Question 1

Lindley 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) D) and E)
G) C) and D)

Question 2

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 3

(The following data apply to Problems 87 through 105.) 
The balance sheet and income statement shown below are for Pettijohn 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.
 
-What is the firm's profit margin?

Accepted Answer

A)   1.40%
B)   1.56%
C)   1.73%
D)   1.93%
E)   2.12%F) A) and D)
G) A) and C) D

Question 4

Northwest Lumber had a profit margin of 5.25%, a total assets turnover of 1.5, and an equity multiplier of 1.8. What was the firm's ROE?

Accepted Answer

A)   12.79%
B)   13.47%
C)   14.18%
D)   14.88%
E)   15.63%F) B) and D)
G) A) and C)

Question 5

Last year Mason Inc. had a total assets turnover of 1.33 and an equity multiplier of 1.75. Its sales were $195,000 and its net income was $10,549. The CFO believes that the company could have operated more efficiently, lowered its costs, and increased its net income by $5,250 without changing its sales, assets, or capital structure. Had it cut costs and increased its net income in this amount, by how much would the ROE have changed?

Accepted Answer

A)   5.66%
B)   5.95%
C)   6.27%
D)   6.58%
E)   6.91%F) D) and E)
G) A) and E)

Question 6

Chambliss Corp.'s total assets at the end of last year were $305,000 and its EBIT was 62,500. What was its basic earning power (BEP) ?

Accepted Answer

A)   18.49%
B)   19.47%
C)   20.49%
D)   21.52%
E)   22.59%F) All of the above
G) A) and E) C

Question 7

(The following data apply to Problems 87 through 105.) 
The balance sheet and income statement shown below are for Pettijohn 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.
 
-What is the firm's inventory turnover ratio?

Accepted Answer

A)   4.38
B)   4.59
C)   4.82
D)   5.06
E)   5.32F) All of the above
G) A) and B)

Question 8

Which of the following statements is CORRECT?

Accepted Answer

A)   Suppose a firm's total assets turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin rises from 9% to 10% and its debt increases from 40% of total assets to 60%. Under theseConditions, the ROE will increase.
B)   Suppose a firm's total assets turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin rises from 9% to 10% and its debt increases from 40% of total assets to 60%. Without additionalInformation, we cannot tell what will happen to the ROE.
C)   The modified Du Pont equation provides information about how operations affect the ROE, but the equation does not include theEffects of debt on the ROE.
D)   Other things held constant, an increase in the debt ratio willResult in an increase in the profit margin on sales.
E)   Suppose a firm's total assets turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin rises from 9% to 10%, and its debt increases from 40% of total assets to 60%. Under these conditions, the ROE will decrease.F) A) and D)
G) A) and C)

Question 9

If a bank loan officer were considering a company's request for a loan, which of the following statements would you consider to be CORRECT?

Accepted Answer

A)   The lower the company's EBITDA coverage ratio, other things held constant, the lower the interest rate the bank would charge theFirm.
B)   Other things held constant, the higher the debt ratio, the lowerThe interest rate the bank would charge the firm.
C)   Other things held constant, the lower the debt ratio, the lower theInterest rate the bank would charge the firm.
D)   The lower the company's TIE ratio, other things held constant, theLower the interest rate the bank would charge the firm.
E)   Other things held constant, the lower the current ratio, the lowerThe interest rate the bank would charge the firm.F) A) and B)
G) A) and D)

Question 10

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.

Accepted Answer

A) True 
 B)False  False

Question 11

Bonner Corp.'s sales last year were $415,000, and its year-end total assets were $355,000. The average firm in the industry has a total assets turnover ratio (TATO)  of 2.4. Bonner's new CFO believes the firm has excess assets that can be sold so as to bring the TATO down to the industry average without affecting sales. By how much must the assets be reduced to bring the TATO to the industry average, holding sales constant?

