Question 1

Vang Corp.'s stock price at the end of last year was $33.50 and its earnings per share for the year were $2.30.What was its P/E ratio?

Accepted Answer

A)  13.84
B)  14.57
C)  15.29
D)  16.06
E)  16.86F) C) and E)
G) A) and D)

Question 2

Exhibit 7.1
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 7.1.What is the firm's debt-to-assets ratio?

Accepted Answer

A)  45.93%
B)  51.03%
C)  56.70%
D)  63.00%
E)  70.00%F) B) and C)
G) A) and B)

Question 3

Exhibit 7.1
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 7.1.What is the firm's market-to-book ratio?

Accepted Answer

A)  0.56
B)  0.66
C)  0.78
D)  0.92
E)  1.08F) C) and E)
G) A) and D)

Question 4

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?

Accepted Answer

A)  14.77%
B)  15.51%
C)  16.28%
D)  17.10%
E)  17.95%F) B) and C)
G) B) and E) A

Question 5

Exhibit 7.1
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 7.1.What is the firm's P/E ratio?

Accepted Answer

A)  12.0
B)  12.6
C)  13.2
D)  13.9
E)  14.6F) All of the above
G) A) and E)

Question 6

Exhibit 7.1
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 7.1.What is the firm's ROA?

Accepted Answer

A)  2.70%
B)  2.97%
C)  3.26%
D)  3.59%
E)  3.95%F) A) and C)
G) A) and D)

Question 7

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?

Accepted Answer

A)  4.36%
B)  4.57%
C)  4.80%
D)  5.04%
E)  5.30%F) All of the above
G) B) and C) A

Question 8

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)  $267.34
B)  $281.41
C)  $296.22
D)  $311.81
E)  $328.22F) B) and D)
G) B) and C)

Question 9

Lofland's has $20 million in current assets and $10 million in current liabilities,while Smaland's current assets are $10 million versus $20 million of current liabilities.Both firms would like to "window dress" their end-of-year financial statements,and to do so each plans to borrow $10 million on a short-term basis and to then hold the borrowed funds in their cash accounts.Which of the statements below best describes the results of these transactions?

Accepted Answer

A)  The transaction would improve both firms' financial strength as measured by their current ratios.
B)  The transactions would raise Lofland's financial strength as measured by its current ratio but lower Smaland's current ratio.
C)  The transactions would lower Lofland's financial strength as measured by its current ratio but raise Smaland's current ratio.
D)  The transaction would have no effect on the firm' financial strength as measured by their current ratios.
E)  The transaction would lower both firm' financial strength as measured by their current ratios.F) A) and D)
G) A) and C) C

Question 10

Which of the following statements is CORRECT?

Accepted Answer

A)  If a firm increases its sales and cost of goods sold while holding its inventories constant, then, other things held constant, its inventory turnover ratio will decrease.
B)  A reduction in inventories held would have no effect on the current ratio.
C)  An increase in inventories would have no effect on the current ratio.
D)  If a firm increases its sales and cost of goods sold while holding its inventories constant, then, other things held constant, its inventory turnover ratio will increase.
E)  A reduction in the inventory turnover ratio will generally lead to an increase in the ROE.F) A) and E)
G) A) and B)

Question 11

Other things held constant,which of the following alternatives would increase a company's cash flow for the current year?

Accepted Answer

A)  Increase the number of years over which fixed assets are depreciated for tax purposes.
B)  Pay down the accounts payables.
C)  Reduce the days' sales outstanding (DSO)  without affecting sales or operating costs.
D)  Pay workers more frequently to decrease the accrued wages balance.
E)  Reduce the inventory turnover ratio without affecting sales or operating costs.F) A) and E)
G) All of the above

Question 12

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) A) and B)
G) A) and C)

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 DSO (days' sales outstanding)  is 40, whereas the average for its competitors is 30.
B)  The division's basic earning power ratio is above the average of other firms in its industry.
C)  The division's total assets turnover ratio is below the average for other firms in its industry.
D)  The division's debt ratio is above the average for other firms in the industry.
E)  The division's inventory turnover is 6, whereas the average for its competitors is 8.F) A) and B)
G) A) and C)

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

Companies Heidee and Leaudy have the same tax rate,sales,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?

Accepted Answer

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

Question 16

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

Accepted Answer

A) True 
 B)False

Question 17

Which of the following statements is CORRECT?

Accepted Answer

A)  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.
B)  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.
C)  A firm's use of debt will have no effect on its profit margin on sales.
D)  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.
E)  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.F) A) and B)
G) A) and C)

Question 18

Exhibit 7.1
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 7.1.What is the firm's inventory turnover ratio?

Accepted Answer

A)  4.17
B)  4.38
C)  4.59
D)  5.82
E)  5.07F) A) and B)
G) All of the above

Question 19

Hutchinson Corporation has zero debt⎯it is financed only with common equity.Its total assets are $410,000.The new CFO wants to employ enough debt to bring the debt/assets ratio to 40%,using the proceeds from the borrowing to buy back common stock at its book value.How much must the firm borrow to achieve the target debt ratio?

Accepted Answer

A)  $155,800
B)  $164,000
C)  $172,200
D)  $180,810
E)  $189,851F) None of the above
G) C) and E)

Question 20

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

Accepted Answer

A) True 
 B)False

Exam 7: Analysis of Financial Statements

Vang Corp.'s stock price at the end of last year was $33.50 and its earnings per share for the year were $2.30.What was its P/E ratio?

Correct Answer
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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?

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A

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A

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C

Which of the following statements is CORRECT?

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Other things held constant,which of the following alternatives would increase a company's cash flow for the current year?

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

Correct Answer
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Companies Heidee and Leaudy have the same tax rate,sales,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?

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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Which of the following statements is CORRECT?

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

Correct Answer
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Exam 7: Analysis of Financial Statements

Vang Corp.'s stock price at the end of last year was $33.50 and its earnings per share for the year were $2.30.What was its P/E ratio?

Correct AnswerverifiedShow Answer

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Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedA

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Correct AnswerverifiedA

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Correct AnswerverifiedC

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Other things held constant,which of the following alternatives would increase a company's cash flow for the current year?

Correct AnswerverifiedShow Answer

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

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

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

Correct AnswerverifiedShow Answer

Companies Heidee and Leaudy have the same tax rate,sales,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?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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A

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A

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C

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