8) Luther Corporation
Consolidated Balance Sheet
December 31, 2006 and 2005 (in $ millions)
Assets 2006 2005
Liabilities and
Stockholders’ Equity 2006 2005
Current Assets Current Liabilities
Cash 52.4 58.5 Accounts payable 88.9 73.5
Accounts receivable 54.6 39.6
Notes payable / short-
term debt 9.3 9.6
Inventories 46.5 42.9
Current maturities of
long-term debt 39.9 36.9
Other current assets 5.4 3.0 Other current liabilities 6.0 12.0
Total current
assets 158.9 144.0
Total current
liabilities 144.1 132.0
Long-Term Assets Long-Term Liabilities
Land 65.8 62.1 Long-term debt 224.8 168.9
Buildings 107.6 91.5
Capital lease
obligations
Equipment 118.3 99.6
Less accumulated
depreciation (56.4) (52.5) Deferred taxes 22.8 22.2
Net property, plant, and
equipment 235.3 200.7
Other long-term
liabilities — —
Goodwill 60.0 —
Total long-term
liabilities 247.6 191.1
Other long-term assets 63.0 42.0 Total liabilities 391.7 323.1
Total long-term assets 358.3 242.7 Stockholders’ Equity 125.5 63.6
Total Assets 517.2 386.7
Total liabilities and
Stockholders’ Equity 517.2 386.7
Refer to the balance sheet above. The change in Luther’s quick ratio from 2005 to 2006 is
closest to ________.
A) a decrease of 0.01
B) an increase of 0.01
C) a decrease of 0.02
D) an increase of 0.02
AACSB Objective: Analytic Skills
Author: JN
Question Status: Revised
21
9) A public company has a book value of $128 million. They have 20 million shares
outstanding, with a market price of $4 per share. Which of the following statements is true
regarding this company?
A) Investors may consider this irm to be a growth company.
B) Investors believe the company’s assets are not likely to be proitable since its market
value is worth less than its book value.
C) The irm’s market value is more than its book value.
D) The value of the irm’s assets is greater than their liquidation value.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
10) GenCorp. has a total debt of $140 million and stockholders’ equity of $50 million. It also
has 26 million shares outstanding, with a market price of $4.00 per share. What is
GenCorp’s market debt-equity ratio?
A) 0.67
B) 1.08
C) 2.80
D) 1.35
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
11) A company has a share price of $22.15 and 118 million shares outstanding. Its market-
to-book ratio is 4.2, its book debt-equity ratio is 3.2, and it has cash of $800 million. How
much would it cost to take over this business assuming you pay its enterprise value?
A) $1.9 billion
B) $3.044 billion
C) $4.566 billion
D) $3.8 billion
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
22
12) Convex Industries has inventories of $218 million, current assets of $1.4 billion, and
current liabilities of $504 million. What is its quick ratio?
A) 1.17
B) 0.94
C) 2.81
D) 2.35
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
13) Which ratio would you use to measure the inancial health of a irm by assessing that
irm’s leverage?
A) debt-equity or equity multiplier ratio
B) market-to-book ratio
C) market debt-equity ratio
D) current or quick ratio
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
14) Company A has current assets of $42 billion and current liabilities of $41 billion.
Company B has current assets of $2.7 billion and current liabilities of $1.8 billion. Which of
the following statements is correct, based on this information?
A) Company A is less likely than Company B to have suicient working capital to meet its
short-term needs.
B) Company A has greater leverage than Company B.
C) Company A has less leverage than Company B.
D) Company A and Company B have roughly equivalent enterprise values.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
23
Use the table for the question(s) below.
Balance Sheet
Assets 2007 2008 Liabilities 2007 2008
Current Assets Current Liabilities
Cash 50 46 Accounts payable 42 48
Accounts receivable 22 12 Notes payable/short-term debt 7 5
Inventories 17 38
Total current assets 89 96 Total current liabilities 49 53
Long-Term Assets Long-Term Liabilities
Net property, plant,
and equipment 121 116 Long-term debt 128 136
Total long-term assets 121 116 Total long-term liabilities 128 136
Total Liabilities 177 189
Stockholders’ Equity 33 23
Total Assets 210 212 Total Liabilities and 210 212
Stockholders’ Equity
15) If the above balance sheet is for a retail company, what indications about this company
would best be drawn from the changes in the balance sheet between 2007 and 2008?
A) The company is having diiculties selling its product.
B) The company has reduced its debt.
C) The company has added a major new asset in terms of plant and equipment.
D) The company has experienced a signiicant rise in its market value.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
16) If the above balance sheet is for a retail company, what indications about this company
would best be drawn from the changes in stockholders’ equity between 2007 and 2008?
A) The company is very proitable because it is obviously collecting receivables faster.
B) The company is selling its property, plant and equipment, which may result in a long-
term deiciency in production capacity.
C) The company’s net income in 2008 was negative.
D) No conclusions can be drawn regarding stockholders’ equity without additional
information.
AACSB Objective: Analytic Skills
Author: JP
Question Status: Revised
24
17) If the above balance sheet is for a retail company, what indications about this company
would best be drawn from the changes in quick ratio between 2007 and 2008?
A) The company has eliminated the risk that it will experience a cash shortfall in the near
future.
B) The company has reduced the risk that it will experience a cash shortfall in the near
future.
