Question 1

Determining whether a firm's financial position is improving or deteriorating requires analyzing more than the ratios for a given year. Trend analysis is one method of examining changes in a firm's performance over time.

Accepted Answer

A) True 
 B)False

Question 2

Faldo Corp sells on terms that allow customers 45 days to pay for merchandise. Its sales last year were $325,000, 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 late? 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)  21.27 
B)  22.38 
C)  23.50 
D)  24.68 
E)  25.91

Question 3

What is the firm's ROE?

Accepted Answer

A)  13.21% 
B)  13.91% 
C)  14.60% 
D)  15.33% 
E)  16.10%

Question 4

Companies E and P each reported the same earnings per share (EPS), but Company E's stock trades at a higher price. Which of the following statements is CORRECT?

Accepted Answer

A)  Company E probably has fewer growth opportunities. 
B)  Company E is probably judged by investors to be riskier. 
C)  Company E must have a higher market-to-book ratio. 
D)  Company E must pay a lower dividend. 
E)  Company E trades at a higher P/E ratio.

Question 5

Which of the following statements is CORRECT?

Accepted Answer

A)  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." 
B)  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." 
C)  Offering discounts to customers who pay with cash rather than buy on credit and then using the funds that come in quicker to purchase fixed assets is an example of "window dressing." 
D)  Using some of the firm's cash to reduce long-term debt is an example of "window dressing." 
E)  "Window dressing" is any action that does not improve a firm's fundamental long-run position and thus increases its intrinsic value.

Question 6

Which of the following statements is CORRECT?

Accepted Answer

A)  Other things held constant, the more debt a firm uses, the higher its operating margin will be. 
B)  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. 
C)  Other things held constant, the more debt a firm uses, the higher its profit margin will be. 
D)  Other things held constant, the higher a firm's debt ratio, the higher its TIE ratio will be. 
E)  Debt management ratios show the extent to which a firm's managers are attempting to reduce risk through the use of financial leverage. The higher the debt ratio, the lower the risk.

Question 7

Han Corp's sales last year were $425,000, and its year-end receivables were $52,500. The firm sells on terms that call for customers to pay 30 days after the purchase, but some 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)  12.94 
B)  13.62 
C)  14.33 
D)  15.09 
E)  15.84

Question 8

Zero Corp's total common equity at the end of last year was $405,000 and its net income was $70,000. What was its ROE?

Accepted Answer

A)  14.82% 
B)  15.60% 
C)  16.42% 
D)  17.28% 
E)  18.15%

Question 9

If a firm's fixed assets turnover ratio is significantly higher than its industry average, this could indicate that it uses its fixed assets efficiently or is operating at over capacity and should probably add fixed assets.

Accepted Answer

A) True 
 B)False

Question 10

Your sister is thinking about starting a new business. The company would require $375,000 of assets, and it would be financed entirely with common stock. She 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)  $41,234 
B)  $43,405 
C)  $45,689 
D)  $48,094 
E)  $50,625

Question 11

It is appropriate to use the fixed assets turnover ratio to appraise firms' effectiveness in managing their fixed assets if and only if all the firms being compared have the same proportion of fixed assets to total assets.

Accepted Answer

A) True 
 B)False

Question 12

What is the firm's P/E ratio?

Accepted Answer

A)  12.0 
B)  12.6 
C)  13.2 
D)  13.9 
E)  14.6

Question 13

What is the firm's EPS?

Accepted Answer

A)  $3.26 
B)  $3.43 
C)  $3.62 
D)  $3.80 
E)  $3.99

Question 14

Other things held constant, the higher a firm's debt ratio, the higher its TIE ratio will be.

Accepted Answer

A) True 
 B)False

Question 15

Chang Corp. has $375,000 of assets, and it uses only common equity capital (zero debt). Its sales for the last year were $595,000, and its net income was $25,000. Stockholders recently voted in a new management team that has promised to lower costs and get the return on equity up to 15.0%. What profit margin would the firm need in order to achieve the 15% ROE, holding everything else constant?

Accepted Answer

A)  9.45% 
B)  9.93% 
C)  10.42% 
D)  10.94% 
E)  11.49%

Question 16

The market/book (M/B) ratio tells us how much investors are willing to pay for a dollar of accounting book value. In general, investors regard companies with higher M/B ratios as being less risky and/or more likely to enjoy higher growth in the future.

Accepted Answer

A) True 
 B)False

Question 17

Last year Jandik Corp. had $295,000 of assets, $18,750 of net income, and a debt-to-total-assets ratio of 37%. Now suppose the new CFO convinces the president to increase the debt ratio to 48%. Sales and total assets will not be affected, but interest expenses would increase. However, the CFO believes that better cost controls would be sufficient to offset the higher interest expense and thus keep net income unchanged. By how much would the change in the capital structure improve the ROE?

Accepted Answer

A)  2.13% 
B)  2.35% 
C)  2.58% 
D)  2.84% 
E)  3.12%

Question 18

The return on common equity (ROE) is generally regarded as being less significant, from a stockholder's viewpoint, than the return on total assets (ROA).

Accepted Answer

A) True 
 B)False

Question 19

What is the firm's dividends per share?

Accepted Answer

A)  $1.14 
B)  $1.27 
C)  $1.39 
D)  $1.53 
E)  $1.68

Question 20

Other things held constant, the more debt a firm uses, the lower its operating margin will be.

Accepted Answer

A) True 
 B)False

Exam 4: Analysis of Financial Statements

Determining whether a firm's financial position is improving or deteriorating requires analyzing more than the ratios for a given year. Trend analysis is one method of examining changes in a firm's performance over time.

What is the firm's ROE?

Companies E and P each reported the same earnings per share (EPS) , but Company E's stock trades at a higher price. Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Zero Corp's total common equity at the end of last year was $405,000 and its net income was $70,000. What was its ROE?

If a firm's fixed assets turnover ratio is significantly higher than its industry average, this could indicate that it uses its fixed assets efficiently or is operating at over capacity and should probably add fixed assets.

It is appropriate to use the fixed assets turnover ratio to appraise firms' effectiveness in managing their fixed assets if and only if all the firms being compared have the same proportion of fixed assets to total assets.

What is the firm's P/E ratio?

What is the firm's EPS?

Other things held constant, the higher a firm's debt ratio, the higher its TIE ratio will be.

The market/book (M/B) ratio tells us how much investors are willing to pay for a dollar of accounting book value. In general, investors regard companies with higher M/B ratios as being less risky and/or more likely to enjoy higher growth in the future.

The return on common equity (ROE) is generally regarded as being less significant, from a stockholder's viewpoint, than the return on total assets (ROA).

What is the firm's dividends per share?

Other things held constant, the more debt a firm uses, the lower its operating margin will be.