Question 1

The greater the variability of sales the higher the earnings coverage ratios should ideally be, all other things equal.

Accepted Answer

A) True 
 B)False  True

Question 2

When examining the debt/equity ratio of a company, consideration should be given to pension liabilities. Specifically, it should be determined if the projected benefit obligation significantly exceeds the plan assets, and if it does compare this to any liability recorded on balance sheet.

Accepted Answer

A) True 
 B)False  True

Question 3

Company B has operating leases with a present value of $2,000 when future minimum lease payments are discounted at 9% as of 12/31/04. Times interest earned ratio, after necessary adjustments, for Company B is:

Accepted Answer

A)  10.26 
B)  9.26 
C)  6.56 
D)  5.55 
A)  10.26 
B)  9.26 
C)  6.56 
D)  5.55 C

Question 4

Which of the following industries would you expect to have the highest inventory turnover?

Accepted Answer

A)  restaurant 
B)  car dealer 
C)  jewelry store 
D)  department store 
A)  restaurant 
B)  car dealer 
C)  jewelry store 
D)  department store

Question 5

When calculating earnings coverage ratios it is common to remove the effects of extraordinary gains and losses and other one-time gains and losses from the numerator.

Accepted Answer

A) True 
 B)False

Question 6

If a company's current ratio increases from 1.1 to 1.3 from one year to the next, it can be concluded that:

Accepted Answer

A)  company's liquidity has increased 
B)  current assets have increased 
C)  current liabilities have decreased 
D)  none of the above 
A)  company's liquidity has increased 
B)  current assets have increased 
C)  current liabilities have decreased 
D)  none of the above

Question 7

Which of the following is least likely to increase the overall risk of a company?

Accepted Answer

A)  increased sales variability 
B)  increased debt levels 
C)  increased variable costs while decreasing fixed costs 
D)  increased interest rates 
A)  increased sales variability 
B)  increased debt levels 
C)  increased variable costs while decreasing fixed costs 
D)  increased interest rates

Question 8

The earnings to fixed charges ratio:

Accepted Answer

A)  indicates how efficiently assets are used 
B)  typically includes depreciation in the denominator 
C)  typically excludes extraordinary gains and losses from the numerator 
D)  indicates the proportion of debt used to finance the company 
A)  indicates how efficiently assets are used 
B)  typically includes depreciation in the denominator 
C)  typically excludes extraordinary gains and losses from the numerator 
D)  indicates the proportion of debt used to finance the company

Question 9

The total leverage ratio of a company will:

Accepted Answer

A)  increase if operating leases are capitalized 
B)  increase if a company sells its receivables 
C)  increase if a company sells more equity 
D)  increase if a company pays suppliers more quickly 
A)  increase if operating leases are capitalized 
B)  increase if a company sells its receivables 
C)  increase if a company sells more equity 
D)  increase if a company pays suppliers more quickly

Question 10

Which of the following is not included in the computation of Altman's Z-score?

Accepted Answer

A)  Liquidity 
B)  Trendline 
C)  Leverage 
D)  Profitability 
A)  Liquidity 
B)  Trendline 
C)  Leverage 
D)  Profitability

Question 11

Which of the following industries would you expect to have the longest operating cycle?

Accepted Answer

A)  Fast Food Industry 
B)  Aerospace Industry 
C)  Discount retail store industry 
D)  Utility industry 
A)  Fast Food Industry 
B)  Aerospace Industry 
C)  Discount retail store industry 
D)  Utility industry

Question 12

Typical debt covenants would
I. Limit the issuance of additional debt senior to the obligation
II. Specify minimum levels of selected financial ratios
III. Specify minimum levels of earnings coverage
IV. Prohibit excessive dividends or stock repurchases

Accepted Answer

A)  II and III 
B)  II and IV 
C)  I, III and IV 
D)  I, II, III and IV 
A)  II and III 
B)  II and IV 
C)  I, III and IV 
D)  I, II, III and IV

Question 13

When calculating the times interest earned adjustments should normally be made for existence of operating leases. A portion of rental payments should be reclassified as interest.

