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Exam 3: Analysis of Financial Statements

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Question 41

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Which of the following statements is CORRECT?

A) If Firms X and Y have the same net income, number of shares outstanding, and price per share, then their market-to-book ratios must also be the same.
B) If Firms X and Y have the same P/E ratios, then their market-to-book ratios must also be the same.
C) 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.
D) If Firms X and Y have the same earnings per share and market-to-book ratio, they must have the same price earnings ratio.
E) 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.

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

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Question 42

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Exhibit 3.1 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. -For the coming year,Crane Inc.is considering two financial plans.Management expects sales to be $301,770,operating costs to be $266,545,assets to be $200,000,and its tax rate to be 35%.Under Plan A it would use 25% debt and 75% common equity.The interest rate on the debt would be 8.8%,but the TIE ratio would have to be kept at 4.00 or more.Under Plan B the maximum debt that met the TIE constraint would be employed.Assuming that sales,operating costs,assets,the interest rate,and the tax rate would all remain constant,by how much would the ROE change in response to the change in the capital structure?

A) 3.83%
B) 4.02%
C) 4.22%
D) 4.43%
E) 4.65%

F) A) and B)
G) None of the above

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Question 43

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Last year Swensen Corp.had sales of $303,225,operating costs of $267,500,and year-end assets of $195,000.The debt-to-total-assets ratio was 27%,the interest rate on the debt was 8.2%,and the firm's tax rate was 37%.The new CFO wants to see how the ROE would have been affected if the firm had used a 45% debt ratio.Assume that sales and total assets would not be affected,and that the interest rate and tax rate would both remain constant.By how much would the ROE change in response to the change in the capital structure?

Branch Corp.'s total assets at the end of last year were $315,000 and its net income after taxes was $22,750.What was its return on total assets?

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

Firms A and B have the same current ratio,0.75,the same amount of sales and cost of goods sold,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.

Last year Vaughn Corp.had sales of $315,000 and a net income of $17,832,and its year-end assets were $210,000.The firm's total-debt-to-total-assets ratio was 42.5%.Based on the DuPont equation,what was Vaughn's ROE?

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?

Exhibit 3.1 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. -Refer to Exhibit 3.1.What is the firm's dividends per share?

Companies Heidee and Leaudy are virtually identical in that they are both profitable,and they have the same total assets (TA) ,Sales (S) ,return on assets (ROA) ,and profit margin (PM) .However,Company Heidee has the higher debt ratio.Which of the following statements is CORRECT?

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

Exhibit 3.1 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. -Refer to Exhibit 3.1.What is the firm's quick ratio?

Which of the following statements is CORRECT?

Heaton Corp.sells on terms that allow customers 45 days to pay for merchandise.Its sales last year were $425,000,and its year-end receivables were $60,000.If its DSO is less than the 45-day credit period,then customers are paying on time.Otherwise,they are paying late.By how much are customers paying early or late? Base your answer on this equation: DSO- Credit period = days early or late,and use a 365-day year when calculating the DSO.A positive answer indicates late payments,while a negative answer indicates early payments.

If a firm finances with only debt and common equity,and if its equity multiplier is 3.0,then its debt ratio must be 0.667.

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.

Last year Rosenberg Corp.had $195,000 of assets,$18,775 of net income,and a debt-to-total-assets ratio of 32%.Now suppose the new CFO convinces the president to increase the debt ratio to 48%.Sales and total assets will not be affected,but interest expenses would increase.However,the CFO believes that better cost controls would be sufficient to offset the higher interest expense and thus keep net income unchanged.By how much would the change in the capital structure improve the ROE?

A new firm is developing its business plan.It will require $565,000 of assets,and it projects $452,800 of sales and $354,300 of operating costs for the first year.Management is quite sure of these numbers because of contracts with its customers and suppliers.It can borrow at a rate of 7.5%,but the bank requires it to have a TIE of at least 4.0,and if the TIE falls below this level the bank will call in the loan and the firm will go bankrupt.What is the maximum debt-to-assets ratio the firm can use? (Hint: Find the maximum dollars of interest,then the debt that produces that interest,and then the related debt ratio.)

Which of the following statements is CORRECT?

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.