Question 1

Which of the following statements is CORRECT?

Accepted Answer

A)   If a firm has high current and quick ratios, this always indicate that the firm is managing its liquidity position well.
B)   If a firm sold some inventory for cash and left the funds in its bank account, its current ratio would probably not change much, but its quick ratio would decline.
C)   If a firm sold some inventory on credit, its current ratio would probably not change much, but its quick ratio would decline.
D)   If a firm sold some inventory on credit as opposed to cash, there is no reason to think that either its current or quick ratio would change.
E)   The inventory turnover ratio and days sales outstanding (DSO)  are two ratios that are used to assess how effectively a firm is managing its current assets.F) A) and D)
G) A) and E)

Question 2

A new firm is developing its business plan. It will require $615,000 of assets, and it projects $450,000 of sales and $355,000 of operating costs for the first year. Management is reasonably 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 ratio (measured as debt/assets)  the firm can use? (Hint: Find the maximum dollars of interest, then the debt that produces that interest, and then the related debt ratio.)

Accepted Answer

A)   41.94%
B)   44.15%
C)   46.47%
D)   48.92%
E)   51.49%F) B) and E)
G) B) and D)

Question 3

Significant variations in accounting methods among firms make meaningful ratio comparisons between firms more difficult than if all firms used the same or similar accounting methods.

Accepted Answer

A) True 
 B)False

Question 4

Which of the following statements is CORRECT?

Accepted Answer

A)   In general, if investors regard a company as being relatively risky and/or having relatively poor growth prospects, then it will have relatively high P/E and M/B ratios.
B)   The basic earning power ratio (BEP)  reflects the earning power of a firm's assets after giving consideration to financial leverage and tax effects.
C)   The "apparent," but not necessarily the "true," financial position of a company whose sales are seasonal can change dramatically during a given year, depending on the time of year when the financial statements are constructed.
D)   The market/book (M/
B)   ratio tells us how much investors are willing to pay for a dollar of accounting book value. In general, investors regard companies with higher M/B ratios as being more risky and/or less likely to enjoy higher future growth.
E)   It 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.F) A) and B)
G) B) and C)

Question 5

If a firm sold some inventory on credit as opposed to cash, there is no reason to think that either its current or quick ratio would change.

Accepted Answer

A) True 
 B)False

Question 6

Last year Ann Arbor Corp had $155,000 of assets, $305,000 of sales, $20,000 of net income, and a debt-to-total-assets ratio of 37.5%. The new CFO believes a new computer program will enable it to reduce costs and thus raise net income to $33,000. Assets, sales, and the debt ratio would not be affected. By how much would the cost reduction improve the ROE?

Accepted Answer

A)   11.51%
B)   12.11%
C)   12.75%
D)   13.42%
E)   14.09%F) C) and E)
G) A) and C)

Question 7

The "apparent," but not necessarily the "true," financial position of a company whose sales are seasonal can change dramatically during a given year, depending on the time of year when the financial statements are constructed.

Accepted Answer

A) True 
 B)False

Question 8

Companies HD and LD have the same total assets, sales, operating costs, and tax rates, and they pay the same interest rate on their debt. However, company HD has a higher debt ratio. Which of the following statements is CORRECT?

Accepted Answer

A)   Given this information, LD must have the higher ROE.
B)   Company LD has a higher basic earning power ratio (BEP) .
C)   Company HD has a higher basic earning power ratio (BEP) .
D)   If the interest rate the companies pay on their debt is more than their basic earning power (BEP) , then Company HD will have the higher ROE.
E)   If the interest rate the companies pay on their debt is less than their basic earning power (BEP) , then Company HD will have the higher ROE.F) None of the above
G) B) and D)

Question 9

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

Accepted Answer

A)   Company HD pays less in taxes.
B)   Company HD has a lower equity multiplier.
C)   Company HD has a higher ROA.
D)   Company HD has a higher times-interest-earned (TI
E)   ratio.
E)   Company HD has more net income.F) A) and D)
G) All of the above

Question 10

Which of the following statements is CORRECT?

Accepted Answer

A)   Borrowing by using short-term notes payable and then using the proceeds to retire long-term debt is an example of "window dressing." Offering discounts to customers who pay with cash rather than buy on credit and then using the funds that come in quicker to purchase additional inventories is another example of "window dressing."
B)   Borrowing on a long-term basis and using the proceeds to retire short-term debt would improve the current ratio and thus could be considered to be an example of "window dressing."
C)   Offering discounts to customers who pay with cash rather than buy on credit and then using the funds that come in quicker to purchase fixed assets is an example of "window dressing."
D)   Using some of the firm's cash to reduce long-term debt is an example of "window dressing."
E)   "Window dressing" is any action that does not improve a firm's fundamental long-run position and thus increases its intrinsic value.F) A) and C)
G) B) and C)

Question 11

If a firm's fixed assets turnover ratio is significantly higher than its industry average, this could indicate that it uses its fixed assets very efficiently or is operating at over capacity and should probably add fixed assets.

Accepted Answer

A) True 
 B)False

Question 12

What is the firm's total assets turnover?

Accepted Answer

A)   1.12
B)   1.40
C)   1.75
D)   2.10
E)   2.52F) A) and D)
G) A) and E)

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)   The division's DSO (days' sales outstanding)  is 40, whereas the average for its competitors is 30.F) C) and E)
G) B) and D)

Question 14

What is the firm's inventory turnover ratio?