Accepted Answer

A) True 
 B)False

Question 14

Refer to the financial statements for Wal*Mart, below              Wal"Mart        (in millions)       Consolidated Statements of Operations       Fiscal Year Ended                      31-Jan X2       31-Jan X3       31-Jan X4      31-Jan X5        31-Jan X6       31-Jan X7      31-Jan X8                Net sales       $ 43,887       $ 55,484       $ 67,345       $ 82,494       $ 93,627       $ 104,859                      Rentals from licensed dept       28       36       47                                           Other income-net       374       465       593       918       1,122       1,287                      Total revenues       44,289       55,985       67,985       83,412       94,749        106,146       118,884               Cost of sales       34,786       44,174       53,444       65,586       74,564       83,663                      Operating, Selling, General& Administrative Expenses       6,684       8,321       10,333       12,858       14,951       16,788                      Total operating expenses       41,470       52,495       63,777       78,444       89,515       100,451                      Operating income       2,819       3,490       4,208       4,968       5,234       5,695       6,378               Interest costs                                                                 Debt       113       143       331       520       692       629                       Capital leases       153       180       186       186       196       216                             266       323       517       706       888       845       930               Income before taxes       2,553       3,167        3,691       4,262       4,346       4,850       5,449               Income tax expense                                                                Current       906       1,137       1,325       1,572       1,530        1,974                      Deferred       39       35       33       9       76       (180)                             945       1,172       1,358       1,581       1,606        1,794       2,016               Net income       $ 1,608       $ 1,995       $ 2,333       $ 2,681       $ 2,740       $ 3,056       $ 3,433               EPS       $ 0.70       $ 0.87       $ 1.02       $ 1.17       $ 1.19       $ 1.33                      Dividends per share (for the whole year)       $ 0.09       $ 0.11       $ 0.13       $ 0.17       $ 0.20       $ 0.21              
   
 $\begin{array}{|l|r|r|}
\hline\text{Shareholders' Equity}&&\
\hline\text{Preferred stock ( \$.10 par value: 100 share authorized, none issued)}&&\
\hline\text{Common stock ( $ \$ .10 $ par value; 5,500 shares}&&\
\text{authorized. 2,285 and 2,293 issued and outstanding in}&&\
\hline 1997 \text { and } 1996, \text { respectively) } & 228 & 229 \
\hline \text { Capital in excess of par value } & 547 & 545 \
\hline \text { Retained earnings } & 16,768 & 14,394 \
\hline \text { Foreign currency translation adjustment } & {(400)}&{(412)} \
\hline \text { Total shareholders' equity } & \underline{17,143} & 14,756 \
\hline \text { Total liabilities and shareholders' equity } & \$ 39,604 & \$ 37,541 \
\hline
\end{array}$ 
a. Calculate for X7 the ratios listed below. X6 numbers are provided for comparative purposes. $$\begin{array} { | l | r | r | } 
\hline & \underline { \mathbf { X } 6 } & \underline { \mathbf { X } 7 } \
\hline \text { Inventory turnover } & 4.96 & \
\hline \text { Days inventory outstanding } & 73.56 & \
\hline \text { Accounts receivable turnover } & 120.58 & \
\hline \text { Days receivable outstanding } & 3.03 & \
\hline \text { Payables turnover } & 12.39 & \
\hline \text { Days payables outstanding } & 29.46 & \
\hline \text { Length of operating cycle } & 76.58 & \
\hline \text { Length of cash cycle } & 47.12 & \
\hline \text { Current ratio } & 1.51 & \
\hline \text { Quick ratio } & 0.12 & \
\hline
\end{array}$$ 
b. Working capital management is an important consideration for many companies. Which component of Wal*Mart's working capital do you think it spends most time managing? That is, which component is likely to be the most important? Why? What has happened to this component from X6 to X7?

Accepted Answer

A. @#IMG-DLM& b. You would expect Wal*Mart to spen

Question 15

Which of the following statements is correct?

