Question 1

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)   $50,625F) All of the above
G) A) and E)

Question 2

Refer to Exhibit 4.1. What is the firm's TIE?

Accepted Answer

A)   2.20
B)   2.45
C)   2.72
D)   3.02
E)   3.33F) None of the above
G) A) and D)

Question 3

If a firm sold some inventory on credit as opposed to cash, there is no reason to think that either its current or quick ratio would change.

Accepted Answer

A) True 
 B)False

Question 4

Market value ratios provide management with an indication of how investors view the firm's past performance and especially its future prospects.

Accepted Answer

A) True 
 B)False

Question 5

Refer to Exhibit 4.1. What is the firm's total assets turnover?

Accepted Answer

A)   1.12
B)   1.40
C)   1.75
D)   2.10
E)   2.52F) All of the above
G) A) and B) C

Question 6

A firm's new president wants to strengthen the company's financial position. Which of the following actions would make it financially stronger?

Accepted Answer

A)   Increase accounts receivable while holding sales constant.
B)   Increase EBIT while holding sales and assets constant.
C)   Increase accounts payable while holding sales constant.
D)   Increase notes payable while holding sales constant.
E)   Increase inventories while holding sales constant.F) C) and E)
G) A) and B)

Question 7

Meyer Inc's total invested capital is $625,000, and its total debt outstanding is $185,000. The new CFO wants to establish a total debt to total capital ratio of 55%. The size of the firm will not change. How much debt must the company add or subtract to achieve the target debt to capital ratio?

Accepted Answer

A)   $158,750
B)   $166,688
C)   $175,022
D)   $183,773
E)   $192,962F) None of the above
G) B) and E)

Question 8

Refer to Exhibit 4.1. What is the firm's ROA?

Accepted Answer

A)   3.62%
B)   3.98%
C)   4.37%
D)   4.81%
E)   5.29%F) D) and E)
G) B) and E)

Question 9

Suppose you are analyzing two firms in the same industry. Firm A has a profit margin of 10% versus a profit margin of 8% for Firm B. Firm A's total debt to total capital ratio [measured as (Short-term debt + Long-term debt)/(Debt + Preferred stock + Common equity)] is 70% versus one of 20% for Firm B. Based only on these two facts, you cannot reach a conclusion as to which firm is better managed, because the difference in debt, not better management, could be the cause of Firm A's higher profit margin.

Accepted Answer

A) True 
 B)False

Question 10

Refer to Exhibit 4.1. What is the firm's inventory turnover ratio?

Accepted Answer

A)   5.47
B)   5.74
C)   6.03
D)   6.33
E)   6.65F) A) and B)
G) None of the above

Question 11

Which of the following statements is CORRECT?

Accepted Answer

A)   If one firm has a higher total debt to total capital ratio than another, we can be certain that the firm with the higher total debt to total capital ratio will have the lower TIE ratio, as that ratio depends entirely on the amount of debt a firm uses.
B)   A firm's use of debt will have no effect on its profit margin.
C)   If two firms differ only in their use of debt-i.e., they have identical assets, identical total invested capital, sales, operating costs, interest rates on their debt, and tax rates-but one firm has a higher total debt to total capital ratio, the firm that uses more debt will have a lower profit margin on sales and a lower return on assets.
D)   The total debt to total capital ratio as it is generally calculated makes an adjustment for the use of assets leased under operating leases, so the debt ratios of firms that lease different percentages of their assets are still comparable.
E)   If two firms differ only in their use of debt-i.e., they have identical assets, identical total invested capital, operating costs, and tax rates-but one firm has a higher total debt to total capital ratio, the firm that uses more debt will have a higher operating margin and return on assets.F) A) and D)
G) A) and C)

Question 12

Although a full liquidity analysis requires the use of a cash budget, the current and quick ratios provide fast and easy-to-use estimates of a firm's liquidity position.

Accepted Answer

A) True 
 B)False

Question 13

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.F) B) and D)
G) D) and E)

Question 14

Refer to Exhibit 4.1. What is the firm's P/E ratio?

Accepted Answer

A)   12.0
B)   12.6
C)   13.2
D)   13.9
E)   14.6F) A) and D)
G) None of the above

Question 15

One problem with ratio analysis is that relationships can sometimes be manipulated. For example, if our current ratio is greater than 1.5, then borrowing on a short-term basis and using the funds to build up our cash account would cause the current ratio to INCREASE.

Accepted Answer

A) True 
 B)False

Question 16

Refer to Exhibit 4.1. What is the firm's dividends per share?

Accepted Answer

A)   $1.14
B)   $1.27
C)   $1.39
D)   $1.53
E)   $1.68F) All of the above
G) A) and C)

Question 17

The inventory turnover and current ratio are related. The combination of a high current ratio and a low inventory turnover ratio, relative to industry norms, suggests that the firm has an above-average inventory level and/or that part of the inventory is obsolete or damaged.

Accepted Answer

A) True 
 B)False

Question 18

Refer to Exhibit 4.1. What is the firm's equity multiplier?

