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pettijohn Inc. The balance sheet and income statement shown below are for Pettijohn Inc. Note that the firm hasno amortization charges, it does not lease any ass ets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over.  Balance Shet (Millions of $ )  \text { Balance Shet (Millions of } \$ \text { ) }  Assets 2016 Cash and securities $1,554.00 Accounts receivable 9,660.00 inventories 13,440.00 Total current assets $24,654.00 Net plant and equipment 17,346.00 Total assets $42,000.00 Liabilities and Equity  Accounts payable $7,980.00 Notes payable 5,880.00 Accruals 4,620.00 Total current liabilities $18,480.00 Cong-term bonds 10,920.00 Cotal liabilities $29,400.00 Common stock 3,360.00 Retained earnings 9,240.00 Total common equity $12,600.00 Total liabilities and equity $42,000.00\begin{array}{lr}\text { Assets } & \underline{2016} \\\text { Cash and securities } & \$ 1,554.00 \\\text { Accounts receivable } & 9,660.00 \\\text { inventories } & 13,440.00 \\\text { Total current assets } & \$ 24,654.00 \\\text { Net plant and equipment } & 17,346.00 \\\text { Total assets } & \$ 42,000.00 \\\text { Liabilities and Equity } \\\text { Accounts payable } & \$ 7,980.00 \\\text { Notes payable } & 5,880.0 0\\\text { Accruals } & 4,620.00\\\text { Total current liabilities } & \$ 18,480.00 \\\text { Cong-term bonds } & 10,920.00 \\\text { Cotal liabilities } & \$ 29,400.0 0\\\text { Common stock } & 3,360.00 \\\text { Retained earnings } & 9,240.00 \\\text { Total common equity } & \$ 12,600.00 \\\text { Total liabilities and equity } & \$ 42,000.00\end{array}  Income Statement (Millions of $)  2016 Net sales $58,800.00 Operating costs except depr’n $55,274.00 Depreciation $1,029.00 Earnings bef int and taxes (EBIT)  $2,497.00 Less interest 1,050.00 Earnings before taxes (EBT)  $1,447.00 Taxes $314.00 Net income $1,133.00 Dther data:  Shares outstanding (millions)  175.00 Common dividends 509.83 Int rate on notes payable & L-T bonds 6.25% Federal plus state income tax rate 21.7% Year-end stock price $77.69\begin{array}{lr}\text { Income Statement (Millions of \$) } & 2016 \\\text { Net sales } & \$ 58,800.00 \\\text { Operating costs except depr'n } & \$ 55,274.00 \\\text { Depreciation } & \$ 1,029.00\\\text { Earnings bef int and taxes (EBIT) } & \$ 2,497.00 \\\text { Less interest } & 1,050.00 \\\text { Earnings before taxes (EBT) } & \$ 1,447.00 \\\text { Taxes } & \$ 314.00 \\\text { Net income } & \$ 1,133.00\\\text { Dther data: }\\\text { Shares outstanding (millions) } & 175.00 \\\text { Common dividends } & 509.83 \\\text { Int rate on notes payable \& L-T bonds } & 6.25 \% \\\text { Federal plus state income tax rate } & 21.7 \% \\\text { Year-end stock price } & \$ 77.69\end{array} -Refer to the data for Pettijohn Inc.What is the firm's inventory turnover ratio?


A) 4.19
B) 4.40
C) 4.62
D) 4.85
E) 5.09

F) C) and E)
G) A) and E)

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


A) The current and quick ratios both increase.
B) The inventory and total assets turnover ratios both decline.
C) The debt ratio increases.
D) The profit margin declines.
E) The EBITDA coverage ratio declines.

