Question 1

Safeco's current assets total to $20 million versus $10 million of current liabilities, while Risco'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 they tentatively plan 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 transactions would improve Safeco's financial strength as measured by its current ratio but lower Risco's current ratio.
B)   The transactions would lower Safeco's financial strength as measured by its current ratio but raise Risco's current ratio.
C)   The transactions would have no effect on the firm' financial strength as measured by their current ratios.
D)   The transactions would lower both firm' financial strength as measured by their current ratios.
E)   The transactions would improve both firms' financial strength as measured by their current ratios.

Question 2

Companies HD and LD are both profitable, and they have the same total assets (TA) , Sales (S) , return on assets (ROA) , and profit margin (PM) . However, Company HD has the higher debt ratio. Which of the following statements is CORRECT?

Accepted Answer

A)   Company HD has a lower total assets turnover than Company LD.
B)   Company HD has a lower equity multiplier than Company LD.
C)   Company HD has a higher fixed assets turnover than Company LD.
D)   Company HD has a higher ROE than Company LD.
E)   Company HD has a lower operating income (EBIT)  than Company LD.

Question 3

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.

Question 4

What is the firm's total assets turnover?

Accepted Answer

A)   1.12
B)   1.40
C)   1.75
D)   2.10
E)   2.52

Question 5

The return on common equity (ROE) is generally regarded as being less significant, from a stockholder's viewpoint, than the return on total assets (ROA).

Accepted Answer

A) True 
 B)False

Question 6

Even though Firm A's current ratio exceeds that of Firm B, Firm B's quick ratio might exceed that of A. However, if A's quick ratio exceeds B's, then we can be certain that A's current ratio is also larger than B's.

Accepted Answer

A) True 
 B)False

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

Considered alone, which of the following would increase a company's current ratio?

Accepted Answer

A)   An increase in net fixed assets.
B)   An increase in accrued liabilities.
C)   An increase in notes payable.
D)   An increase in accounts receivable.
E)   An increase in accounts payable.

Question 9

Song Corp's stock price at the end of last year was $23.50 and its earnings per share for the year were $1.30. What was its P/E ratio?

Accepted Answer

A)   17.17
B)   18.08
C)   18.98
D)   19.93
E)   20.93

Question 10

Which of the following statements is CORRECT?

Accepted Answer

A)   Other things held constant, the less debt a firm uses, the lower its return on total assets will be.
B)   The advantage of the basic earning power ratio (BEP)  over the return on total assets for judging a company's operating efficiency is that the BEP does not reflect the effects of debt and taxes.
C)   The return on common equity (RO
E)   is generally regarded as being less significant, from a stockholder's viewpoint, than the return on total assets (RO
A)  .
D)   The price/earnings (P/
E)   ratio tells us how much investors are willing to pay for a dollar of current earnings. In general, investors regard companies with higher P/E ratios as being more risky and/or less likely to enjoy higher future growth.
E)   Suppose you are analyzing two firms in the same industry. Firm A has a profit margin of 10% versus a margin of 8% for Firm B. Firm A's debt ratio is 70% versus 20% for Firm B. Based only on these two facts, you cannot reach a conclusion as to which firm is better managed, because the difference in debt, not better management, could be the cause of Firm A's higher profit margin.

Question 11

Companies E and P each reported the same earnings per share (EPS) , but Company E's stock trades at a higher price. Which of the following statements is CORRECT?

Accepted Answer

A)   Company E probably has fewer growth opportunities.
B)   Company E is probably judged by investors to be riskier.
C)   Company E must have a higher market-to-book ratio.
D)   Company E must pay a lower dividend.
E)   Company E trades at a higher P/E ratio.

Question 12

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?

Accepted Answer

A)   The ROA will decline.
B)   Taxable income will decline.
C)   The tax bill will increase.
D)   Net income will decrease.
E)   The times-interest-earned ratio will decrease.

Question 13

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 less risky and/or more likely to enjoy higher growth in the future.

Accepted Answer

A) True 
 B)False

Question 14

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

Question 15

What is the firm's equity multiplier?