Accepted Answer

A)  Company A has the same ROA as company B 
B)  Company A has a lower ROE than company B 
C)  Company A has same ROE as company B 
D)  Company A has used financial leverage to increase its return to its shareholders 
A)  Company A has the same ROA as company B 
B)  Company A has a lower ROE than company B 
C)  Company A has same ROE as company B 
D)  Company A has used financial leverage to increase its return to its shareholders

Question 16

If a company increased its dividend payments what would happen to the following ratios, all other things being equal? $$\begin{array} { | l | l | l | l | } 
\hline & \text { Total Debt/Equity } & \text { Times Interest Earned } & \text { Financial Leverage Ratio } \
\hline \text { A) } & \text { Same } & \text { Same } & \text { Same } \
\hline \text { B) } & \text { Increase } & \text { Same } & \text { Decrease } \
\hline \text { C) } & \text { Same } & \text { Decrease } & \text { Decrease } \
\hline \text { D) } & \text { Increase } & \text { Same } & \text { Increase } \
\hline
\end{array}$$

Accepted Answer

A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D 
A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D

Question 17

Liquidity is viewed as the company's ability to meet its short term and long term obligations.

Accepted Answer

A) True 
 B)False

Question 18

Minority shareholders' interest on the balance sheet represents a liability to the company and should always be included in debt when calculating the debt/equity ratio.

Accepted Answer

A) True 
 B)False

Question 19

If a company wishes to increase its current ratio, it could:

Accepted Answer

A)  take out a short-term loan 
B)  pay suppliers more quickly 
C)  increase useful life of machinery 
D)  not determinable without more information 
A)  take out a short-term loan 
B)  pay suppliers more quickly 
C)  increase useful life of machinery 
D)  not determinable without more information

Question 20

If a company's current ratio increases from 1.2 to 1.4 from one year to the next, and its quick ratio decreases from 0.2 to 0.15 over the same time period, this indicates:

Accepted Answer

A)  company's liquidity must have increased 
B)  accounts receivable have decreased 
C)  inventory management should be further examined 
D)  current liabilities have decreased 
A)  company's liquidity must have increased 
B)  accounts receivable have decreased 
C)  inventory management should be further examined 
D)  current liabilities have decreased

The greater the variability of sales the higher the earnings coverage ratios should ideally be, all other things equal.

When examining the debt/equity ratio of a company, consideration should be given to pension liabilities. Specifically, it should be determined if the projected benefit obligation significantly exceeds the plan assets, and if it does compare this to any liability recorded on balance sheet.

Company B has operating leases with a present value of $2,000 when future minimum lease payments are discounted at 9% as of 12/31/04. Times interest earned ratio, after necessary adjustments, for Company B is:

Which of the following industries would you expect to have the highest inventory turnover?

When calculating earnings coverage ratios it is common to remove the effects of extraordinary gains and losses and other one-time gains and losses from the numerator.

If a company's current ratio increases from 1.1 to 1.3 from one year to the next, it can be concluded that:

Which of the following is least likely to increase the overall risk of a company?

The earnings to fixed charges ratio:

The total leverage ratio of a company will:

Which of the following is not included in the computation of Altman's Z-score?

Which of the following industries would you expect to have the longest operating cycle?

Typical debt covenants would I. Limit the issuance of additional debt senior to the obligation II. Specify minimum levels of selected financial ratios III. Specify minimum levels of earnings coverage IV. Prohibit excessive dividends or stock repurchases

When calculating the times interest earned adjustments should normally be made for existence of operating leases. A portion of rental payments should be reclassified as interest.

Which of the following statements is correct?

If a company increased its dividend payments what would happen to the following ratios, all other things being equal? Total Debt/Equity Times Interest Earned Financial Leverage Ratio A) Same Same Same B) Increase Same Decrease C) Same Decrease Decrease D) Increase Same Increase

Liquidity is viewed as the company's ability to meet its short term and long term obligations.

Minority shareholders' interest on the balance sheet represents a liability to the company and should always be included in debt when calculating the debt/equity ratio.