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

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pettijohn Inc. The balance sheet and income statement shown below are for Pettijohn Inc. Note that the firm hasno amortization charges, it does not lease any ass ets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over.  Balance Shet (Millions of $ )  \text { Balance Shet (Millions of } \$ \text { ) }  Assets 2016 Cash and securities $1,554.00 Accounts receivable 9,660.00 inventories 13,440.00 Total current assets $24,654.00 Net plant and equipment 17,346.00 Total assets $42,000.00 Liabilities and Equity  Accounts payable $7,980.00 Notes payable 5,880.00 Accruals 4,620.00 Total current liabilities $18,480.00 Cong-term bonds 10,920.00 Cotal liabilities $29,400.00 Common stock 3,360.00 Retained earnings 9,240.00 Total common equity $12,600.00 Total liabilities and equity $42,000.00 Income Statement (Millions of $)  2016 Net sales $58,800.00 Operating costs except depr’n $55,274.00 Depreciation $1,029.00 Earnings bef int and taxes (EBIT)  $2,497.00 Less interest 1,050.00 Earnings before taxes (EBT)  $1,447.00 Taxes $314.00 Net income $1,133.00 Dther data:  Shares outstanding (millions)  175.00 Common dividends 509.83 Int rate on notes payable & L-T bonds 6.25% Federal plus state income tax rate 21.7% Year-end stock price $77.69\begin{array}{lr}\text { Assets } & \underline{2016} \\\text { Cash and securities } & \$ 1,554.00 \\\text { Accounts receivable } & 9,660.00 \\\text { inventories } & 13,440.00 \\\text { Total current assets } & \$ 24,654.00 \\\text { Net plant and equipment } & 17,346.00 \\\text { Total assets } & \$ 42,000.00 \\\text { Liabilities and Equity } \\\text { Accounts payable } & \$ 7,980.00 \\\text { Notes payable } & 5,880.0 0\\\text { Accruals } & 4,620.00\\\text { Total current liabilities } & \$ 18,480.00 \\\text { Cong-term bonds } & 10,920.00 \\\text { Cotal liabilities } & \$ 29,400.0 0\\\text { Common stock } & 3,360.00 \\\text { Retained earnings } & 9,240.00 \\\text { Total common equity } & \$ 12,600.00 \\\text { Total liabilities and equity } & \$ 42,000.00\\\\\text { Income Statement (Millions of \$) } & 2016 \\\text { Net sales } & \$ 58,800.00 \\\text { Operating costs except depr'n } & \$ 55,274.00 \\\text { Depreciation } & \$ 1,029.00\\\text { Earnings bef int and taxes (EBIT) } & \$ 2,497.00 \\\text { Less interest } & 1,050.00 \\\text { Earnings before taxes (EBT) } & \$ 1,447.00 \\\text { Taxes } & \$ 314.00 \\\text { Net income } & \$ 1,133.00\\\text { Dther data: }\\\text { Shares outstanding (millions) } & 175.00 \\\text { Common dividends } & 509.83 \\\text { Int rate on notes payable \& L-T bonds } & 6.25 \% \\\text { Federal plus state income tax rate } & 21.7 \% \\\text { Year-end stock price } & \$ 77.69\end{array} -Refer to the data for Pettijohn Inc.What is the firm's EBITDA coverage?


A) 3.03
B) 3.19
C) 3.36
D) 3.53
E) 3.70

F) C) and D)
G) B) and E)

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A 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.

A) True
B) False

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False

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


A) If the interest rate the companies pay on their debt is less than their basic earning power (BEP) , then Company Heidee will have the higher ROE.
B) Given this information, Leaudy must have the higher ROE.
C) Company Leaudy has a higher basic earning power ratio (BEP) .
D) Company Heidee has a higher basic earning power ratio (BEP) .
E) If the interest rate the companies pay on their debt is more than their basic earning power (BEP) , then Company Heidee will have the higher ROE.

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

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Amram Company's current ratio is 1.9.Considered alone, which of the following actions would reduce the company's current ratio?


