Question 1

Last year Altman Corp. had $205,000 of assets, $303,500 of sales, $18,250 of net income, and a debt-to-total-assets ratio of 41%. The new CFO believes the firm has excessive fixed assets and inventory that could be sold, enabling it to reduce its total assets to $152,500. Sales, costs, and net income would not be affected, and the firm would maintain the 41% debt ratio. By how much would the reduction in assets improve the ROE?

Accepted Answer

A)   4.69%
B)   4.93%
C)   5.19%
D)   5.45%
E)   5.73%F) B) and E)
G) A) and C)

Question 2

Which of the following statements is CORRECT?

Accepted Answer

A)   If one firm has a higher debt ratio than another, we can be certain that the firm with the higher debt ratio will have the lower TIE ratio, as that ratio depends entirely on the amount of debt a firmUses.
B)   A firm's use of debt will have no effect on its profit margin onSales.
C)   If two firms differ only in their use of debt-i.e., they have identical assets, sales, operating costs, interest rates on their debt, and tax rates-but one firm has a higher debt ratio, the firmThat uses more debt will have a lower profit margin on sales.
D)   The debt ratio as it is generally calculated makes an adjustment for the use of assets leased under operating leases, so the debt ratios of firms that lease different percentages of their assetsAre still comparable.
E)   If two firms differ only in their use of debt-i.e., they have identical assets, sales, operating costs, and tax rates-but one firm has a higher debt ratio, the firm that uses more debt willHave a higher profit margin on sales.F) A) and E)
G) All of the above

Question 3

Which of the following statements is CORRECT?

Accepted Answer

A)   Borrowing by using short-term notes payable and then using the proceeds to retire long-term debt is an example of "window dressing." Offering discounts to customers who pay with cash rather than buy on credit and then using the funds that come in quicker to purchase additional inventories is another example of "windowDressing."
B)   Borrowing on a long-term basis and using the proceeds to retire short-term debt would improve the current ratio and thus could beConsidered to be an example of "window dressing."
C)   Offering discounts to customers who pay with cash rather than buy on credit and then using the funds that come in quicker to purchaseAdditional inventories is an example of "window dressing."
D)   Using some of the firm's cash to reduce long-term debt is anExample of "window dressing."
E)   "Window dressing" is any action that improves a firm's fundamental, long-run position and thus increases its intrinsic value.F) A) and D)
G) B) and C)

Question 4

The inventory turnover ratio and days sales outstanding (DSO) are two ratios that are used to assess how effectively a firm is managing its assets.

Accepted Answer

A) True 
 B)False

Question 5

(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 BEP?

Accepted Answer

A)   6.00%
B)   6.32%
C)   6.65%
D)   6.98%
E)   7.33%F) B) and E)
G) A) and B)

Question 6

(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 dividends per share?

Accepted Answer

A)   $2.62
B)   $2.91
C)   $3.20
D)   $3.53
E)   $3.88F) B) and D)
G) A) and B)

Question 7

Although a full liquidity analysis requires the use of a cash budget, the current and quick ratios provide fast and easy-to-use measures of a firm's liquidity position.

Accepted Answer

A) True 
 B)False

Question 8

Harper Corp.'s sales last year were $395,000, and its year-end receivables were $42,500. Harper sells on terms that call for customers to pay 30 days after the purchase, but many 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.

Accepted Answer

A)   7.95
B)   8.37
C)   8.81
D)   9.27
E)   9.74F) A) and E)
G) None of the above

Question 9

What is the firm's current ratio?

Accepted Answer

A)   0.97
B)   1.08
C)   1.20
D)   1.33
E)   1.47F) A) and B)
G) A) and C)

Question 10

Walter Industries' current ratio is 0.5. Considered alone, which of the following actions would increase the company's current ratio?

Accepted Answer

A)   Borrow using short-term notes payable and use the cash to increase inventories.
B)   Use cash to reduce accruals.
C)   Use cash to reduce accounts payable.
D)   Use cash to reduce short-term notes payable.
E)   Use cash to reduce long-term bonds outstanding.F) A) and B)
G) B) and D)

Question 11

Debt management ratios show the extent to which a firm's managers are attempting to magnify returns on owners' capital through the use of financial leverage.

Accepted Answer

A) True 
 B)False

Question 12

Suppose Firms A and B have the same amount of assets, pay the same interest rate on their debt, have the same basic earning power (BEP), and have the same tax rate. However, Firm A has a higher debt 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.

