Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

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

Accepted Answer

A)   Offer price reductions along with generous credit terms that would (1)  enable the firm to sell some of its excess inventory and (2)  lead to an increase in accounts receivable.
B)   Issue new common stock and use the proceeds to increase inventories.
C)   Speed up the collection of receivables and use the cash generated to increase inventories.
D)   Use some of its cash to purchase additional inventories.E) All of the above
F) B) and C)

Question 3

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 4

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) A) and D)
F) None of the above

Question 5

Pace Corp.'s assets are $625,000, and its total debt outstanding is $185,000. The new CFO wants to employ a debt ratio of 55%. How much debt must the company add or subtract to achieve the target debt ratio?

Accepted Answer

A)   $158,750
B)   $166,688
C)   $175,022
D)   $183,773E) B) and D)
F) All of the above

Question 6

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 P/E ratio?

Accepted Answer

A)   12.0
B)   12.6
C)   13.2
D)   13.9E) A) and C)
F) B) and C)

Question 7

Rappaport Corp.'s sales last year were $320,000, and its net income after taxes was $23,000. What was its profit margin on sales?

Accepted Answer

A)   6.49%
B)   6.83%
C)   7.19%
D)   7.55%E) A) and B)
F) None of the above

Question 8

Stewart Inc.'s latest EPS was $3.50, its book value per share was $22.75, it had 215,000 shares outstanding, and its debt ratio was 46%. How much debt was outstanding?

Accepted Answer

A)   $3,572,356
B)   $3,760,375
C)   $3,958,289
D)   $4,166,620E) B) and C)
F) A) and D)

Question 9

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)   $3.53E) C) and D)
F) B) and C)

Question 10

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) A) and C)
F) None of the above

Question 11

Companies HD and LD are both profitable, and they have the same total assets (TA) , Sales (S) , return on assets (ROA) , and profit margin (PM) . However, Company HD has the higher debt ratio. Which of the following statements is correct?

Accepted Answer

A)   Company HD has a lower total assets turnover than Company LD.
B)   Company HD has a lower equity multiplier than Company LD.
C)   Company HD has a higher fixed assets turnover than Company LD.
D)   Company HD has a higher ROE than Company LD.E) None of the above
F) All of the above

Question 12

Which of the following statements is correct?

Accepted Answer

A)   If Firms X and Y have the same P/E ratios, then their market-to-book ratios must also be the same.
B)   If Firms X and Y have the same net income, number of shares outstanding, and price per share, then their P/E ratios must also be the same.
C)   If Firms X and Y have the same earnings per share and market-to-book ratio, they must have the same price earnings ratio.
D)   If Firm X's P/E ratio exceeds that of Firm Y, then Y is likely to be less risky and also to be expected to grow at a faster rate.E) A) and B)
F) A) and D)

Question 13

If the CEO of a large, 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.

Accepted Answer

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 debt 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) B) and D)
F) C) and D)

Question 14

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 market-to-book ratio?

Accepted Answer

A)   0.66
B)   0.78
C)   0.92
D)   1.08E) B) and C)
F) A) and D)

Question 15

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 firm uses.
B)   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 firm that uses more debt will have a lower profit margin on sales.
C)   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 assets are still comparable.
D)   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 will have a higher profit margin on sales.E) None of the above
F) B) and C)

Question 16

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

Accepted Answer

A) True 
 B)False

Question 17

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)   $191,188E) B) and C)
F) A) and D)

Question 18

Which of the following statements best describes the Du Pont analysis?

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 these conditions, 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 additional information, 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 the effects of debt on the ROE.
D)   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.E) A) and C)
F) All of the above

Question 19

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)   5.06E) A) and B)
F) C) and D)

Question 20

Aziz Industries has sales of $100,000 and accounts receivable of $11,500, and it gives its customers 30 days to pay. The industry average DSO is 27 days, based on a 365-day year. If the company changes its credit and collection policy sufficiently to cause its DSO to fall to the industry average, and if it earns 8.0% on any cash freed up by this change, how would that affect its net income, assuming other things are held constant?

Accepted Answer

A)   $281.41
B)   $296.22
C)   $311.81
D)   $328.22E) All of the above
F) A) and B)

Exam 3: Analysis of Financial Statements

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

Correct Answer
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Correct Answer
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Which of the following statements best describes the Du Pont analysis?

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

Correct Answer
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Correct Answer
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Correct Answer
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Companies HD and LD are both profitable, and they have the same total assets (TA) , Sales (S) , return on assets (ROA) , and profit margin (PM) . However, Company HD has the higher debt ratio. Which of the following statements is correct?

Correct Answer
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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?

Correct Answer
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Rappaport Corp.'s sales last year were $320,000, and its net income after taxes was $23,000. What was its profit margin on sales?

Correct Answer
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Which of the following statements is correct?

Correct Answer
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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 market-to-book ratio?

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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If the CEO of a large, 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.

Correct Answer
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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 P/E ratio?

Correct Answer
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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?

Correct Answer
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Pace Corp.'s assets are $625,000, and its total debt outstanding is $185,000. The new CFO wants to employ a debt ratio of 55%. How much debt must the company add or subtract to achieve the target debt ratio?

Correct Answer
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Stewart Inc.'s latest EPS was $3.50, its book value per share was $22.75, it had 215,000 shares outstanding, and its debt ratio was 46%. How much debt was outstanding?

Correct Answer
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Which of the following statements is correct?

Correct Answer
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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?

Correct Answer
verified

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
verified

Exam 3: Analysis of Financial Statements

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements best describes the Du Pont analysis?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Companies HD and LD are both profitable, and they have the same total assets (TA) , Sales (S) , return on assets (ROA) , and profit margin (PM) . However, Company HD has the higher debt ratio. Which of the following statements is correct?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

Rappaport Corp.'s sales last year were $320,000, and its net income after taxes was $23,000. What was its profit margin on sales?

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

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 market-to-book ratio?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

If the CEO of a large, 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.

Correct AnswerverifiedShow Answer

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 P/E ratio?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

Pace Corp.'s assets are $625,000, and its total debt outstanding is $185,000. The new CFO wants to employ a debt ratio of 55%. How much debt must the company add or subtract to achieve the target debt ratio?

Correct AnswerverifiedShow Answer

Stewart Inc.'s latest EPS was $3.50, its book value per share was $22.75, it had 215,000 shares outstanding, and its debt ratio was 46%. How much debt was outstanding?

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

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?

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 Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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