If a company wishes to increase its current ratio, it could:

If a company's current ratio increases from 1.2 to 1.4 from one year to the next, and its quick ratio decreases from 0.2 to 0.15 over the same time period, this indicates:

Overview of Financial Statement Analysis

Financial Reporting and Analysis

Analyzing Financing Activities

Analyzing Investing Activities

Analyzing Investing Activities: Intercorporate Investments

Analyzing Operating Activities

Cash Flow Analysis

Return on Invested Capital and Profitability Analysis

Prospective Analysis

Equity Analysis and Valuation

Filters

Wal"Mart (in millions)	Consolidated Statements of Operations Fiscal Year Ended
	31-Jan X2	31-Jan X3	31-Jan X4	31-Jan X5	31-Jan X6	31-Jan X7	31-Jan X8
Net sales	$ 43,887	$ 55,484	$ 67,345	$ 82,494	$ 93,627	$ 104,859
Rentals from licensed dept	28	36	47
Other income-net	374	465	593	918	1,122	1,287
Total revenues	44,289	55,985	67,985	83,412	94,749	106,146	118,884
Cost of sales	34,786	44,174	53,444	65,586	74,564	83,663
Operating, Selling, General& Administrative Expenses	6,684	8,321	10,333	12,858	14,951	16,788
Total operating expenses	41,470	52,495	63,777	78,444	89,515	100,451
Operating income	2,819	3,490	4,208	4,968	5,234	5,695	6,378
Interest costs
Debt	113	143	331	520	692	629
Capital leases	153	180	186	186	196	216
	266	323	517	706	888	845	930
Income before taxes	2,553	3,167	3,691	4,262	4,346	4,850	5,449
Income tax expense
Current	906	1,137	1,325	1,572	1,530	1,974
Deferred	39	35	33	9	76	(180)
	945	1,172	1,358	1,581	1,606	1,794	2,016
Net income	$ 1,608	$ 1,995	$ 2,333	$ 2,681	$ 2,740	$ 3,056	$ 3,433
EPS	$ 0.70	$ 0.87	$ 1.02	$ 1.17	$ 1.19	$ 1.33
Dividends per share (for the whole year)	$ 0.09	$ 0.11	$ 0.13	$ 0.17	$ 0.20	$ 0.21

Exam 10: Credit Analysis

The greater the variability of sales the higher the earnings coverage ratios should ideally be, all other things equal.

When examining the debt/equity ratio of a company, consideration should be given to pension liabilities. Specifically, it should be determined if the projected benefit obligation significantly exceeds the plan assets, and if it does compare this to any liability recorded on balance sheet.

Company B has operating leases with a present value of $2,000 when future minimum lease payments are discounted at 9% as of 12/31/04. Times interest earned ratio, after necessary adjustments, for Company B is:

Which of the following industries would you expect to have the highest inventory turnover?

When calculating earnings coverage ratios it is common to remove the effects of extraordinary gains and losses and other one-time gains and losses from the numerator.

If a company's current ratio increases from 1.1 to 1.3 from one year to the next, it can be concluded that:

Which of the following is least likely to increase the overall risk of a company?

The earnings to fixed charges ratio:

The total leverage ratio of a company will:

Which of the following is not included in the computation of Altman's Z-score?

Which of the following industries would you expect to have the longest operating cycle?

Typical debt covenants would I. Limit the issuance of additional debt senior to the obligation II. Specify minimum levels of selected financial ratios III. Specify minimum levels of earnings coverage IV. Prohibit excessive dividends or stock repurchases

When calculating the times interest earned adjustments should normally be made for existence of operating leases. A portion of rental payments should be reclassified as interest.

Which of the following statements is correct?

If a company increased its dividend payments what would happen to the following ratios, all other things being equal? Total Debt/Equity Times Interest Earned Financial Leverage Ratio A) Same Same Same B) Increase Same Decrease C) Same Decrease Decrease D) Increase Same Increase

Liquidity is viewed as the company's ability to meet its short term and long term obligations.

Minority shareholders' interest on the balance sheet represents a liability to the company and should always be included in debt when calculating the debt/equity ratio.

If a company wishes to increase its current ratio, it could:

If a company's current ratio increases from 1.2 to 1.4 from one year to the next, and its quick ratio decreases from 0.2 to 0.15 over the same time period, this indicates:

Overview of Financial Statement Analysis

Financial Reporting and Analysis

Analyzing Financing Activities

Analyzing Investing Activities

Analyzing Investing Activities: Intercorporate Investments

Analyzing Operating Activities

Cash Flow Analysis

Return on Invested Capital and Profitability Analysis

Prospective Analysis

Equity Analysis and Valuation

Filters