A) Use cash to reduce accounts payable.
B) Borrow using short-term notes payable and use the proceeds to reduce accruals.
C) Borrow using short-term notes payable and use the proceeds to reduce long-term debt.
D) Use cash to reduce accruals.
E) Use cash to reduce short-term notes payable.

F) C) and D)
G) None of the above

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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?


A) 13.84
B) 14.57
C) 15.29
D) 16.06
E) 16.86

F) B) and D)
G) A) and D)

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pettijohn Inc. The balance sheet and income statement shown below are for Pettijohn Inc. Note that the firm hasno amortization charges, it does not lease any ass ets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over.  Balance Shet (Millions of $ )  \text { Balance Shet (Millions of } \$ \text { ) }  Assets 2016 Cash and securities $1,554.00 Accounts receivable 9,660.00 inventories 13,440.00 Total current assets $24,654.00 Net plant and equipment 17,346.00 Total assets $42,000.00 Liabilities and Equity  Accounts payable $7,980.00 Notes payable 5,880.00 Accruals 4,620.00 Total current liabilities $18,480.00 Cong-term bonds 10,920.00 Cotal liabilities $29,400.00 Common stock 3,360.00 Retained earnings 9,240.00 Total common equity $12,600.00 Total liabilities and equity $42,000.00 Income Statement (Millions of $)  2016 Net sales $58,800.00 Operating costs except depr’n $55,274.00 Depreciation $1,029.00 Earnings bef int and taxes (EBIT)  $2,497.00 Less interest 1,050.00 Earnings before taxes (EBT)  $1,447.00 Taxes $314.00 Net income $1,133.00 Dther data:  Shares outstanding (millions)  175.00 Common dividends 509.83 Int rate on notes payable & L-T bonds 6.25% Federal plus state income tax rate 21.7% Year-end stock price $77.69\begin{array}{lr}\text { Assets } & \underline{2016} \\\text { Cash and securities } & \$ 1,554.00 \\\text { Accounts receivable } & 9,660.00 \\\text { inventories } & 13,440.00 \\\text { Total current assets } & \$ 24,654.00 \\\text { Net plant and equipment } & 17,346.00 \\\text { Total assets } & \$ 42,000.00 \\\text { Liabilities and Equity } \\\text { Accounts payable } & \$ 7,980.00 \\\text { Notes payable } & 5,880.0 0\\\text { Accruals } & 4,620.00\\\text { Total current liabilities } & \$ 18,480.00 \\\text { Cong-term bonds } & 10,920.00 \\\text { Cotal liabilities } & \$ 29,400.0 0\\\text { Common stock } & 3,360.00 \\\text { Retained earnings } & 9,240.00 \\\text { Total common equity } & \$ 12,600.00 \\\text { Total liabilities and equity } & \$ 42,000.00\\\\\text { Income Statement (Millions of \$) } & 2016 \\\text { Net sales } & \$ 58,800.00 \\\text { Operating costs except depr'n } & \$ 55,274.00 \\\text { Depreciation } & \$ 1,029.00\\\text { Earnings bef int and taxes (EBIT) } & \$ 2,497.00 \\\text { Less interest } & 1,050.00 \\\text { Earnings before taxes (EBT) } & \$ 1,447.00 \\\text { Taxes } & \$ 314.00 \\\text { Net income } & \$ 1,133.00\\\text { Dther data: }\\\text { Shares outstanding (millions) } & 175.00 \\\text { Common dividends } & 509.83 \\\text { Int rate on notes payable \& L-T bonds } & 6.25 \% \\\text { Federal plus state income tax rate } & 21.7 \% \\\text { Year-end stock price } & \$ 77.69\end{array} -Refer to the data for Pettijohn Inc.What is the firm's ROA?


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

F) None of the above
G) C) and D)

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

A) True
B) False

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Which of the following statements is CORRECT?


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) C) and E)
G) A) and C)

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D

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.