Accepted Answer

A) True 
 B)False

Question 13

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

Accepted Answer

A)   Reduce the company's days' sales outstanding to the industry average and use the resulting cash savings to purchase plant andEquipment.
B)   Use cash to repurchase some of the company's own stock.
C)   Borrow using short-term debt and use the proceeds to repay debtThat has a maturity of more than one year.
D)   Issue new stock and then use some of the proceeds to purchaseAdditional inventory and hold the remainder as cash.
E)   Use cash to increase inventory holdings.F) A) and C)
G) A) and D)

Question 14

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.

Accepted Answer

A) True 
 B)False

Question 15

The current ratio and inventory turnover ratios both help us measure the firm's liquidity. The current ratio measures the relationship of a firm's current assets to its current liabilities, while the inventory turnover ratio gives us an indication of how long it takes the firm to convert its inventory into cash.

Accepted Answer

A) True 
 B)False

Question 16

Companies HD and LD have the same tax rate, sales, total assets, and basic earning power. Both companies have positive net incomes. Company HD has a higher debt ratio and, therefore, a higher interest expense. Which of the following statements is CORRECT?

Accepted Answer

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

Question 17

Ziebart Corp.'s EBITDA last year was $390,000 (= EBIT + depreciation + amortization) , its interest charges were $9,500, it had to repay $26,000 of long-term debt, and it had to make a payment of $17,400 under a long- term lease. The firm had no amortization charges. What was the EBITDA coverage ratio?

Accepted Answer

A)   7.32
B)   7.70
C)   8.09
D)   8.49
E)   8.92F) B) and E)
G) A) and D)

Question 18

Market value ratios provide management with an indication of how investors view the firm's past performance and especially its future prospects.

Accepted Answer

A) True 
 B)False

Question 19

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

Accepted Answer

A)   The inventory and total assets turnover ratios both decline.
B)   The debt ratio increases.
C)   The profit margin declines.
D)   The EBITDA coverage ratio declines.
E)   The current and quick ratios both increase.F) B) and C)
G) D) and E)

Question 20

Amram Company's current ratio is 1.9. Considered alone, which of the following actions would reduce the company's current ratio?

Accepted Answer

A)   Borrow using short-term notes payable and use the proceeds to reduce accruals.
B)   Borrow using short-term notes payable and use the proceeds toReduce long-term debt.
C)   Use cash to reduce accruals.
D)   Use cash to reduce short-term notes payable.
E)   Use cash to reduce accounts payable.F) B) and D)
G) B) and C)

Exam 3: Analysis of Financial Statements

What is the firm's current ratio?

Correct Answer
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Although a full liquidity analysis requires the use of a cash budget, the current and quick ratios provide fast and easy-to-use measures of a firm's liquidity position.

Correct Answer
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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.

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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Market value ratios provide management with an indication of how investors view the firm's past performance and especially its future prospects.

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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The inventory turnover ratio and days sales outstanding (DSO) are two ratios that are used to assess how effectively a firm is managing its assets.

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

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

Correct Answer
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Companies HD and LD have the same tax rate, sales, total assets, and basic earning power. Both companies have positive net incomes. Company HD has a higher debt ratio and, therefore, a higher interest expense. Which of the following statements is CORRECT?

Correct Answer
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Correct Answer
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Correct Answer
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Debt management ratios show the extent to which a firm's managers are attempting to magnify returns on owners' capital through the use of financial leverage.

Correct Answer
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Walter Industries' current ratio is 0.5. Considered alone, which of the following actions would increase the company's current ratio?

Correct Answer
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Amram Company's current ratio is 1.9. Considered alone, which of the following actions would reduce the company's current ratio?

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

What is the firm's current ratio?

Correct AnswerverifiedShow Answer

Although a full liquidity analysis requires the use of a cash budget, the current and quick ratios provide fast and easy-to-use measures of a firm's liquidity position.

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Market value ratios provide management with an indication of how investors view the firm's past performance and especially its future prospects.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The inventory turnover ratio and days sales outstanding (DSO) are two ratios that are used to assess how effectively a firm is managing its assets.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Companies HD and LD have the same tax rate, sales, total assets, and basic earning power. Both companies have positive net incomes. Company HD has a higher debt ratio and, therefore, a higher interest expense. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Debt management ratios show the extent to which a firm's managers are attempting to magnify returns on owners' capital through the use of financial leverage.

Correct AnswerverifiedShow Answer

Walter Industries' current ratio is 0.5. Considered alone, which of the following actions would increase the company's current ratio?

Correct AnswerverifiedShow Answer

Amram Company's current ratio is 1.9. Considered alone, which of the following actions would reduce the company's current ratio?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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