Accepted Answer

A)   5.47
B)   5.74
C)   6.03
D)   6.33
E)   6.65F) A) and B)
G) A) and C)

Question 15

Precision Aviation had a profit margin of 6.25%, a total assets turnover of 1.5, and an equity multiplier of 1.8. What was the firm's ROE?

Accepted Answer

A)   15.23%
B)   16.03%
C)   16.88%
D)   17.72%
E)   18.60%F) B) and C)
G) All of the above

Question 16

What is the firm's days sales outstanding? Assume a 365-day year for this calculation.

Accepted Answer

A)   39.07
B)   41.13
C)   43.29
D)   45.57
E)   47.97F) A) and B)
G) D) and E)

Question 17

Which of the following statements is CORRECT?

Accepted Answer

A)   A decline in a firm's inventory turnover ratio suggests that it is improving both its inventory management and its liquidity position, i.e., that it is becoming more liquid.
B)   In general, it's better to have a low inventory turnover ratio than a high one, as a low one indicates that the firm has an adequate stock of inventory relative to sales and thus will not lose sales as a result of running out of stock.
C)   If a firm's fixed assets turnover ratio is significantly lower than its industry average, this could indicate that it uses its fixed assets very efficiently or is operating at over capacity and should probably add fixed assets.
D)   The more conservative a firm's management is, the higher its debt ratio is likely to be.
E)   The days sales outstanding ratio tells us how long it takes, on average, to collect after a sale is made. The DSO can be compared with the firm's credit terms to get an idea of whether customers are paying on time.F) C) and E)
G) A) and E)

Question 18

Which of the following statements is CORRECT?

Accepted Answer

A)   The ratio of long-term debt to total capital is more likely to experience seasonal fluctuations than is either the DSO or the inventory turnover ratio.
B)   If two firms have the same ROA, the firm with the most debt can be expected to have the lower ROE.
C)   An increase in the DSO, other things held constant, could be expected to increase the total assets turnover ratio.
D)   An increase in the DSO, other things held constant, could be expected to increase the ROE.
E)   An increase in a firm's debt ratio, with no changes in its sales or operating costs, could be expected to lower its profit margin.F) A) and B)
G) A) and D)

Question 19

Other things held constant, a decline in sales accompanied by an increase in financial leverage must result in a lower profit margin.

Accepted Answer

A) True 
 B)False

Question 20

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 equal.
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/or be expected to grow at a faster rate.
E)   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.F) A) and E)
G) None of the above

Exam 4: Statement Analysis

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

Correct Answer
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Other things held constant, a decline in sales accompanied by an increase in financial leverage must result in a lower profit margin.

Correct Answer
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Precision Aviation had a profit margin of 6.25%, 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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Which of the following statements is CORRECT?

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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What is the firm's days sales outstanding? Assume a 365-day year for this calculation.

Correct Answer
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Companies HD and LD have the same total assets, sales, operating costs, and tax rates, and they pay the same interest rate on their debt. However, company HD has a higher debt ratio. Which of the following statements is CORRECT?

Correct Answer
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If a firm's fixed assets turnover ratio is significantly higher than its industry average, this could indicate that it uses its fixed assets very efficiently or is operating at over capacity and should probably add fixed assets.

Correct Answer
verified

Which of the following statements is CORRECT?

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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What is the firm's inventory turnover ratio?

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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Significant variations in accounting methods among firms make meaningful ratio comparisons between firms more difficult than if all firms used the same or similar accounting methods.

Correct Answer
verified

If a firm sold some inventory on credit as opposed to cash, there is no reason to think that either its current or quick ratio would change.

Correct Answer
verified

The "apparent," but not necessarily the "true," financial position of a company whose sales are seasonal can change dramatically during a given year, depending on the time of year when the financial statements are constructed.

Correct Answer
verified

What is the firm's total assets turnover?

Correct Answer
verified

Exam 4: Statement Analysis

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

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

Correct AnswerverifiedShow Answer

Other things held constant, a decline in sales accompanied by an increase in financial leverage must result in a lower profit margin.

Correct AnswerverifiedShow Answer

Precision Aviation had a profit margin of 6.25%, a total assets turnover of 1.5, and an equity multiplier of 1.8. What was the firm's ROE?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

What is the firm's days sales outstanding? Assume a 365-day year for this calculation.

Correct AnswerverifiedShow Answer

Companies HD and LD have the same total assets, sales, operating costs, and tax rates, and they pay the same interest rate on their debt. However, company HD has a higher debt ratio. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

If a firm's fixed assets turnover ratio is significantly higher than its industry average, this could indicate that it uses its fixed assets very efficiently or is operating at over capacity and should probably add fixed assets.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

What is the firm's inventory turnover ratio?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Significant variations in accounting methods among firms make meaningful ratio comparisons between firms more difficult than if all firms used the same or similar accounting methods.

Correct AnswerverifiedShow Answer

If a firm sold some inventory on credit as opposed to cash, there is no reason to think that either its current or quick ratio would change.

Correct AnswerverifiedShow Answer

The "apparent," but not necessarily the "true," financial position of a company whose sales are seasonal can change dramatically during a given year, depending on the time of year when the financial statements are constructed.

Correct AnswerverifiedShow Answer

What is the firm's total assets turnover?

Correct AnswerverifiedShow Answer

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