Question 1

The times-interest-earned ratio is one indication of a firm's ability to meet both long-term and short-term obligations.

Accepted Answer

A) True 
 B)False  True

Question 2

An analyst has obtained the following information regarding two companies, Company X and Company Y: • Company X and Company Y have the same total assets.
• Company X has a higher interest expense than Company Y.
• Company X has a lower operating income (EBIT)• Company X and Company Y have the same return on equity (ROE)• Company X and Company Y have the same total assets turnover (TATO)• Company X and Company Y have the same tax rate.
Based on this information, which of the following statements is most correct?

Accepted Answer

A)   Company X has a higher times-interest-earned (TI
E)   ratio.
B)   Company X and Company Y have the same debt ratio.
C)   Company X has a higher return on assets (RO
A)  .
D)   Company X has a lower profit margin.
E)   Company X has a higher basic earning power (BEP)  ratio. D

Question 3

Which of the following statements is most correct?

Accepted Answer

A)   If two companies have the same return on equity, they should have the same stock price.
B)   If Company A has a higher profit margin and higher total assets turnover relative to Company B, then Company A must have a higher return on assets.
C)   If Company A and Company B have the same debt ratio, they must have the same times interest earned (TI
E)   ratio.
D)   Answers b and c are correct.
E)   None of the answers above is correct. B

Question 4

The degree to which the managers of a firm attempt to magnify the returns to owners' capital through the use of financial leverage is captured in debt management ratios.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following actions will cause an increase in the quick ratio in the short run?

Accepted Answer

A)   $1,000 worth of inventory is sold, and an account receivable is created. The receivable exceeds the inventory by the amount of profit on the sale, which is added to retained earnings.
B)   A small subsidiary which was acquired for $100,000 two years ago and which was generating profits at the rate of 10 percent is sold for $100,000 cash. (Average company profits are 15 percent of assets.) 
C)   Marketable securities are sold at cost.
D)   All of the answers above.
E)   Answers a and b above.

Question 6

Q Corp. has a basic earnings power (BEP) ratio of 15 percent, and has a times interest earned (TIE) ratio of 6. Total assets are $100,000. The corporate tax rate is 40 percent. What is Q Corp.'s return on assets (ROA)?

Accepted Answer

A)   7.5%
B)   10.0%
C)   12.2%
D)   13.1%
E)   14.5%

Question 7

Which of the following statements is most correct about Economic Value Added (EVA)?

Accepted Answer

A)   If a company has no debt, its EVA equals its net income.
B)   If a company has positive ROE, its EVA must also be positive.
C)   A company's EVA will be positive whenever the cost of equity exceeds the ROE.
D)   All of the statements above are correct.
E)   None of the statements above is correct.

Question 8

Selzer Inc. sells all its merchandise on credit. It has a profit margin of 4 percent, days sales outstanding equal to 60 days (based on a 365-day year), receivables of $147,945.2, total assets of $3 million, and a debt ratio of 0.64. What is the firm's return on equity (ROE)?

Accepted Answer

A)   7.1%
B)   33.3%
C)   3.3%
D)   71.0%
E)   8.1%

Question 9

The Merriam Company has determined that its return on equity is 15 percent. Management is interested in the various components that went into this calculation. You are given the following information: total debt/total assets = 0.35 and total assets turnover = 2.8. What is the profit margin?

Accepted Answer

A)   3.48%
B)   5.42%
C)   6.96%
D)   2.45%
E)   12.82%

Question 10

Which of the following statements is most correct?

Accepted Answer

A)   A firm with financial leverage has a larger equity multiplier than an otherwise identical firm with no debt in its capital structure.
B)   The use of debt in a company's capital structure results in tax benefits to the investors who purchase the company's bonds.
C)   All else equal, a firm with a higher debt ratio will have a lower basic earning power ratio.
D)   All of the answers above are correct.
E)   Answers a and c are correct.

Question 11

The inventory turnover ratio and days sales outstanding (DSO) are two ratios that can be used to assess how effectively the firm is managing its assets in consideration of current and projected operating levels.

Accepted Answer

A) True 
 B)False

Question 12

Pepsi Corporation's current ratio is 0.5, while Coke Company's current ratio is 1.5. Both firms want to "window dress" their coming end-of-year financial statements. As part of their window dressing strategy, each firm will double its current liabilities by adding short-term debt and placing the funds obtained in the cash account. Which of the statements below best describes the actual results of these transactions?

Accepted Answer

A)   The transactions will have no effect on the current ratios.
B)   The current ratios of both firms will be increased.
C)   The current ratios of both firms will be decreased.
D)   Only Pepsi Corporation's current ratio will be increased.
E)   Only Coke Company's current ratio will be increased.