Accepted Answer

A)   3.85
B)   4.04
C)   4.24
D)   4.45
E)   4.68

Question 16

Other things held constant, the more debt a firm uses, the lower its profit margin will be.

Accepted Answer

A) True 
 B)False

Question 17

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.

Accepted Answer

A) True 
 B)False

Question 18

The current and quick ratios both help us measure a firm's liquidity. The current ratio measures the relationship of the firm's current assets to its current liabilities, while the quick ratio measures the firm's ability to pay off short-term obligations without relying on the sale of inventories.

Accepted Answer

A) True 
 B)False

Question 19

Han Corp's sales last year were $425,000, and its year-end receivables were $52,500. The firm sells on terms that call for customers to pay 30 days after the purchase, but some 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.

Accepted Answer

A)   12.94
B)   13.62
C)   14.33
D)   15.09
E)   15.84

Question 20

What is the firm's quick ratio?

Accepted Answer

A)   0.51
B)   0.64
C)   0.76
D)   0.92
E)   1.10

Exam 4: Statement Analysis

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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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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Considered alone, which of the following would increase a company's current ratio?

Correct Answer
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Companies HD and LD are both profitable, and they have the same total assets (TA) , Sales (S) , return on assets (ROA) , and profit margin (PM) . However, Company HD has the higher debt ratio. Which of the following statements is CORRECT?

Correct Answer
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What is the firm's quick ratio?

Correct Answer
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The return on common equity (ROE) is generally regarded as being less significant, from a stockholder's viewpoint, than the return on total assets (ROA).

Correct Answer
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Companies E and P each reported the same earnings per share (EPS) , but Company E's stock trades at a higher price. Which of the following statements is CORRECT?

Correct Answer
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Other things held constant, the more debt a firm uses, the lower its profit margin will be.

Correct Answer
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Song Corp's stock price at the end of last year was $23.50 and its earnings per share for the year were $1.30. What was its P/E ratio?

Correct Answer
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Correct Answer
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The current and quick ratios both help us measure a firm's liquidity. The current ratio measures the relationship of the firm's current assets to its current liabilities, while the quick ratio measures the firm's ability to pay off short-term obligations without relying on the sale of inventories.

Correct Answer
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What is the firm's total assets turnover?

Correct Answer
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What is the firm's equity multiplier?

Correct Answer
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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 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 less risky and/or more likely to enjoy higher growth in the future.

Correct Answer
verified

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

Correct Answer
verified

Even though Firm A's current ratio exceeds that of Firm B, Firm B's quick ratio might exceed that of A. However, if A's quick ratio exceeds B's, then we can be certain that A's current ratio is also larger than B's.

Correct Answer
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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.

Correct Answer
verified

Exam 4: Statement Analysis

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

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

Considered alone, which of the following would increase a company's current ratio?

Correct AnswerverifiedShow Answer

Companies HD and LD are both profitable, and they have the same total assets (TA) , Sales (S) , return on assets (ROA) , and profit margin (PM) . However, Company HD has the higher debt ratio. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

What is the firm's quick ratio?

Correct AnswerverifiedShow Answer

The return on common equity (ROE) is generally regarded as being less significant, from a stockholder's viewpoint, than the return on total assets (ROA).

Correct AnswerverifiedShow Answer

Companies E and P each reported the same earnings per share (EPS) , but Company E's stock trades at a higher price. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Other things held constant, the more debt a firm uses, the lower its profit margin will be.

Correct AnswerverifiedShow Answer

Song Corp's stock price at the end of last year was $23.50 and its earnings per share for the year were $1.30. What was its P/E ratio?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The current and quick ratios both help us measure a firm's liquidity. The current ratio measures the relationship of the firm's current assets to its current liabilities, while the quick ratio measures the firm's ability to pay off short-term obligations without relying on the sale of inventories.

Correct AnswerverifiedShow Answer

What is the firm's total assets turnover?

Correct AnswerverifiedShow Answer

What is the firm's equity multiplier?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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 less risky and/or more likely to enjoy higher growth in the future.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Even though Firm A's current ratio exceeds that of Firm B, Firm B's quick ratio might exceed that of A. However, if A's quick ratio exceeds B's, then we can be certain that A's current ratio is also larger than B's.

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

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