Accepted Answer

A)   $164,330
B)   $172,979
C)   $182,083
D)   $191,188
E)   $200,747F) B) and D)
G) B) and C)

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

Last year Urbana Corp. had $197,500 of assets, $307,500 of sales, $19,575 of net income, and a debt-to-total-assets ratio of 37.5%. The new CFO believes a new computer program will enable it to reduce costs and thus raise net income to $33,000. Assets, sales, and the debt ratio would not be affected. By how much would the cost reduction improve the ROE?

Accepted Answer

A)   9.32%
B)   9.82%
C)   10.33%
D)   10.88%
E)   11.42%F) B) and C)
G) A) and E)

Question 14

(The following data apply to Problems 87 through 105.) 
The balance sheet and income statement shown below are for Pettijohn 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.
 
-What is the firm's EBITDA coverage?

Accepted Answer

A)   3.29
B)   3.46
C)   3.64
D)   3.82
E)   4.01F) None of the above
G) C) and E)

Question 15

Profitability ratios show the combined effects of liquidity, asset management, and debt management on operating results.

Accepted Answer

A) True 
 B)False

Question 16

(The following data apply to Problems 87 through 105.) 
The balance sheet and income statement shown below are for Pettijohn 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.
 
-What is the firm's quick ratio?

Accepted Answer

A)   0.49
B)   0.61
C)   0.73
D)   0.87
E)   1.05F) All of the above
G) C) and E)

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

(The following data apply to Problems 87 through 105.) 
The balance sheet and income statement shown below are for Pettijohn 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.
 
-What is the firm's ROE?

Accepted Answer

A)   8.54%
B)   8.99%
C)   9.44%
D)   9.91%
E)   10.41%F) All of the above
G) B) and E)

Question 19

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 itsCapital structure.
C)   If two firms have identical sales, interest rates paid, operating costs, and assets, but differ in the way they are financed, theFirm with less debt will generally have the higher expected ROE.
D)   Holding bonds is better than holding stock for investors because income from bonds is taxed on a more favorable basis than incomeFrom stock.
E)   All else equal, increasing the debt ratio will increase the ROA.F) A) and B)
G) A) and C)

Question 20

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 theInventory turnover ratio.
B)   If two firms have the same ROA, the firm with the most debt can beExpected to have the lower ROE.
C)   An increase in the DSO, other things held constant, could beExpected to increase the total assets turnover ratio.
D)   An increase in the DSO, other things held constant, could beExpected to increase the ROE.
E)   An increase in a firm's debt ratio, with no changes in its sales orOperating costs, could be expected to lower the profit margin.F) B) and D)
G) C) and E)

Exam 3: Analysis of Financial Statements

Lindley 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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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
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Correct Answer
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D

Northwest Lumber had a profit margin of 5.25%, 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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Correct Answer
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Chambliss Corp.'s total assets at the end of last year were $305,000 and its EBIT was 62,500. What was its basic earning power (BEP) ?

Correct Answer
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C

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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If a bank loan officer were considering a company's request for a loan, which of the following statements would you consider to be CORRECT?

Correct Answer
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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.

Correct Answer
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False

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

Correct Answer
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Correct Answer
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Correct Answer
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Profitability ratios show the combined effects of liquidity, asset management, and debt management on operating results.

Correct Answer
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Correct Answer
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A decline in a firm's inventory turnover ratio suggests that it is managing its inventory more efficiently and also that its liquidity position is improving, i.e., it is becoming more liquid.

Correct Answer
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Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Exam 3: Analysis of Financial Statements

Lindley 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

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

Correct AnswerverifiedD

Northwest Lumber had a profit margin of 5.25%, a total assets turnover of 1.5, and an equity multiplier of 1.8. What was the firm's ROE?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Chambliss Corp.'s total assets at the end of last year were $305,000 and its EBIT was 62,500. What was its basic earning power (BEP) ?

Correct AnswerverifiedC

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

If a bank loan officer were considering a company's request for a loan, which of the following statements would you consider to be CORRECT?

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedFalse

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Profitability ratios show the combined effects of liquidity, asset management, and debt management on operating results.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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D

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C

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False

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