Question 13

You are an analyst following two companies, Company X and Company Y. You have collected the following information: • The two companies have the same total assets.
• Company X has a higher total assets turnover than Company Y.
• Company X has a higher profit margin than Company Y.
• Company Y has a higher inventory turnover ratio than Company X.
• Company Y has a higher current ratio than Company X.
Which of the following statements is most correct?

Accepted Answer

A)   Company X must have a higher net income.
B)   Company X must have a higher ROE.
C)   Company Y must have a higher quick ratio.
D)   Statements a and b are correct.
E)   Statements a and c are correct.

Question 14

Company J and Company K each recently reported the same earnings per share (EPS). Company J's stock, however, trades at a higher price. Which of the following statements is most correct?

Accepted Answer

A)   Company J must have a higher P/E ratio.
B)   Company J must have a higher market to book ratio.
C)   Company J must be riskier.
D)   Company J must have fewer growth opportunities.
E)   All of the statements above are correct.

Question 15

Since ROA measures the firm's effective utilization of assets (without considering how these assets are financed), two firms with the same EBIT must have the same ROA.

Accepted Answer

A) True 
 B)False

Question 16

Companies A and B each have the same level of total assets, the same tax rate, and the same earnings before interest and taxes (EBIT). Company A, however, has a higher debt ratio. Which of the following statements is most correct?

Accepted Answer

A)   Company A has a lower return on assets (RO
A)  .
B)   Company A has a lower basic earning power (BEP) .
C)   Company A has a lower times interest earned (TI
E)   ratio.
D)   Answers a and c are correct.
E)   All of the answers above are correct.

Question 17

Two firms have the same current ratio, 0.75, and the same amount of sales. However, Firm A has a higher inventory turnover ratio than Firm B. Therefore, we can conclude that the quick ratio of Firm A will be smaller than that of Firm B.

Accepted Answer

A) True 
 B)False

Question 18

A firm which has an equity multiplier of 4.0 will have a debt ratio of

Accepted Answer

A)   4.00
B)   3.00
C)   1.00
D)   0.75
E)   0.25

Question 19

If the equity multiplier is 2.0, the debt ratio must be 0.5.

Accepted Answer

A) True 
 B)False

Question 20

Austin & Company has a debt ratio of 0.5, a total assets turnover ratio of 0.25, and a profit margin of 10 percent. The Board of Directors is unhappy with the current return on equity (ROE), and they think it could be doubled. This could be accomplished (1) by increasing the profit margin to 12 percent, and (2) by increasing debt utilization. Total assets turnover will not change. What new debt ratio, along with the new 12 percent profit margin, would be required to double the ROE?

Accepted Answer

A)   55%
B)   60%
C)   65%
D)   70%
E)   75%

Exam 8: Analysis of Financial Statements

The times-interest-earned ratio is one indication of a firm's ability to meet both long-term and short-term obligations.

Which of the following statements is most correct?

The degree to which the managers of a firm attempt to magnify the returns to owners' capital through the use of financial leverage is captured in debt management ratios.

Which of the following actions will cause an increase in the quick ratio in the short run?

Q Corp. has a basic earnings power (BEP) ratio of 15 percent, and has a times interest earned (TIE) ratio of 6. Total assets are $100,000. The corporate tax rate is 40 percent. What is Q Corp.'s return on assets (ROA) ?

Which of the following statements is most correct about Economic Value Added (EVA) ?

Selzer Inc. sells all its merchandise on credit. It has a profit margin of 4 percent, days sales outstanding equal to 60 days (based on a 365-day year) , receivables of $147,945.2, total assets of $3 million, and a debt ratio of 0.64. What is the firm's return on equity (ROE) ?

The Merriam Company has determined that its return on equity is 15 percent. Management is interested in the various components that went into this calculation. You are given the following information: total debt/total assets = 0.35 and total assets turnover = 2.8. What is the profit margin?

Which of the following statements is most correct?

The inventory turnover ratio and days sales outstanding (DSO) are two ratios that can be used to assess how effectively the firm is managing its assets in consideration of current and projected operating levels.

Company J and Company K each recently reported the same earnings per share (EPS) . Company J's stock, however, trades at a higher price. Which of the following statements is most correct?

Since ROA measures the firm's effective utilization of assets (without considering how these assets are financed), two firms with the same EBIT must have the same ROA.

Companies A and B each have the same level of total assets, the same tax rate, and the same earnings before interest and taxes (EBIT) . Company A, however, has a higher debt ratio. Which of the following statements is most correct?

Two firms have the same current ratio, 0.75, and the same amount of sales. However, Firm A has a higher inventory turnover ratio than Firm B. Therefore, we can conclude that the quick ratio of Firm A will be smaller than that of Firm B.

A firm which has an equity multiplier of 4.0 will have a debt ratio of

If the equity multiplier is 2.0, the debt ratio must be 0.5.