Question 1

One problem with ratio analysis is that relationships can be manipulated.For example,we know that if our current ratio is less than 1.0,then using some of our cash to pay off some of our current liabilities would cause the current ratio to increase and thus make the firm look stronger.

Accepted Answer

A) True 
 B)False

Question 2

It is appropriate to use the fixed assets turnover ratio to appraise firms' effectiveness in managing their fixed assets if all the firms being compared have the same proportion of fixed assets to total assets.

Accepted Answer

A) True 
 B)False

Question 3

Crindle Canada's stock price at the end of last year was $133.50,and its book value per share was $75.00.What was its market/book ratio?

Accepted Answer

A)  1.34
B)  1.78
C)  1.48
D)  1.55E) A) and B)
F) A) and C)

Question 4

Taggart Technologies is considering issuing new common stock and using the proceeds to reduce its outstanding debt.The stock issue would have no effect on total assets,the interest rate Taggart pays,EBIT,or the tax rate.What is likely to occur if the company proceeds with the stock issue?

Accepted Answer

A)  The ROA will decline.
B)  The tax bill will increase.
C)  Net income will decrease.
D)  The times-interest-earned ratio will decrease.E) B) and D)
F) A) and B)

Question 5

What does ratio analysis involve?

Accepted Answer

A)  analyzing financial statements in order to appraise a firm's stock market position and strength
B)  analyzing balance sheets in order to appraise a firm's financial position and strength
C)  analyzing technical chart patterns in order to appraise a firm's financial position and strength
D)  analyzing financial statements in order to appraise a firm's financial position and strengthE) B) and C)
F) None of the above

Question 6

U.S.regulators are fundamentally opposed to changing from Generally Accepted Accounting Principles (GAPP) to International Financial Reporting Standards (IFRS).

Accepted Answer

A) True 
 B)False

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

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) A) and B)
F) All of the above

Question 9

Which of the following statements is correct?

Accepted Answer

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

Question 10

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 11

​Scenario: Pettijohn Inc.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.​​   Income Statement (Millions of $ )  2007 Net sales $58,800.00 Operating costs except depr’n $54,978.0 Depreciation $1,029.0 Earnings before interest and taxes (EBIT)  $2,793.0 Less interest 1,050.0 Earnings before taxes (EBT)  $1,743.0 Taxes $610.1 Net income $1,133.0 Other data:  Shares outstanding (millions)  175.00 Common dividends $509.83 Interest rate on notes payable & L-T bonds 6.25% Federal plus state income tax rate 35% Year-end stock price $77.69\begin{array}{lr}	ext { Income Statement (Millions of } \$ 	ext { )  } & 2007 \	ext { Net sales } & \$ 58,800.00 \	ext { Operating costs except depr&#x27;n } & \$ 54,978.0 \	ext { Depreciation } & \$ 1,029.0 \	ext { Earnings before interest and taxes (EBIT)  } & \$ 2,793.0 \	ext { Less interest } & 1,050.0 \	ext { Earnings before taxes (EBT)  } & \$ 1,743.0 \	ext { Taxes } & \$ 610.1 \	ext { Net income } & \$ 1,133.0 \	ext { Other data: } & \	ext { Shares outstanding (millions)  } & 175.00 \	ext { Common dividends } & \$ 509.83 \	ext { Interest rate on notes payable \& L-T bonds } & 6.25 \% \	ext { Federal plus state income tax rate } & 35 \% \	ext { Year-end stock price } & \$ 77.69\end{array} Income Statement (Millions of $ )   Net sales  Operating costs except depr’n  Depreciation  Earnings before interest and taxes (EBIT)   Less interest  Earnings before taxes (EBT)   Taxes  Net income  Other data:  Shares outstanding (millions)   Common dividends  Interest rate on notes payable & L-T bonds  Federal plus state income tax rate  Year-end stock price ​2007$58,800.00$54,978.0$1,029.0$2,793.01,050.0$1,743.0$610.1$1,133.0175.00$509.836.25%35%$77.69​ 
-Refer to Scenario: Pettijohn Inc.What is the firm's TIE?

Accepted Answer

A)  1.94
B)  2.15
C)  2.39
D)  2.66 E) C) and D)
F) A) and C)

Question 12

Which statement regarding the Du Pont analysis 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 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) None of the above
F) A) and C)

Question 13

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.

Accepted Answer

A) True 
 B)False

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

You observe that a firm's ROE is above the industry average,but its profit margin and debt ratio are both below the industry average.Which of the following statements is correct?

