Question 1

The Meryl Corporation's common stock currently is selling at $100 per share, which represents a P/E ratio of 10.If the firm has 100 shares of common stock outstanding, a return on equity of 20 percent, and a debt ratio of 60 percent, what is its return on total assets (ROA)?

Accepted Answer

A)  8.0% 
B)  10.0% 
C)  12.0% 
D)  16.7% 
E)  20.0%

Question 2

Suppose a firm wants to maintain a specific TIE ratio.If the firm knows the level of its debt, the interest rate it will pay on that debt and the applicable tax rate, the firm can then calculate the earnings level required to maintain its target TIE ratio.

Accepted Answer

A) True 
 B)False

Question 3

Retailers Inc.and Computer Corp.each have assets of $10,000 and a return on common equity equal to 15%.Retailers has twice as much debt and twice as many sales relative to Computer Corp.Retailers' net income equals $750, and its total asset turnover is equal to 3.What is Computer Corp.'s profit margin?

Accepted Answer

A)  2.50% 
B)  5.00% 
C)  7.50% 
D)  10.00% 
E)  12.50%

Question 4

Micromain Company has 10,000,000 shares of common stock authorized and 8,000,000 shares outstanding, each with a $1.00 par value.The firm's additional paid-in capital account has a balance of $18,000,000.The previous year's retained earnings account was $124,000,000.In the year just ended, Micromain generated net income of $16,000,000 and the firm has a dividend payout ratio of 40 percent.What will Micromain's book value per share be when based on the final year-end balance sheet?

Accepted Answer

A)  $20.75 
B)  $15.00 
C)  $15.96 
D)  $19.95 
E)  $18.75

Question 5

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 6

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 7

Most annual reports include detailed financial data for the two most recent years, along with historical summaries of key accounting statistic for the past five or ten years.

Accepted Answer

A) True 
 B)False

Question 8

Market value ratios provide management with a current assessment of how investors in the market view the firm's past performance and future prospects.

Accepted Answer

A) True 
 B)False

Question 9

Ratio analysis involves a comparison of the relationships between financial statement accounts so as to analyze the financial position and strength of a firm.

Accepted Answer

A) True 
 B)False

Question 10

Non-cash assets are expected to produce cash over time but the amount of cash they eventually produce could be higher or lower than the values at which the assets are carried on the books.

Accepted Answer

A) True 
 B)False

Question 11

A stock dividend and a stock split should, at least conceptually, have the same effect on shareholders' wealth.

Accepted Answer

A) True 
 B)False

Question 12

Tapley Dental Supply Company has the following data:  If Tapley could streamline operations, cut operating costs, and raise net income to $300, without affecting sales or the balance sheet (the additional profits will be paid out as dividends), by how much would its ROE increase?

Accepted Answer

A)  3.00% 
B)  3.50% 
C)  4.00% 
D)  4.25% 
E)  5.50%

Question 13

Other things held constant, which of the following will not affect the quick ratio? (Assume that current assets equal current liabilities.)

Accepted Answer

A)  Fixed assets are sold for cash. 
B)  Cash is used to purchase inventories. 
C)  Cash is used to pay off accounts payable. 
D)  Accounts receivable are collected. 
E)  Long-term debt is issued to pay off a short-term bank loan.

Question 14

Culver Inc.has earnings after interest but before taxes of $300.The company's before-tax times-interest-earned ratio is 7.00.Calculate the company's interest charges.

Accepted Answer

A)  $42.86 
B)  $50.00 
C)  $40.00 
D)  $60.00 
E)  $57.93

Question 15

Manufacturer's Inc.estimates that its interest charges for this year will be $700 and that its net income will be $3,000.Assuming its average tax rate is 30%, what is the company's estimated times interest earned ratio?

Accepted Answer

A)  2.40 
B)  4.25 
C)  5.33 
D)  7.12 
E)  7.75

Question 16

As long as sales revenues exceed all costs over part of an accounting period, a firm will avoid any cash shortage.

Accepted Answer

A) True 
 B)False

Question 17

All of the following represent cash outflows to the firm except

Accepted Answer

A)  Taxes. 
B)  Interest payments. 
C)  Dividends. 
D)  Purchase of plant and equipment. 
E)  Depreciation.

Question 18

Taxes, payment patterns, and reporting considerations, as well as credit sales and non-cash costs, are reasons why operating cash flows can differ from accounting profits.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following statements is most correct?

Accepted Answer

A)  An increase in a firm's debt ratio, with no changes in its sales and operating costs, could be expected to lower its profit margin on sales. 
B)  An increase in the DSO, other things held constant, would generally lead to an increase in the total asset turnover ratio. 
C)  An increase in the DSO, other things held constant, would generally lead to an increase in the ROE. 
D)  In a competitive economy, where all firms earn similar returns on equity, one would expect to find lower profit margins for airlines, which require a lot of fixed assets relative to sales, than for fresh fish markets. 
E)  It is more important to adjust the Debt/Assets ratio than the inventory turnover ratio to account for seasonal fluctuations.

Question 20

The retained earnings account on the balance sheet does not represent cash and in fact, represents a claim against the existing assets of the firm.This implies that retained earnings are in fact the reinvested earnings of stockholders.

Accepted Answer

A) True 
 B)False

Exam 7: Analysis of Financial Statements

The Meryl Corporation's common stock currently is selling at $100 per share, which represents a P/E ratio of 10.If the firm has 100 shares of common stock outstanding, a return on equity of 20 percent, and a debt ratio of 60 percent, what is its return on total assets (ROA) ?

Suppose a firm wants to maintain a specific TIE ratio.If the firm knows the level of its debt, the interest rate it will pay on that debt and the applicable tax rate, the firm can then calculate the earnings level required to maintain its target TIE ratio.

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.

Most annual reports include detailed financial data for the two most recent years, along with historical summaries of key accounting statistic for the past five or ten years.

Market value ratios provide management with a current assessment of how investors in the market view the firm's past performance and future prospects.

Ratio analysis involves a comparison of the relationships between financial statement accounts so as to analyze the financial position and strength of a firm.

Non-cash assets are expected to produce cash over time but the amount of cash they eventually produce could be higher or lower than the values at which the assets are carried on the books.

A stock dividend and a stock split should, at least conceptually, have the same effect on shareholders' wealth.

Tapley Dental Supply Company has the following data: If Tapley could streamline operations, cut operating costs, and raise net income to $300, without affecting sales or the balance sheet (the additional profits will be paid out as dividends) , by how much would its ROE increase?

Other things held constant, which of the following will not affect the quick ratio? (Assume that current assets equal current liabilities.)

Culver Inc.has earnings after interest but before taxes of $300.The company's before-tax times-interest-earned ratio is 7.00.Calculate the company's interest charges.

Manufacturer's Inc.estimates that its interest charges for this year will be $700 and that its net income will be $3,000.Assuming its average tax rate is 30%, what is the company's estimated times interest earned ratio?

As long as sales revenues exceed all costs over part of an accounting period, a firm will avoid any cash shortage.

All of the following represent cash outflows to the firm except

Taxes, payment patterns, and reporting considerations, as well as credit sales and non-cash costs, are reasons why operating cash flows can differ from accounting profits.

Which of the following statements is most correct?

The retained earnings account on the balance sheet does not represent cash and in fact, represents a claim against the existing assets of the firm.This implies that retained earnings are in fact the reinvested earnings of stockholders.