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Exam 4: Analysis of Financial Statements

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Question 31

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Precision Aviation had a profit margin of 7.00%,a total assets turnover of 1.5,and an equity multiplier of 1.8.What was the firm's ROE?

A) 16.07%
B) 22.87%
C) 15.88%
D) 22.11%
E) 18.90%

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

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Question 32

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If the CEO of a large and 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.

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) A) and B)

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Question 33

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Herring Corporation has operating income of $275,000 and a 25% tax rate.The firm has short-term debt of $143,000,long-term debt of $323,000,and common equity of $466,000.What is its return on invested capital?

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 profit margin? Do not round your intermediate calculations.

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.

Significant variations in accounting methods among firms make meaningful ratio comparisons between firms more difficult than if all firms used the same or similar accounting methods.

If a firm sold some inventory on credit,its current ratio would probably not change much,but its quick ratio would increase.

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?

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.

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

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 less risky and/or more likely to enjoy higher growth in the future.

The basic earning power ratio (BEP)reflects the earning power of a firm's assets after giving consideration to financial leverage and tax effects.

Which of the following statements is CORRECT?

A firm wants to strengthen its financial position.Which of the following actions would increase its current ratio?

Your sister is thinking about starting a new business.The company would require $355,000 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?

Determining whether a firm's financial position is improving or deteriorating requires analyzing more than the ratios for a given year.Trend analysis is one method of examining changes in a firm's performance over time.

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

A decline in a firm's inventory turnover ratio suggests that it is improving both its inventory management and its liquidity position,i.e. ,that it is becoming more liquid.

Ryngard Corp's sales last year were $24,000,and its total assets were $16,000.What was its total assets turnover ratio (TATO) ?

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%.