Question 1

Which of the following statements is CORRECT?

Accepted Answer

A)   If a firm has high current and quick ratios, this always indicate that the firm is managing its liquidity position well.
B)   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.
C)   If a firm sold some inventory on credit, its current ratio would probably not change much, but its quick ratio would decline.
D)   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.
E)   The inventory turnover ratio and days sales outstanding (DSO)  are two ratios that are used to assess how effectively a firm is managing its current assets.F) A) and C)
G) D) and E)

Question 2

Companies HD and LD are both profitable, and they have the same total assets (TA) , total invested capital, sales (S) , return on assets (ROA) , and profit margin (PM) . Both firms finance using only debt and common equity. However, Company HD has the higher total debt to total capital ratio. Which of the following statements is CORRECT?

Accepted Answer

A)   Company HD has a lower total assets turnover than Company LD.
B)   Company HD has a lower equity multiplier than Company LD.
C)   Company HD has a higher fixed assets turnover than Company LD.
D)   Company HD has a higher ROE than Company LD.
E)   Company HD has a lower operating income (EBIT)  than Company LD.F) A) and B)
G) A) and C)

Question 3

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

Accepted Answer

A)   0.51
B)   0.64
C)   0.76
D)   0.92
E)   1.10F) A) and B)
G) B) and C)

Question 4

Walter Industries' current ratio is 0.5. Considered alone, which of the following actions would increase the company's current ratio?

Accepted Answer

A)   Borrow using short-term notes payable and use the cash to increase inventories.
B)   Use cash to reduce accruals.
C)   Use cash to reduce accounts payable.
D)   Use cash to reduce short-term notes payable.
E)   Use cash to reduce long-term bonds outstanding.F) C) and D)
G) B) and E)

Question 5

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.

Accepted Answer

A) True 
 B)False

Question 6

Precision Aviation had a profit margin of 6.25%, a total assets turnover of 1.5, and an equity multiplier of 1.8. What was the firm's ROE?

Accepted Answer

A)   15.23%
B)   16.03%
C)   16.88%
D)   17.72%
E)   18.60%F) A) and E)
G) B) and C)

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

In general, if investors regard a company as being relatively risky and/or having relatively poor growth prospects, then it will have relatively high P/E and M/B ratios.

Accepted Answer

A) True 
 B)False

Question 9

Suppose Firms A and B have the same amount of assets, total assets are equal to total invested capital, pay the same interest rate on their debt, have the same basic earning power (BEP), finance with only debt and common equity, and have the same tax rate. However, Firm A has a higher debt to capital ratio. If BEP is greater than the interest rate on debt, Firm A will have a higher ROE as a result of its higher debt ratio.

Accepted Answer

A) True 
 B)False

Question 10

Klein Cosmetics has a profit margin of 5.0%, a total assets turnover ratio of 1.5 times, no debt and therefore an equity multiplier of 1.0, and an ROE of 7.5%. The CFO recommends that the firm borrow funds using long-term debt, use the funds to buy back stock, and raise the equity multiplier to 2.0. The size of the firm (assets) would not change. She thinks that operations would not be affected, but interest on the new debt would lower the profit margin to 4.5%. This would probably be a good move, as it would increase the ROE from 7.5% to 13.5%.

Accepted Answer

A) True 
 B)False

Question 11

Suppose all firms follow similar financing policies, face similar risks, have equal access to capital, and operate in competitive product and capital markets. However, firms face different operating conditions because, for example, the grocery store industry is different from the airline industry. Under these conditions, firms with high profit margins will tend to have high asset turnover ratios, and firms with low profit margins will tend to have low turnover ratios.

Accepted Answer

A) True 
 B)False

Question 12

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

Accepted Answer

A)   7.41%
B)   7.80%
C)   8.21%
D)   8.63%
E)   9.06%F) A) and B)
G) B) and E)

Question 13

The profit margin measures net income per dollar of sales.

Accepted Answer

A) True 
 B)False

Question 14

Which of the following statements is CORRECT?