Accepted Answer

A)   3.85
B)   4.04
C)   4.24
D)   4.45
E)   4.68F) C) and E)
G) B) and E) A

Question 19

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?

Accepted Answer

A)   The company's current ratio increased.
B)   The company's times interest earned ratio decreased.
C)   The company's basic earning power ratio increased.
D)   The company's equity multiplier increased.
E)   The company's total debt to total capital ratio increased.F) A) and C)
G) A) and B) A

Question 20

If a firm's ROE is equal to 9% and its ROA is equal to 6%, its equity multiplier must be 1.5.

Accepted Answer

A) True 
 B)False

Exam 4: Analysis of Financial Statements

Correct Answer
verified

Refer to Exhibit 4.1. What is the firm's TIE?

Correct Answer
verified

If a firm sold some inventory on credit as opposed to cash, there is no reason to think that either its current or quick ratio would change.

Correct Answer
verified

Market value ratios provide management with an indication of how investors view the firm's past performance and especially its future prospects.

Correct Answer
verified

Refer to Exhibit 4.1. What is the firm's total assets turnover?

Correct Answer
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C

A firm's new president wants to strengthen the company's financial position. Which of the following actions would make it financially stronger?

Correct Answer
verified

Meyer Inc's total invested capital is $625,000, and its total debt outstanding is $185,000. The new CFO wants to establish a total debt to total capital ratio of 55%. The size of the firm will not change. How much debt must the company add or subtract to achieve the target debt to capital ratio?

Correct Answer
verified

Refer to Exhibit 4.1. What is the firm's ROA?

Correct Answer
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Correct Answer
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Refer to Exhibit 4.1. What is the firm's inventory turnover ratio?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Although a full liquidity analysis requires the use of a cash budget, the current and quick ratios provide fast and easy-to-use estimates of a firm's liquidity position.

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Refer to Exhibit 4.1. What is the firm's P/E ratio?

Correct Answer
verified

One problem with ratio analysis is that relationships can sometimes be manipulated. For example, if our current ratio is greater than 1.5, then borrowing on a short-term basis and using the funds to build up our cash account would cause the current ratio to INCREASE.

Correct Answer
verified

Refer to Exhibit 4.1. What is the firm's dividends per share?

Correct Answer
verified

The inventory turnover and current ratio are related. The combination of a high current ratio and a low inventory turnover ratio, relative to industry norms, suggests that the firm has an above-average inventory level and/or that part of the inventory is obsolete or damaged.

Correct Answer
verified

Refer to Exhibit 4.1. What is the firm's equity multiplier?

Correct Answer
verified
A

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?

Correct Answer
verified
A

If a firm's ROE is equal to 9% and its ROA is equal to 6%, its equity multiplier must be 1.5.

Correct Answer
verified

Exam 4: Analysis of Financial Statements

Correct AnswerverifiedShow Answer

Refer to Exhibit 4.1. What is the firm's TIE?

Correct AnswerverifiedShow Answer

If a firm sold some inventory on credit as opposed to cash, there is no reason to think that either its current or quick ratio would change.

Correct AnswerverifiedShow Answer

Market value ratios provide management with an indication of how investors view the firm's past performance and especially its future prospects.

Correct AnswerverifiedShow Answer

Refer to Exhibit 4.1. What is the firm's total assets turnover?

Correct AnswerverifiedC

A firm's new president wants to strengthen the company's financial position. Which of the following actions would make it financially stronger?

Correct AnswerverifiedShow Answer

Meyer Inc's total invested capital is $625,000, and its total debt outstanding is $185,000. The new CFO wants to establish a total debt to total capital ratio of 55%. The size of the firm will not change. How much debt must the company add or subtract to achieve the target debt to capital ratio?

Correct AnswerverifiedShow Answer

Refer to Exhibit 4.1. What is the firm's ROA?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Refer to Exhibit 4.1. What is the firm's inventory turnover ratio?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Although a full liquidity analysis requires the use of a cash budget, the current and quick ratios provide fast and easy-to-use estimates of a firm's liquidity position.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Refer to Exhibit 4.1. What is the firm's P/E ratio?

Correct AnswerverifiedShow Answer

One problem with ratio analysis is that relationships can sometimes be manipulated. For example, if our current ratio is greater than 1.5, then borrowing on a short-term basis and using the funds to build up our cash account would cause the current ratio to INCREASE.

Correct AnswerverifiedShow Answer

Refer to Exhibit 4.1. What is the firm's dividends per share?

Correct AnswerverifiedShow Answer

The inventory turnover and current ratio are related. The combination of a high current ratio and a low inventory turnover ratio, relative to industry norms, suggests that the firm has an above-average inventory level and/or that part of the inventory is obsolete or damaged.

Correct AnswerverifiedShow Answer

Refer to Exhibit 4.1. What is the firm's equity multiplier?

Correct AnswerverifiedA

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?

Correct AnswerverifiedA

If a firm's ROE is equal to 9% and its ROA is equal to 6%, its equity multiplier must be 1.5.

Correct AnswerverifiedShow Answer

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C

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A

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A

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