Question 1

Which of the following statements is CORRECT?

Accepted Answer

A)   If Firms X and Y have the same P/E ratios, then their market-to-book ratios must also be equal.
B)   If Firms X and Y have the same net income, number of shares outstanding, and price per share, then their P/E ratios must also be the same.
C)   If Firms X and Y have the same earnings per share and market-to-book ratio, they must have the same price/earnings ratio.
D)   If Firm X's P/E ratio exceeds that of Firm Y, then Y is likely to be less risky and/or be expected to grow at a faster rate.
E)   If Firms X and Y have the same net income, number of shares outstanding, and price per share, then their market-to-book ratios must also be the same.F) A) and B)
G) All of the above

Question 2

The advantage of the basic earning power ratio (BEP) over the return on total assets for judging a company's operating efficiency is that the BEP does not reflect the effects of debt and taxes.

Accepted Answer

A) True 
 B)False

Question 3

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

Accepted Answer

A) True 
 B)False

Question 4

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?

Accepted Answer

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

Question 5

Other things held constant, the higher a firm's total debt to total capital ratio [measured as (Short-term debt + Long- term debt)/(Debt + Preferred stock + common equity)], the higher its TIE ratio will be.

Accepted Answer

A) True 
 B)False

Question 6

Helmuth Inc's latest net income was $1,250,000, and it had 225,000 shares outstanding. The company wants to pay out 45% of its income. What dividend per share should it declare?

Accepted Answer

A)   $2.14
B)   $2.26
C)   $2.38
D)   $2.50
E)   $2.63F) A) and B)
G) A) and C)

Question 7

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.

Accepted Answer

A) True 
 B)False

Question 8

Even though Firm A's current ratio exceeds that of Firm B, Firm B's quick ratio might exceed that of A. However, if A's quick ratio exceeds B's, then we can be certain that A's current ratio is also larger than B's.

Accepted Answer

A) True 
 B)False

Question 9

Duffert Industries has total assets of $1,000,000 and total current liabilities (consisting only of accounts payable and accruals)  of $125,000. Duffert finances using only long-term debt and common equity. The interest rate on its debt is 8% and its tax rate is 40%. The firm's basic earning power ratio is 15% and its debt-to capital rate is 40%. What are Duffert's ROE and ROIC?

Accepted Answer

A)   12.00%; 10.29%
B)   12.57%; 10.29%
C)   13.94%; 9.86%
D)   13.94%; 10.29%
E)   13.94%; 11.50%F) A) and D)
G) B) and D)

Question 10

The return on invested capital (ROIC) differs from the return on assets (ROA). First, ROIC is based on total invested capital rather than total assets. Second, the numerator of the ROIC is after-tax operating income rather than net income.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following statements is CORRECT?

Accepted Answer

A)   The ratio of long-term debt to total capital is more likely to experience seasonal fluctuations than is either the DSO or the inventory turnover ratio.
B)   If two firms have the same ROA, the firm with the most debt can be expected to have the lower ROE.
C)   An increase in the DSO, other things held constant, could be expected to increase the total assets turnover ratio.
D)   An increase in the DSO, other things held constant, could be expected to increase the ROE.
E)   An increase in a firm's total debt to total capital ratio, with no changes in its sales or operating costs, could be expected to lower its profit margin.F) A) and B)
G) None of the above

Question 12

Companies HD and LD have the same sales, tax rate, interest rate on their debt, total assets, and basic earning power. Both firms finance using only debt and common equity and total assets equal total invested capital. Both companies have positive net incomes. Company HD has a higher total debt to total capital ratio and, therefore, a higher interest expense. Which of the following statements is CORRECT?

Accepted Answer

A)   Company HD pays less in taxes.
B)   Company HD has a lower equity multiplier.
C)   Company HD has a higher ROA.
D)   Company HD has a higher times-interest-earned (TI
E)   ratio.
E)   Company HD has more net income.F) A) and D)
G) C) and D)

Question 13

Which of the following statements is CORRECT?

Accepted Answer

A)   Even though Firm A's current ratio exceeds that of Firm B, Firm B's quick ratio might exceed that of A. However, if A's quick ratio exceeds B's, then we can be certain that A's current ratio is also larger than B's.
B)   Suppose a firm wants to maintain a specific TIE ratio. It knows the amount of its debt, the interest rate on that debt, the applicable tax rate, and its operating costs. With this information, the firm can calculate the amount of sales required to achieve its target TIE ratio.
C)   Since the ROA measures the firm's effective utilization of assets without considering how these assets are financed, two firms with the same EBIT must have the same ROA.
D)   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.
E)   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 not be a good move, as it would decrease the ROE from 7.5% to 6.5%.F) A) and B)
G) A) and C)

Question 14

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

Accepted Answer

A)   0.99
B)   1.10
C)   1.23
D)   1.36
E)   1.50F) D) and E)
G) C) and E)

Question 15

If the CEO of a large, diversified, firm were filling out a fitness report on a division manager (i.e., "grading" the manager) , which of the following situations would be likely to cause the manager to receive a better grade? In all cases, assume that other things are held constant.

