Question 1

By how much would the reduction in assets improve the ROE?

Accepted Answer

A)   2.85%
B)   3.00%
C)   3.16%
D)   3.31%
E)   3.48%F) A) and D)
G) B) and E)

Question 2

You observe that a firm's ROE is above the industry average, but its profit margin and debt ratio are both below the industry average. Which of the following statements is CORRECT?

Accepted Answer

A)   Its total assets turnover must be above the industry average.
B)   Its return on assets must equal the industry average.
C)   Its TIE ratio must be below the industry average.
D)   Its total assets turnover must be below the industry average.
E)   Its total assets turnover must equal the industry average.F) A) and D)
G) B) and D)

Question 3

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

Accepted Answer

A)   The inventory and total assets turnover ratios both decline.
B)   The debt ratio increases.
C)   The profit margin declines.
D)   The times-interest-earned ratio declines.
E)   The current and quick ratios both increase.F) B) and C)
G) C) and D)

Question 4

Market value ratios provide management with an indication of how investors view the firm's past performance and especially its future prospects.

Accepted Answer

A) True 
 B)False

Question 5

Jordan Inc has the following balance sheet and income statement data: The new CFO thinks that inventories are excessive and could be lowered sufficiently to cause the current ratio to equal the industry average, 2.75, without affecting either sales or net income. Assuming that inventories are sold off and not replaced to get the current ratio to the target level, and that the funds generated are used to buy back common stock at book value, by how much would the ROE change?

Accepted Answer

A)   11.26%
B)   11.85%
C)   12.45%
D)   13.07%
E)   13.72%F) All of the above
G) B) and E)

Question 6

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

Accepted Answer

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

Question 7

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 8

Zero Corp's total common equity at the end of last year was $405,000 and its net income was $70,000. What was its ROE?

Accepted Answer

A)   14.82%
B)   15.60%
C)   16.42%
D)   17.28%
E)   18.15%F) A) and D)
G) A) and C)

Question 9

The inventory turnover and current ratio are related. The combination of a high current ratio and a low inventory turnover ratio, relative to industry norms, suggests that the firm has an above-average inventory level and/or that part of the inventory is obsolete or damaged.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following statements is CORRECT?

Accepted Answer

A)   If a security analyst saw that a firm's days' sales outstanding (DSO)  was higher than the industry average, and was increasing and trending still higher, this would be interpreted as a sign of strength.
B)   A high average DSO indicates that none of its customers are paying on time. In addition, it makes no sense to evaluate the firm's DSO with the firm's credit terms.
C)   There is no relationship between the days' sales outstanding (DSO)  and the average collection period (ACP) . These ratios measure entirely different things.
D)   A reduction in accounts receivable would have no effect on the current ratio, but it would lead to an increase in the quick ratio.
E)   If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days' sales outstanding will decline.F) B) and D)
G) A) and E)

Question 11

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

Question 12

What is the firm's dividends per share?

Accepted Answer

A)   $1.14
B)   $1.27
C)   $1.39
D)   $1.53
E)   $1.68F) C) and D)
G) B) and E)

Question 13

What is the firm's debt/assets ratio?

Accepted Answer

A)   48.55%
B)   53.95%
C)   59.94%
D)   66.60%
E)   74.00%F) A) and E)
G) C) and D)

Question 14

Suppose Firms A and B have the same amount of assets, pay the same interest rate on their debt, have the same basic earning power (BEP), and have the same tax rate. However, Firm A has a higher debt ratio. If BEP is greater than the interest rate on debt, Firm A will have a higher ROE as a result of its higher debt ratio.

Accepted Answer

A) True 
 B)False

Question 15

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 16

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

Accepted Answer

A)   Increase accounts receivable while holding sales constant.
B)   Increase EBIT while holding sales and assets constant.
C)   Increase accounts payable while holding sales constant.
D)   Increase notes payable while holding sales constant.
E)   Increase inventories while holding sales constant.F) C) and D)
G) B) and D)

Question 17

What is the firm's book value per share?

Accepted Answer

A)   $22.29
B)   $23.47
C)   $24.70
D)   $26.00
E)   $27.30F) A) and D)
G) A) and C)

Question 18

Beranek Corp has $720,000 of assets, and it uses no debt--it is financed only with common equity. The new CFO wants to employ enough debt to raise the debt/assets ratio to 40%, using the proceeds from borrowing to buy back common stock at its book value. How much must the firm borrow to achieve the target debt ratio?

Accepted Answer

A)   $273,600
B)   $288,000
C)   $302,400
D)   $317,520
E)   $333,396F) A) and B)
G) B) and D)

Question 19

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.F) B) and C)
G) B) and D)

Question 20

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.

Accepted Answer

A) True 
 B)False

Exam 4: Statement Analysis

Market value ratios provide management with an indication of how investors view the firm's past performance and especially its future prospects.

Correct Answer
verified

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.

Correct Answer
verified

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

Correct Answer
verified

Zero Corp's total common equity at the end of last year was $405,000 and its net income was $70,000. What was its ROE?

Correct Answer
verified

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

Correct Answer
verified

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

What is the firm's debt/assets ratio?

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

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
verified

What is the firm's dividends per share?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Correct Answer
verified

By how much would the reduction in assets improve the ROE?

Correct Answer
verified

The inventory turnover and current ratio are related. The combination of a high current ratio and a low inventory turnover ratio, relative to industry norms, suggests that the firm has an above-average inventory level and/or that part of the inventory is obsolete or damaged.

Correct Answer
verified

What is the firm's book value per share?

Correct Answer
verified

You observe that a firm's ROE is above the industry average, but its profit margin and debt ratio are both below the industry average. Which of the following statements is CORRECT?

Correct Answer
verified

Correct Answer
verified

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

Correct Answer
verified

Exam 4: Statement Analysis

Market value ratios provide management with an indication of how investors view the firm's past performance and especially its future prospects.

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Zero Corp's total common equity at the end of last year was $405,000 and its net income was $70,000. What was its ROE?

Correct AnswerverifiedShow Answer

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

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

What is the firm's debt/assets ratio?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

What is the firm's dividends per share?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

By how much would the reduction in assets improve the ROE?

Correct AnswerverifiedShow Answer

The inventory turnover and current ratio are related. The combination of a high current ratio and a low inventory turnover ratio, relative to industry norms, suggests that the firm has an above-average inventory level and/or that part of the inventory is obsolete or damaged.

Correct AnswerverifiedShow Answer

What is the firm's book value per share?

Correct AnswerverifiedShow Answer

You observe that a firm's ROE is above the industry average, but its profit margin and debt ratio are both below the industry average. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified