Question 1

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)

Question 2

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.

-Refer to the data for Pettijohn Inc.What is the firm's current ratio?

Accepted Answer

A)   0.97
B)   1.08
C)   1.20
D)   1.33
E)   1.47F) A) and E)
G) A) and B)

Question 3

Arshadi Corp.'s sales last year were $52,000, and its total assets were $22,000.What was its total assets turnover ratio (TATO) ?

Accepted Answer

A)   2.03
B)   2.13
C)   2.25
D)   2.36
E)   2.48F) All of the above
G) A) and B)

Question 4

Which of the following statements is CORRECT?

Accepted Answer

A)   All else equal, increasing the debt ratio will increase the ROA.
B)   The use of debt financing will tend to lower the basic earning power ratio, other things held constant.
C)   A firm that employs financial leverage will have a higher equity multiplier than an otherwise identical firm that has no debt in its capital structure.
D)   If two firms have identical sales, interest rates paid, operating costs, and assets, but differ in the way they are financed, the firm with less debt will generally have the higher expected ROE.
E)   Holding bonds is better than holding stock for investors because income from bonds is taxed on a more favorable basis than income from stock.F) B) and E)
G) B) and D)

Question 5

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

Question 6

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.

-Refer to the data for Pettijohn Inc.What is the firm's EPS?

Accepted Answer

A)   $5.84
B)   $6.15
C)   $6.47
D)   $6.80
E)   $7.14F) A) and E)
G) A) and B)

Question 7

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-to-assets ratio was 46%.How much debt was outstanding?

Accepted Answer

A)   $3,393,738
B)   $3,572,356
C)   $3,760,375
D)   $3,958,289
E)   $4,166,620F) A) and E)
G) A) and D)

Question 8

Bonner Corp.'s sales last year were $415,000, and its year-end total assets were $355,000.The average firm in the industry has a total assets turnover ratio (TATO)  of 2.4.Bonner's new CFO believes the firm has excess assets that can be sold so as to bring the TATO down to the industry average without affecting sales.By how much must the assets be reduced to bring the TATO to the industry average, holding sales constant?

Accepted Answer

A)   $164,330
B)   $172,979
C)   $182,083
D)   $191,188
E)   $200,747F) B) and E)
G) B) and D)

Question 9

Which of the following statements is CORRECT?

Accepted Answer

A)   "Window dressing" is any action that improves a firm's fundamental, long-run position and thus increases its intrinsic value.
B)   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."
C)   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."
D)   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 an example of "window dressing."
E)   Using some of the firm's cash to reduce long-term debt is an example of "window dressing."F) A) and D)
G) B) and D)

Question 10

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?

Accepted Answer

A)   Heidee has lower operating income (EBIT)  than Leaudy.
B)   Heidee has a lower total assets turnover ratio than Leaudy.
C)   Heidee has a lower equity multiplier than Leaudy.
D)   Heidee has a higher fixed assets turnover ratio than Leaudy.
E)   Heidee has a higher ROE than Leaudy.F) B) and D)
G) B) and C)

Question 11

Which of the following statements is CORRECT?

Accepted Answer

A)   If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days' sales outstanding will decline.
B)   If a security analyst saw that a firm's days' sales outstanding (DSO)  was higher than the industry average and was also increasing and trending still higher, this would be interpreted as a sign of strength.
C)   If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days' sales outstanding (DSO)  will increase.
D)   There is no relationship between the days' sales outstanding (DSO)  and the average collection period (ACP) .These ratios measure entirely different things.
E)   A reduction in accounts receivable would have no effect on the current ratio, but it would lead to an increase in the quick ratio.F) All of the above
G) C) and E)

Question 12

Last year Central Chemicals had sales of $205,000, assets of $127,500, a profit margin of 5.3%, and an equity multiplier of 1.2.The CFO believes that the company could reduce its assets by $21,000 without affecting either sales or costs.Had it reduced its assets in this amount, and had the debt-to-assets ratio, sales, and costs remained constant, by how much would the ROE have changed?

Accepted Answer

A)   1.81%
B)   2.02%
C)   2.22%
D)   2.44%
E)   2.68%F) B) and D)
G) None of the above

Question 13

Lincoln Industries' current ratio is 0.5.Considered alone, which of the following actions would increase the company's current ratio?

Accepted Answer

A)   Use cash to reduce long-term bonds outstanding.
B)   Borrow using short-term notes payable and use the cash to increase inventories.
C)   Use cash to reduce accruals.
D)   Use cash to reduce accounts payable.
E)   Use cash to reduce short-term notes payable.F) C) and E)
G) A) and B)

Exam 3: Analysis of Financial Statements

Correct Answer
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Arshadi Corp.'s sales last year were $52,000, and its total assets were $22,000.What was its total assets turnover ratio (TATO) ?

Correct Answer
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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?

Correct Answer
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Which of the following statements is CORRECT?

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Which of the following statements is CORRECT?

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Lincoln Industries' current ratio is 0.5.Considered alone, which of the following actions would increase the company's current ratio?

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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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Which of the following statements is CORRECT?

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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-to-assets ratio was 46%.How much debt was outstanding?

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Exam 3: Analysis of Financial Statements

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Arshadi Corp.'s sales last year were $52,000, and its total assets were $22,000.What was its total assets turnover ratio (TATO) ?

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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?

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Which of the following statements is CORRECT?

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Which of the following statements is CORRECT?

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Lincoln Industries' current ratio is 0.5.Considered alone, which of the following actions would increase the company's current ratio?

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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?

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Which of the following statements is CORRECT?

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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-to-assets ratio was 46%.How much debt was outstanding?

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