Accepted Answer

A)   The use of debt financing will tend to lower the basic earning power ratio, other things held constant.
B)   A firm that employs financial leverage will have a higher equity multiplier than an otherwise identical firm that has no debt in its capital structure.
C)   If two firms have identical sales, interest rates paid, operating costs, and assets, but differ in the way they are financed, the firm with less debt will generally have the higher expected ROE.
D)   The numerator used in the TIE ratio is earnings before taxes (EBT) . EBT is used because interest is paid with post-tax dollars, so the firm's ability to pay current interest is affected by taxes.
E)   All else equal, increasing the total debt to total capital ratio will increase the ROA.F) A) and B)
G) All of the above

Question 15

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

Accepted Answer

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

Question 16

Hoagland Corp's stock price at the end of last year was $33.50, and its book value per share was $25.00. What was its market/book ratio?

Accepted Answer

A)   1.34
B)   1.41
C)   1.48
D)   1.55
E)   1.63F) A) and B)
G) A) and C)

Question 17

Ratio analysis involves analyzing financial statements to help appraise a firm's financial position and strength.

Accepted Answer

A) True 
 B)False

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

HD Corp and LD Corp have identical assets, sales, interest rates paid on their debt, tax rates, and EBIT. Both firms finance using only debt and common equity and total assets equal total invested capital. However, HD uses more debt than LD. Which of the following statements is CORRECT?

Accepted Answer

A)   Without more information, we cannot tell if HD or LD would have a higher or lower net income.
B)   HD would have the lower equity multiplier for use in the DuPont equation.
C)   HD would have to pay more in income taxes.
D)   HD would have the lower net income as shown on the income statement.
E)   HD would have the higher operating margin.F) B) and D)
G) B) and C)

Question 20

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

Accepted Answer

A)   Borrow using short-term notes payable and use the proceeds to reduce accruals.
B)   Borrow using short-term notes payable and use the proceeds to reduce long-term debt.
C)   Use cash to reduce accruals.
D)   Use cash to reduce short-term notes payable.
E)   Use cash to reduce accounts payable.F) A) and B)
G) A) and C)

Exam 4: Analysis of Financial Statements

Correct Answer
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The profit margin measures net income per dollar of sales.

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

Correct Answer
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Which of the following statements is CORRECT?

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

Correct Answer
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Refer to Exhibit 4.1. What is the firm's EPS?

Correct Answer
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In general, if investors regard a company as being relatively risky and/or having relatively poor growth prospects, then it will have relatively high P/E and M/B ratios.

Correct Answer
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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.

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

Correct Answer
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Ratio analysis involves analyzing financial statements to help appraise a firm's financial position and strength.

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Precision Aviation had a profit margin of 6.25%, a total assets turnover of 1.5, and an equity multiplier of 1.8. What was the firm's ROE?

Correct Answer
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Hoagland Corp's stock price at the end of last year was $33.50, and its book value per share was $25.00. What was its market/book ratio?

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

Correct Answer
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HD Corp and LD Corp have identical assets, sales, interest rates paid on their debt, tax rates, and EBIT. Both firms finance using only debt and common equity and total assets equal total invested capital. However, HD uses more debt than LD. Which of the following statements is CORRECT?

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

Correct Answer
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Correct Answer
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Walter Industries' current ratio is 0.5. Considered alone, which of the following actions would increase the company's current ratio?

Correct Answer
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Exam 4: Analysis of Financial Statements

Correct AnswerverifiedShow Answer

The profit margin measures net income per dollar of sales.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

In general, if investors regard a company as being relatively risky and/or having relatively poor growth prospects, then it will have relatively high P/E and M/B ratios.

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Ratio analysis involves analyzing financial statements to help appraise a firm's financial position and strength.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Precision Aviation had a profit margin of 6.25%, a total assets turnover of 1.5, and an equity multiplier of 1.8. What was the firm's ROE?

Correct AnswerverifiedShow Answer

Hoagland Corp's stock price at the end of last year was $33.50, and its book value per share was $25.00. What was its market/book ratio?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

HD Corp and LD Corp have identical assets, sales, interest rates paid on their debt, tax rates, and EBIT. Both firms finance using only debt and common equity and total assets equal total invested capital. However, HD uses more debt than LD. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Walter Industries' current ratio is 0.5. Considered alone, which of the following actions would increase the company's current ratio?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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