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Exam 4: Analysis of Financial Statements

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Question 1

True/False

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

A) True
B) False

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Question 2

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Exhibit 4.1 The balance sheet and income statement shown below are for Koski Inc.Note that the firm has no amortization charges,it does not lease any assets,none of its debt must be retired during the next 5 years,and the notes payable will be rolled over. -Refer to Exhibit 4.1.What is the firm's BEP? Do not round your intermediate calculations.

A) 5.77%
B) 6.70%
C) 7.13%
D) 6.48%
E) 5.63%

F) B) and D)
G) All of the above

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Question 3

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Which of the following statements is CORRECT?

The current and quick ratios help us measure a firm's liquidity.The current ratio measures the relationship of the firm's current assets to its current liabilities,while the quick ratio measures the firm's ability to pay off short-term obligations without relying on the sale of inventories.

Last year Jandik Corp.had $250,000 of assets (which is equal to its total invested capital) ,$18,750 of net income,and a debt-to-total-capital ratio of 37%.Now suppose the new CFO convinces the president to increase the debt-to-total-capital ratio to 48%.Sales,total assets and total invested capital will not be affected,but interest expenses would increase.However,the CFO believes that better cost controls would be sufficient to offset the higher interest expense and thus keep net income unchanged.By how much would the change in the capital structure improve the ROE? Do not round your intermediate calculations.

Which of the following statements is CORRECT?

Brookman Inc's latest EPS was $2.75,its book value per share was $22.75,it had 325,000 shares outstanding,and its debt/total invested capital ratio was 44%.The firm finances using only debt and common equity and its total assets equal total invested capital.How much debt was outstanding? Do not round your intermediate calculations.

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?

Companies E and P each reported the same earnings per share (EPS) ,but Company E's stock trades at a higher price.Which of the following statements is CORRECT?

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.

Exhibit 4.1 The balance sheet and income statement shown below are for Koski Inc.Note that the firm has no amortization charges,it does not lease any assets,none of its debt must be retired during the next 5 years,and the notes payable will be rolled over. -Refer to Exhibit 4.1.What is the firm's total debt to total capital ratio? Do not round your intermediate calculations.

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.

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?

Exhibit 4.1 The balance sheet and income statement shown below are for Koski Inc.Note that the firm has no amortization charges,it does not lease any assets,none of its debt must be retired during the next 5 years,and the notes payable will be rolled over. -Refer to Exhibit 4.1.What is the firm's total assets turnover? Do not round your intermediate calculations.

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

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

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.

The return on common equity (ROE)is generally regarded as being less significant,from a stockholder's viewpoint,than the return on total assets (ROA).

Han Corp's sales last year were $485,000,and its year-end receivables were $52,500.The firm sells on terms that call for customers to pay 30 days after the purchase,but some delay payment beyond Day 30.On average,how many days late do customers pay? Base your answer on this equation: DSO - Allowed credit period = Average days late,and use a 365-day year when calculating the DSO.Assume all sales to be on credit.Do not round your intermediate calculations.

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.