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Exam 4: Statement Analysis

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Question 21

Multiple Choice

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A firm wants to strengthen its financial position. Which of the following actions would increase its current ratio?

A) Reduce the company's days' sales outstanding to the industry average and use the resulting cash savings to purchase plant and equipment.
B) Use cash to repurchase some of the company's own stock.
C) Borrow using short-term debt and use the proceeds to repay debt that has a maturity of more than one year.
D) Issue new stock, then use some of the proceeds to purchase additional inventory and hold the remainder as cash.
E) Use cash to increase inventory holdings.

F) C) and D)
G) A) and E)

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Question 22

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River Corp's total assets at the end of last year were $415,000 and its net income was $32,750. What was its return on total assets?

A) 7.89%
B) 8.29%
C) 8.70%
D) 9.14%
E) 9.59%

F) D) and E)
G) C) and D)

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Question 23

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Firms A and B have the same current ratio, 0.75, the same amount of sales, and the same amount of current liabilities. However, Firm A has a higher inventory turnover ratio than B. Therefore, we can conclude that A's quick ratio must be smaller than B's.

What is the firm's TIE?

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?

If a bank loan officer were considering a company's loan request, which of the following statements would you consider to be CORRECT?

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

If a firm sold some inventory for cash and left the funds in its bank account, its current ratio would probably not change much, but its quick ratio would decline.

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?

Which of the following statements is CORRECT?

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

Amram Company's current ratio is 2.0. Considered alone, which of the following actions would lower the current ratio?

Other things held constant, a decline in sales accompanied by an increase in financial leverage must result in a lower profit margin.

What is the firm's debt/assets ratio?

Ryngard Corp's sales last year were $38,000, and its total assets were $16,000. What was its total assets turnover ratio (TATO) ?

Last year Hamdi Corp. had sales of $500,000, operating costs of $450,000, and year-end assets of $395,000. The debt-to-total-assets ratio was 17%, the interest rate on the debt was 7.5%, and the firm's tax rate was 35%. The new CFO wants to see how the ROE would have been affected if the firm had used a 50% debt ratio. Assume that sales, operating costs, total assets, and the tax rate would not be affected, but the interest rate would rise to 8.0%. By how much would the ROE change in response to the change in the capital structure?

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

Royce Corp's sales last year were $280,000, and its net income was $23,000. What was its profit margin?

The profit margin measures net income per dollar of sales.

Casey Communications recently issued new common stock and used the proceeds to pay off some of its short-term notes payable. This action had no effect on the company's total assets or operating income. Which of the following effects would occur as a result of this action?