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Exam 4: Analysis of Financial Statements

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Question 51

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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 EPS? Do not round your intermediate calculations.

A) $3.09
B) $2.69
C) $2.54
D) $1.93
E) $2.41

F) A) and B)
G) A) and C)

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Question 52

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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 ROE? Do not round your intermediate calculations.

A) 7.49%
B) 9.03%
C) 7.76%
D) 10.02%
E) 7.58%

F) B) and D)
G) C) and D)

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Question 53

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Song Corp's stock price at the end of last year was $16.75 and its earnings per share for the year were $1.30.What was its P/E ratio?

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.

Last year Hamdi Corp.had sales of $500,000,operating costs of $450,000,and year-end assets (which is equal to its total invested capital) of $435,000.The debt-to-total-capital 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-to-total-capital ratio.Assume that sales,operating costs,total assets,total invested capital,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? Do not round your intermediate calculations.

Your sister is thinking about starting a new business.The company would require $425,000 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?

The market/book (M/B)ratio tells us how much investors are willing to pay for a dollar of accounting book value.In general,investors regard companies with higher M/B ratios as being less risky and/or more likely to enjoy higher growth in the future.

Which of the following statements is CORRECT?

Which of the following would indicate an improvement in a company's financial position,holding other things constant?

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.

Which of the following would,generally,indicate an improvement in a company's financial position,holding other things constant?

The times-interest-earned ratio measures the extent to which operating income can decline before the firm is unable to meet its annual interest costs.

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.

Last year Kruse Corp had $410,000 of assets (which is equal to its total invested capital) ,$403,000 of sales,$28,250 of net income,and a debt-to-total-capital ratio of 39%.The new CFO believes the firm has excessive fixed assets and inventory that could be sold,enabling it to reduce its total assets and total invested capital to $252,500.The firm finances using only debt and common equity.Sales,costs,and net income would not be affected,and the firm would maintain the same capital structure (but with less total debt) .By how much would the reduction in assets improve the ROE? Do not round your intermediate calculations.

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

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.

A firm's ROE is equal to 9% and its ROA is equal to 6%.The firm finances only with short-term debt,long-term debt,and common equity,so assets equal total invested capital.The firm's total debt to total capital ratio must be 50%.

The "apparent," but not necessarily the "true," financial position of a company whose sales are seasonal can change dramatically during a given year,depending on the time of year when the financial statements are constructed.

Zero Corp's total common equity at the end of last year was $370,000 and its net income was $70,000.What was its ROE?

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 money,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%.