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Exam 3: Financial Analysis

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Question 51

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Which of the following statements is CORRECT?

A) If a firm has the highest price/earnings ratio of any firm in its industry, then, other things held constant, this suggests that the board of directors should fire the president.
B) If a firm has the highest market/book ratio of any firm in its industry, then, other things held constant, this suggests that the board of directors should fire the president.
C) Other things held constant, the higher a firm's expected future growth rate, the lower its P/E ratio is likely to be.
D) The higher the market/book ratio, then, other things held constant, the higher one would expect to find the Market Value Added (MVA) .
E) If a firm has a history of high Economic Value Added (EVA) numbers each year, and if investors expect this situation to continue, then its market/book ratio and MVA are both likely to be below average.

F) B) and E)
G) A) and E)

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Question 52

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

A) True
B) False

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Question 53

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Suppose firms follow similar financing policies, face similar risks, have equal access to capital, and operate in competitive product and capital markets.Under these conditions, then firms that have high profit margins will tend to have high asset turnover ratios, and firms with low profit margins will tend to have low turnover ratios.

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?

is the firm's EPS?

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.

Suppose a firm wants to maintain a specific TIE ratio.It knows the amount of its debt, the interest rate on that debt, the applicable tax rate, and its operating costs.With this information, the firm can calculate the amount of sales required to achieve its target TIE ratio.

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

Beranek Corp.has $410,000 of assets, and it uses no debt--it is financed only with common equity.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?

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?

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?

is the firm's profit margin?

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.

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.

firm's new president wants to strengthen the company's financial position.Which of the following actions would make it financially stronger?

Which of the following statements is CORRECT?

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.Which of the following is likely to occur if the company goes ahead with the stock issue?

is the firm's cash flow per share?

Quigley Inc.is considering two financial plans for the coming year.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 firm finances with only debt and common equity, and if its equity multiplier is 3.0, then its debt ratio must be 0.667.