Accepted Answer

A)  Its total assets turnover must be above the industry average.
B)  Its return on assets must equal the industry average.
C)  Its TIE ratio must be below the industry average.
D)  Its total assets turnover must be below the industry average.E) C) and D)
F) B) and C)

Question 16

To take full advantage of the credit term provided,management should try to lengthen the average payables period with cautions.

Accepted Answer

A) True 
 B)False

Question 17

Casey Communications recently issued new common stock and used the proceeds to pay off some of its short-term notes payable.This action had no effect on the company's total assets or operating income.What would occur as a result of this action?

Accepted Answer

A)  The company's current ratio would increase.
B)  The company's times-interest-earned ratio would decrease.
C)  The company's basic earning power ratio would increase.
D)  The company's equity multiplier would increase.E) A) and B)
F) A) and C)

Question 18

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

Accepted Answer

A)  The TIE declines.
B)  The DSO increases.
C)  The EBITDA coverage ratio increases.
D)  The current and quick ratios both decline.E) A) and B)
F) C) and D)

Exam 3: Analysis of Financial Statements

U.S.regulators are fundamentally opposed to changing from Generally Accepted Accounting Principles (GAPP) to International Financial Reporting Standards (IFRS).

Correct Answer
verified

One problem with ratio analysis is that relationships can be manipulated.For example,we know that if our current ratio is less than 1.0,then using some of our cash to pay off some of our current liabilities would cause the current ratio to increase and thus make the firm look stronger.

Correct Answer
verified

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

Correct Answer
verified

To take full advantage of the credit term provided,management should try to lengthen the average payables period with cautions.

Correct Answer
verified

Correct Answer
verified

Casey Communications recently issued new common stock and used the proceeds to pay off some of its short-term notes payable.This action had no effect on the company's total assets or operating income.What would occur as a result of this action?

Correct Answer
verified

Which statement regarding the Du Pont analysis is correct?

Correct Answer
verified

Which of the following statements is correct?

Correct Answer
verified

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

Correct Answer
verified

What does ratio analysis involve?

Correct Answer
verified

Crindle Canada's stock price at the end of last year was $133.50,and its book value per share was $75.00.What was its market/book ratio?

Correct Answer
verified

Taggart Technologies is considering issuing new common stock and using the proceeds to reduce its outstanding debt.The stock issue would have no effect on total assets,the interest rate Taggart pays,EBIT,or the tax rate.What is likely to occur if the company proceeds with the stock issue?

Correct Answer
verified

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
verified

It is appropriate to use the fixed assets turnover ratio to appraise firms' effectiveness in managing their fixed assets if all the firms being compared have the same proportion of fixed assets to total assets.

Correct Answer
verified

You observe that a firm's ROE is above the industry average,but its profit margin and debt ratio are both below the industry average.Which of the following statements is correct?

Correct Answer
verified

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.

Correct Answer
verified

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
verified

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
verified

Exam 3: Analysis of Financial Statements

U.S.regulators are fundamentally opposed to changing from Generally Accepted Accounting Principles (GAPP) to International Financial Reporting Standards (IFRS).

Correct AnswerverifiedShow Answer

One problem with ratio analysis is that relationships can be manipulated.For example,we know that if our current ratio is less than 1.0,then using some of our cash to pay off some of our current liabilities would cause the current ratio to increase and thus make the firm look stronger.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

To take full advantage of the credit term provided,management should try to lengthen the average payables period with cautions.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Casey Communications recently issued new common stock and used the proceeds to pay off some of its short-term notes payable.This action had no effect on the company's total assets or operating income.What would occur as a result of this action?

Correct AnswerverifiedShow Answer

Which statement regarding the Du Pont analysis is correct?

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

What does ratio analysis involve?

Correct AnswerverifiedShow Answer

Crindle Canada's stock price at the end of last year was $133.50,and its book value per share was $75.00.What was its market/book ratio?

Correct AnswerverifiedShow Answer

Taggart Technologies is considering issuing new common stock and using the proceeds to reduce its outstanding debt.The stock issue would have no effect on total assets,the interest rate Taggart pays,EBIT,or the tax rate.What is likely to occur if the company proceeds with the stock issue?

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

It is appropriate to use the fixed assets turnover ratio to appraise firms' effectiveness in managing their fixed assets if all the firms being compared have the same proportion of fixed assets to total assets.

Correct AnswerverifiedShow Answer

You observe that a firm's ROE is above the industry average,but its profit margin and debt ratio are both below the industry average.Which of the following statements is correct?

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

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

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 AnswerverifiedShow Answer

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