is either the DSO or the inventory turnover ratio. 
C)  If two firms have the same ROA, the firm with the most debt can be expected to have the lower ROE. 
D)  An increase in the DSO, other things held constant, could be expected to increase the total assets turnover ratio. 
E)  An increase in the DSO, other things held constant, could be expected to increase the ROE. 
A)  An increase in a firm's debt ratio, with no changes in its sales or operating costs, could be expected to lower the profit margin. 
B)  The ratio of long-term debt to total capital is more likely to experience seasonal fluctuations than is either the DSO or the inventory turnover ratio. 
C)  If two firms have the same ROA, the firm with the most debt can be expected to have the lower ROE. 
D)  An increase in the DSO, other things held constant, could be expected to increase the total assets turnover ratio. 
E)  An increase in the DSO, other things held constant, could be expected to increase the ROE.

Question 12

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 13

Which of the following statements is CORRECT?

Accepted Answer

A)  "Window dressing" is any action that improves a firm's fundamental, long-run position and thus increases its intrinsic value. 
B)  Borrowing by using short-term notes payable and then using the proceeds to retire long-term debt is an example of "window dressing." Offering discounts to customers who pay with cash rather than buy on credit and then using the funds that come in quicker to purchase additional inventories is another example of "window dressing." 
C)  Borrowing on a long-term basis and using the proceeds to retire short-term debt would improve the current ratio and thus could be considered to be an example of "window dressing." 
D)  Offering discounts to customers who pay with cash rather than buy on credit and then using the funds that come in quicker to purchase additional inventories is an example of "window dressing." 
E)  Using some of the firm's cash to reduce long-term debt is an example of "window dressing." 
A)  "Window dressing" is any action that improves a firm's fundamental, long-run position and thus increases its intrinsic value. 
B)  Borrowing by using short-term notes payable and then using the proceeds to retire long-term debt is an example of "window dressing." Offering discounts to customers who pay with cash rather than buy on credit and then using the funds that come in quicker to purchase additional inventories is another example of "window dressing." 
C)  Borrowing on a long-term basis and using the proceeds to retire short-term debt would improve the current ratio and thus could be considered to be an example of "window dressing." 
D)  Offering discounts to customers who pay with cash rather than buy on credit and then using the funds that come in quicker to purchase additional inventories is an example of "window dressing." 
E)  Using some of the firm's cash to reduce long-term debt is an example of "window dressing."

Question 14

Ratio analysis involves analyzing financial statements in order to appraise a firm's financial position and strength.

Accepted Answer

A) True 
 B)False

Question 15

Muscarella Inc.has the following balance sheet and income statement data:
 
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 16

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.

Question 17

Considered alone, which of the following would increase a company's current ratio?

Accepted Answer

A)  An increase in accounts payable. 
B)  An increase in net fixed assets. 
C)  An increase in accrued liabilities. 
D)  An increase in notes payable. 
E)  An increase in accounts receivable. 
A)  An increase in accounts payable. 
B)  An increase in net fixed assets. 
C)  An increase in accrued liabilities. 
D)  An increase in notes payable. 
E)  An increase in accounts receivable.

Question 18

An investor is considering starting a new business.The company would require $475, 000 of assets, and it would be financed entirely with common stock.The investor will go forward only if she thinks the firm can provide a 13.5% return on the invested capital, which means that the firm must have an ROE of 13.5%.How much net income must be expected to warrant starting the business?

Accepted Answer

A)  $52, 230 
B)  $54, 979 
C)  $57, 873 
D)  $60, 919 
E)  $64, 125 
A)  $52, 230 
B)  $54, 979 
C)  $57, 873 
D)  $60, 919 
E)  $64, 125

Question 19

Lofland's has $20 million in current assets and $10 million in current liabilities, while Smaland's current assets are $10 million versus $20 million of current liabilities.Both firms would like to "window dress" their end-of-year financial statements, and to do so each plans to borrow $10 million on a short-term basis and to then hold the borrowed funds in their cash accounts.Which of the statements below best describes the results of these transactions?

Accepted Answer

A)  The transaction would improve both firms' financial strength as measured by their current ratios. 
B)  The transactions would raise Lofland's financial strength as measured by its current ratio but lower Smaland's current ratio. 
C)  The transactions would lower Lofland's financial strength as measured by its current ratio but raise Smaland's current ratio. 
D)  The transaction would have no effect on the firm' financial strength as measured by their current ratios. 
E)  The transaction would lower both firm' financial strength as measured by their current ratios. 
A)  The transaction would improve both firms' financial strength as measured by their current ratios. 
B)  The transactions would raise Lofland's financial strength as measured by its current ratio but lower Smaland's current ratio. 
C)  The transactions would lower Lofland's financial strength as measured by its current ratio but raise Smaland's current ratio. 
D)  The transaction would have no effect on the firm' financial strength as measured by their current ratios. 
E)  The transaction would lower both firm' financial strength as measured by their current ratios.

Question 20

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

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.

Profitability ratios show the combined effects of liquidity, asset management, and debt management on operating results.

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

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?

Which of the following statements is CORRECT?

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.

Which of the following statements is CORRECT?

Ratio analysis involves analyzing financial statements in order to appraise a firm's financial position and strength.

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?

Considered alone, which of the following would increase a company's current ratio?

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

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

Valuation of stocks and corporations

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

Corporate valuation and financial planning

Agency conflicts and corporate governance

Distributions to shareholders: dividends and repurchases

Capital structure decisions

Supply chains and working capital management

Multinational financial management

Filters

Exam 3: Analysis of financial statements

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.

Profitability ratios show the combined effects of liquidity, asset management, and debt management on operating results.

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

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?

Which of the following statements is CORRECT?

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.

Which of the following statements is CORRECT?

Ratio analysis involves analyzing financial statements in order to appraise a firm's financial position and strength.

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?

Considered alone, which of the following would increase a company's current ratio?

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

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

Valuation of stocks and corporations

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

Corporate valuation and financial planning

Agency conflicts and corporate governance

Distributions to shareholders: dividends and repurchases

Capital structure decisions

Supply chains and working capital management

Multinational financial management

Filters