A) 7.95
B) 8.37
C) 8.81
D) 9.27
E) 9.74

F) A) and C)
G) B) and D)

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Emerson Inc.'s would like to undertake a policy of paying out 45% of its income.Its latest net income was $1,250,000, and it had 225,000 shares outstanding.What dividend per share should it declare?


A) $2.14
B) $2.26
C) $2.38
D) $2.50
E) $2.63

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

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pettijohn Inc. The balance sheet and income statement shown below are for Pettijohn Inc. Note that the firm hasno amortization charges, it does not lease any ass ets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over.  Balance Shet (Millions of $ )  \text { Balance Shet (Millions of } \$ \text { ) }  Assets 2016 Cash and securities $1,554.00 Accounts receivable 9,660.00 inventories 13,440.00 Total current assets $24,654.00 Net plant and equipment 17,346.00 Total assets $42,000.00 Liabilities and Equity  Accounts payable $7,980.00 Notes payable 5,880.00 Accruals 4,620.00 Total current liabilities $18,480.00 Cong-term bonds 10,920.00 Cotal liabilities $29,400.00 Common stock 3,360.00 Retained earnings 9,240.00 Total common equity $12,600.00 Total liabilities and equity $42,000.00 Income Statement (Millions of $)  2016 Net sales $58,800.00 Operating costs except depr’n $55,274.00 Depreciation $1,029.00 Earnings bef int and taxes (EBIT)  $2,497.00 Less interest 1,050.00 Earnings before taxes (EBT)  $1,447.00 Taxes $314.00 Net income $1,133.00 Dther data:  Shares outstanding (millions)  175.00 Common dividends 509.83 Int rate on notes payable & L-T bonds 6.25% Federal plus state income tax rate 21.7% Year-end stock price $77.69\begin{array}{lr}\text { Assets } & \underline{2016} \\\text { Cash and securities } & \$ 1,554.00 \\\text { Accounts receivable } & 9,660.00 \\\text { inventories } & 13,440.00 \\\text { Total current assets } & \$ 24,654.00 \\\text { Net plant and equipment } & 17,346.00 \\\text { Total assets } & \$ 42,000.00 \\\text { Liabilities and Equity } \\\text { Accounts payable } & \$ 7,980.00 \\\text { Notes payable } & 5,880.0 0\\\text { Accruals } & 4,620.00\\\text { Total current liabilities } & \$ 18,480.00 \\\text { Cong-term bonds } & 10,920.00 \\\text { Cotal liabilities } & \$ 29,400.0 0\\\text { Common stock } & 3,360.00 \\\text { Retained earnings } & 9,240.00 \\\text { Total common equity } & \$ 12,600.00 \\\text { Total liabilities and equity } & \$ 42,000.00\\\\\text { Income Statement (Millions of \$) } & 2016 \\\text { Net sales } & \$ 58,800.00 \\\text { Operating costs except depr'n } & \$ 55,274.00 \\\text { Depreciation } & \$ 1,029.00\\\text { Earnings bef int and taxes (EBIT) } & \$ 2,497.00 \\\text { Less interest } & 1,050.00 \\\text { Earnings before taxes (EBT) } & \$ 1,447.00 \\\text { Taxes } & \$ 314.00 \\\text { Net income } & \$ 1,133.00\\\text { Dther data: }\\\text { Shares outstanding (millions) } & 175.00 \\\text { Common dividends } & 509.83 \\\text { Int rate on notes payable \& L-T bonds } & 6.25 \% \\\text { Federal plus state income tax rate } & 21.7 \% \\\text { Year-end stock price } & \$ 77.69\end{array} -Refer to the data for Pettijohn Inc.What is the firm's market-to-book ratio?


A) 0.56
B) 0.66
C) 0.78
D) 0.92
E) 1.08

F) A) and B)
G) None of the above

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Debt management ratios show the extent to which a firm's managers are attempting to magnify returns on owners' capital through the use of financial leverage.

A) True
B) False

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

A) True
B) False

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Which of the following statements is CORRECT?