Accepted Answer

A)   The division's basic earning power ratio is above the average of other firms in its industry.
B)   The division's total assets turnover ratio is below the average for other firms in its industry.
C)   The division's total debt to total capital ratio is above the average for other firms in the industry.
D)   The division's inventory turnover is 6×, whereas the average for its competitors is 8×.
E)   The division's DSO (days' sales outstanding)  is 40 days, whereas the average for its competitors is 30 days.F) B) and D)
G) All of the above

Question 16

The return on invested capital measures the total return that a company has provided for its investors.

Accepted Answer

A) True 
 B)False

Question 17

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

Accepted Answer

A)   1.51%
B)   1.67%
C)   1.86%
D)   2.07%
E)   2.27%F) B) and E)
G) A) and B)

Question 18

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%F) B) and D)
G) A) and B)

Question 19

The more conservative a firm's management is, the higher its total debt to total capital ratio [measured as (Short- term debt + Long-term debt)/(Debt + Preferred stock + Common equity)] is likely to be.

Accepted Answer

A) True 
 B)False

Question 20

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.

Accepted Answer

A) True 
 B)False

Exam 4: Analysis of Financial Statements

Even though Firm A's current ratio exceeds that of Firm B, Firm B's quick ratio might exceed that of A. However, if A's quick ratio exceeds B's, then we can be certain that A's current ratio is also larger than B's.

Correct Answer
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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?

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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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?

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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The return on invested capital (ROIC) differs from the return on assets (ROA). First, ROIC is based on total invested capital rather than total assets. Second, the numerator of the ROIC is after-tax operating income rather than net income.

Correct Answer
verified

If the CEO of a large, diversified, firm were filling out a fitness report on a division manager (i.e., "grading" the manager) , which of the following situations would be likely to cause the manager to receive a better grade? In all cases, assume that other things are held constant.

Correct Answer
verified

The more conservative a firm's management is, the higher its total debt to total capital ratio [measured as (Short- term debt + Long-term debt)/(Debt + Preferred stock + Common equity)] is likely to be.

Correct Answer
verified

Other things held constant, the higher a firm's total debt to total capital ratio [measured as (Short-term debt + Long- term debt)/(Debt + Preferred stock + common equity)], the higher its TIE ratio will be.

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Helmuth Inc's latest net income was $1,250,000, and it had 225,000 shares outstanding. The company wants to pay out 45% of its income. What dividend per share should it declare?

Correct Answer
verified

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.

Correct Answer
verified

Correct Answer
verified

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.

Correct Answer
verified

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

Correct Answer
verified

The advantage of the basic earning power ratio (BEP) over the return on total assets for judging a company's operating efficiency is that the BEP does not reflect the effects of debt and taxes.

Correct Answer
verified

Correct Answer
verified

The return on invested capital measures the total return that a company has provided for its investors.

Correct Answer
verified

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

Correct Answer
verified

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

Correct Answer
verified

Exam 4: Analysis of Financial Statements

Even though Firm A's current ratio exceeds that of Firm B, Firm B's quick ratio might exceed that of A. However, if A's quick ratio exceeds B's, then we can be certain that A's current ratio is also larger than B's.

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

The return on invested capital (ROIC) differs from the return on assets (ROA). First, ROIC is based on total invested capital rather than total assets. Second, the numerator of the ROIC is after-tax operating income rather than net income.

Correct AnswerverifiedShow Answer

If the CEO of a large, diversified, firm were filling out a fitness report on a division manager (i.e., "grading" the manager) , which of the following situations would be likely to cause the manager to receive a better grade? In all cases, assume that other things are held constant.

Correct AnswerverifiedShow Answer

The more conservative a firm's management is, the higher its total debt to total capital ratio [measured as (Short- term debt + Long-term debt)/(Debt + Preferred stock + Common equity)] is likely to be.

Correct AnswerverifiedShow Answer

Other things held constant, the higher a firm's total debt to total capital ratio [measured as (Short-term debt + Long- term debt)/(Debt + Preferred stock + common equity)], the higher its TIE ratio will be.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Helmuth Inc's latest net income was $1,250,000, and it had 225,000 shares outstanding. The company wants to pay out 45% of its income. What dividend per share should it declare?

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The advantage of the basic earning power ratio (BEP) over the return on total assets for judging a company's operating efficiency is that the BEP does not reflect the effects of debt and taxes.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The return on invested capital measures the total return that a company has provided for its investors.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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