C) The risk that the company will experience a cash shortfall in the near future is
unchanged.
D) The company has increased the risk that it will experience a cash shortfall in the near
future.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
18) If the above balance sheet is for a retail company, how has the company’s leverage
changed between 2007 and 2008?
A) The company has experienced a very signiicant decrease in its leverage.
B) The company has experienced a signiicant decrease in its leverage.
C) The company has experienced no signiicant change in its leverage.
D) The company has experienced a signiicant increase in its leverage.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
25
Use the table for the question(s) below.
Luther Corporation
Consolidated Income Statement
Year ended December 31 (in $ millions)
2006 2005
Total sales 610.1 578.3
Cost of sales (500.2) (481.9)
Gross proit 109.9 96.4
Selling, general, and
administrative expenses (40.5) (39.0)
Research and development (24.6) (22.8)
Depreciation and amortization (3.6) (3.3)
Operating income 41.2 31.3
Other income — —
Earnings before interest and taxes
(EBIT) 41.2 31.3
Interest income (expense) (25.1) (15.8)
Pretax income 16.1 15.5
Taxes (5.5) (5.3)
Net income 10.6 10.2
Price per share $16 $15
Shares outstanding (millions) 10.2 8.0
Stock options outstanding (millions) 0.3 0.2
Stockholders’ Equity 126.6 63.6
Total Liabilities and Stockholders’
Equity 533.1 386.7
19) Refer to the partial balance sheet above. If on December 31, 2005 Luther has 8 million
shares outstanding trading at $15 per share, then what is Luther’s market-to-book ratio?
AACSB Objective: Analytic Skills
Author: JN
Question Status: Revised
26
Use the table for the question(s) below.
Luther Corporation
Consolidated Balance Sheet
December 31, 2006 and 2005 (in $ millions)
Assets 2006 2005
Liabilities and
Stockholders’ Equity 2006 2005
Current Assets Current Liabilities
Cash 63.6 58.5 Accounts payable 87.6 73.5
Accounts receivable 55.5 39.6
Notes payable /
short-term debt 10.5 9.6
Inventories 45.9 42.9
Current maturities of
long-term debt 39.9 36.9
Other current assets 6.0 3.0 Other current liabilities 6.0 12.0
Total current assets 171.0 144.0
Total current
liabilities 144.0 132.0
Long-Term Assets Long-Term Liabilities
Land 66.6 62.1 Long-term debt 239.7 168.9
Buildings 109.5 91.5
Capital lease
obligations — —
Equipment 119.1 99.6 Total Debt 239.7 168.9
Less accumulated
depreciation (56.1) (52.5) Deferred taxes 22.8 22.2
Net property, plant, and
equipment 239.1 200.7
Other long-term
liabilities — —
Goodwill 60.0 —
Total long-term
liabilities 262.5 191.1
Other long-term assets 63.0 42.0 Total liabilities 406.5 323.1
Total long-term
assets 362.1 242.7 Stockholders’ Equity 126.6 63.6
Total Assets 533.1 386.7
Total liabilities and
Stockholders’ Equity 533.1 386.7
20) Refer to the balance sheet above. If on December 31, 2005 Luther has 8 million shares
outstanding trading at $15 per share, then what is Luther’s enterprise value?
AACSB Objective: Analytic Skills
Author: JN
Question Status: Revised
27
21) How does a irm select the date for preparation of its balance sheet?
AACSB Objective: Analytic Skills
Author: SS
Question Status: Previous Edition
22) What will be the efect on the balance sheet if a irm buys a new processing plant
through a new loan?
AACSB Objective: Relective Thinking Skills
Author: SS
Question Status: Revised
2.4 The Income Statement
1) The income statement reports the irm’s revenues and expenses, and it computes the
irm’s bottom line of net income, or earnings.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
2) What is a irm’s net income?
A) the diference between the sales and other income generated by a irm, and all costs,
taxes, and expenses incurred by the irm in a given period
B) the last or “bottom” line of the income statement
C) a measure of the irm’s proitability over a given period
D) all of the above
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
28
3) What is a irm’s gross proit?
A) the diference between the sales and other income generated by the irm, and all costs,
taxes, and expenses incurred by a irm in a given period
B) the diference between sales revenues and the costs
C) the diference between sales revenues and cash expenditures associated with those
sales
D) all of the above
AACSB Objective: Analytic Skills
Author: JP
Question Status: Revised
4) Which of the following is NOT considered to be an operating expense on the income
statement?
A) administrative expenses and overhead
B) corporate taxes
C) salaries
D) depreciation and amortization
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
29
5) Income Statement for Xenon Manufacturing:
2008 2009
Total sales 202 212
Cost of sales -148 -172
Gross Proit 54 40
Selling, general,
and administrative expenses -22 -20
Research and development -8 -7
Depreciation and amortization -4 -3
Other income 4 6
Earnings before interest
and taxes (EBIT) 24 16
Interest income (expense) -7 -4
Pretax income 14 12
Taxes -4 -3
Net Income 10 9
Consider the above Income Statement for Xenon Manufacturing. All values are in millions
of dollars. If Xenon Manufacturing has 20 million shares outstanding, what is its EPS in
2008?
A) $0.50
B) $0.25
C) $0.40
D) $0.60
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
30