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 decrease.
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%.Under these conditions, the ROE will increase.
C) 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.
D) The modified DuPont equation provides information about how operations affect the ROE, but the equation does not include the effects of debt on the ROE.
E) Other things held constant, an increase in the debt ratio will result in an increase in the profit margin on sales.

F) A) and E)
G) A) and C)

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Which of the following statements is CORRECT?


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) A) and D)
G) A) and C)

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C

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

A) True
B) False

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pettijohn Inc. The balance sheet and income statement shown below are for Pettijohn Inc. Note that the firm hasno amortization charges, it does not lease any ass ets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over.  Balance Shet (Millions of $ )  \text { Balance Shet (Millions of } \$ \text { ) }  Assets 2016 Cash and securities $1,554.00 Accounts receivable 9,660.00 inventories 13,440.00 Total current assets $24,654.00 Net plant and equipment 17,346.00 Total assets $42,000.00 Liabilities and Equity  Accounts payable $7,980.00 Notes payable 5,880.00 Accruals 4,620.00 Total current liabilities $18,480.00 Cong-term bonds 10,920.00 Cotal liabilities $29,400.00 Common stock 3,360.00 Retained earnings 9,240.00 Total common equity $12,600.00 Total liabilities and equity $42,000.00 Income Statement (Millions of $)  2016 Net sales $58,800.00 Operating costs except depr’n $55,274.00 Depreciation $1,029.00 Earnings bef int and taxes (EBIT)  $2,497.00 Less interest 1,050.00 Earnings before taxes (EBT)  $1,447.00 Taxes $314.00 Net income $1,133.00 Dther data:  Shares outstanding (millions)  175.00 Common dividends 509.83 Int rate on notes payable & L-T bonds 6.25% Federal plus state income tax rate 21.7% Year-end stock price $77.69\begin{array}{lr}\text { Assets } & \underline{2016} \\\text { Cash and securities } & \$ 1,554.00 \\\text { Accounts receivable } & 9,660.00 \\\text { inventories } & 13,440.00 \\\text { Total current assets } & \$ 24,654.00 \\\text { Net plant and equipment } & 17,346.00 \\\text { Total assets } & \$ 42,000.00 \\\text { Liabilities and Equity } \\\text { Accounts payable } & \$ 7,980.00 \\\text { Notes payable } & 5,880.0 0\\\text { Accruals } & 4,620.00\\\text { Total current liabilities } & \$ 18,480.00 \\\text { Cong-term bonds } & 10,920.00 \\\text { Cotal liabilities } & \$ 29,400.0 0\\\text { Common stock } & 3,360.00 \\\text { Retained earnings } & 9,240.00 \\\text { Total common equity } & \$ 12,600.00 \\\text { Total liabilities and equity } & \$ 42,000.00\\\\\text { Income Statement (Millions of \$) } & 2016 \\\text { Net sales } & \$ 58,800.00 \\\text { Operating costs except depr'n } & \$ 55,274.00 \\\text { Depreciation } & \$ 1,029.00\\\text { Earnings bef int and taxes (EBIT) } & \$ 2,497.00 \\\text { Less interest } & 1,050.00 \\\text { Earnings before taxes (EBT) } & \$ 1,447.00 \\\text { Taxes } & \$ 314.00 \\\text { Net income } & \$ 1,133.00\\\text { Dther data: }\\\text { Shares outstanding (millions) } & 175.00 \\\text { Common dividends } & 509.83 \\\text { Int rate on notes payable \& L-T bonds } & 6.25 \% \\\text { Federal plus state income tax rate } & 21.7 \% \\\text { Year-end stock price } & \$ 77.69\end{array} -Refer to the data for Pettijohn Inc.What is the firm's debt ratio (i.e., debt-to-assets ratio) ?


A) 33.87%
B) 35.00%
C) 36.40%
D) 38.00%
E) 40.00%

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

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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) A) and D)
G) A) and B)

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