Chapter 03: Analysis of Financial Statements
71. Refer to the data for Pettijohn Inc. What is the firm’s ROE?
a. 8.54%
b. 8.99%
c. 9.44%
d. 9.91%
e. 10.41%
72. Refer to the data for Pettijohn Inc. What is the firm’s BEP?
a. 5.37%
b. 5.65%
c. 5.95%
d. 6.24%
e. 6.55%
Chapter 03: Analysis of Financial Statements
73. Refer to the data for Pettijohn Inc. What is the firm’s profit margin?
a. 1.40%
b. 1.56%
c. 1.73%
d. 1.93%
e. 2.12%
74. Refer to the data for Pettijohn Inc. What is the firm’s dividends per share?
a. $2.62
b. $2.91
c. $3.20
d. $3.53
e. $3.88
75. Market value ratios provide management with an indication of how investors view the firm’s past performance and
especially its future prospects.
a. True
b. False
Chapter 03: Analysis of Financial Statements
76. Companies A and C each reported the same earnings per share (EPS), but Company A’s stock trades at a higher price.
Which of the following statements is CORRECT?
a. Company A trades at a higher P/E ratio.
b. Company A probably has fewer growth opportunities.
c. Company A is probably judged by investors to be riskier.
d. Company A must have a higher market-to-book ratio.
e. Company A must pay a lower dividend.
77. 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.
Chapter 03: Analysis of Financial Statements
78. The Cavendish Company recently issued new common stock and used the proceeds to pay off some of its short-term
notes payable. This action had no effect on the company’s total assets or operating income. Which of the following effects
would occur as a result of this action?
a. The company’s debt ratio increased.
b. The company’s current ratio increased.
c. The company’s times interest earned ratio decreased.
d. The company’s basic earning power ratio increased.
e. The company’s equity multiplier increased.
79. Which of the following statements is CORRECT?
a. If Firms X and Y have the same net income, number of shares outstanding, and price per share, then their market-
to-book ratios must also be the same.
b. If Firms X and Y have the same P/E ratios, then their market-to-book ratios must also be the same.
c. If Firms X and Y have the same net income, number of shares outstanding, and price per share, then their P/E
ratios must also be the same.
d. If Firms X and Y have the same earnings per share and market-to-book ratio, they must have the same price
earnings ratio.
e. If Firm X’s P/E ratio exceeds that of Firm Y, then Y is likely to be less risky and also to be expected to grow at a
faster rate.
Chapter 03: Analysis of Financial Statements
80. 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
81. Lindley Corp.’s stock price at the end of last year was $33.50, and its book value per share was $25.00. What was its
market/book ratio?
a. 1.34
b. 1.41
c. 1.48
d. 1.55
e. 1.63
Chapter 03: Analysis of Financial Statements
82. 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
83. 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?
a. $3,393,738
b. $3,572,356
c. $3,760,375
d. $3,958,289
e. $4,166,620
Chapter 03: Analysis of Financial Statements
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.
Balance Sheet (Millions of $)
Assets 2016
Cash and securities $ 1,554.0
Accounts receivable 9,660.0
Inventories 13,440.0
Total current assets $24,654.0
Net plant and equipment 17,346.0
Total assets $42,000.0
Liabilities and Equity
Accounts payable $ 7,980.0
Notes payable 5,880.0
Accruals 4,620.0
Total current liabilities $18,480.0
Long-term bonds 10,920.0
Total liabilities $29,400.0
Common stock 3,360.0
Retained earnings 9,240.0
Total common equity $12,600.0
Total liabilities and equity $42,000.0
Income Statement (Millions of $) 2016
Net sales $58,800.0
Operating costs except depr’n $55,274.0
Depreciation $ 1,029.0
Earnings bef int and taxes (EBIT) $ 2,497.0
Less interest 1,050.0
Chapter 03: Analysis of Financial Statements
Earnings before taxes (EBT) $ 1,447.0
Taxes $ 314.0
Net income $ 1,133.0
Other 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
84. Refer to the data for Pettijohn Inc. What is the firm’s EPS?
a. $5.84
b. $6.15
c. $6.47
d. $6.80
e. $7.14
85. Refer to the data for Pettijohn Inc. What is the firm’s P/E ratio?
a. 12.0
b. 12.6
c. 13.2
d. 13.9
e. 14.6
Chapter 03: Analysis of Financial Statements
86. Refer to the data for Pettijohn Inc. What is the firm’s book value per share?
a. $61.73
b. $64.98
c. $68.40
d. $72.00
e. $75.60
87. 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
Chapter 03: Analysis of Financial Statements
88. Determining whether a firm’s financial position is improving or deteriorating requires analyzing more than the ratios
for a given year. Trend analysis is one method of measuring changes in a firm’s performance over time.
a. True
b. False
89. Suppose firms follow similar financing policies, face similar risks, have equal access to capital, and operate in
competitive product and capital markets. Under these conditions, then firms that have high profit margins will tend to
have high asset turnover ratios, and firms with low profit margins will tend to have low turnover ratios.
a. True
b. False
90. If a firm finances with only debt and common equity, and if its equity multiplier is 3.0, then its debt ratio must be
0.667.
a. True
b. False
Chapter 03: Analysis of Financial Statements
91. 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.
92. 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.
Chapter 03: Analysis of Financial Statements
e. Other things held constant, an increase in the debt ratio will result in an increase in the profit margin on sales.
93. 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?
a. Its total assets turnover must equal the industry average.
b. Its total assets turnover must be above the industry average.
c. Its return on assets must equal the industry average.
d. Its TIE ratio must be below the industry average.
e. Its total assets turnover must be below the industry average.
Chapter 03: Analysis of Financial Statements
94. 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?
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.
95. Heidee Corp. and Leaudy Corp. have identical assets, sales, interest rates paid on their debt, tax rates, and EBIT.
However, Heidee uses more debt than Leaudy. Which of the following statements is CORRECT?
a. Heidee would have higher net income as shown on the income statement than Leaudy.
b. Without more information, we cannot tell if Heidee or Leaudy would have a higher or lower net income.
c. Heidee would have a lower equity multiplier for use in the DuPont equation than Leaudy.
d. Heidee would have to pay more in income taxes than Leaudy.
e. Heidee would have lower net income as shown on the income statement than Leaudy.
Chapter 03: Analysis of Financial Statements
96. Companies Heidee and Leaudy have the same sales, tax rate, interest rate on their debt, total assets, and basic earning
power. Both companies have positive net incomes. Company Heidee has a higher debt ratio and, therefore, a higher
interest expense. Which of the following statements is CORRECT?
a. Heidee has more net income than Leaudy.
b. Heidee pays less in taxes than Leaudy.
c. Heidee has a lower equity multiplier than Leaudy.
d. Heidee has a higher ROA than Leaudy.
e. Heidee has a higher times interest earned (TIE) ratio than Leaudy.
97. Companies Heidee and Leaudy have the same tax rate, sales, total assets, and basic earning power. Both companies
have positive net incomes. Company Heidee has a higher debt ratio and, therefore, a higher interest expense. Which of the
following statements is CORRECT?
a. Heidee has a lower times interest earned (TIE) ratio than Leaudy.
b. Heidee has a lower equity multiplier than Leaudy.
c. Heidee has more net income than Leaudy.
d. Heidee pays more in taxes than Leaudy.
e. Heidee has a lower ROE than Leaudy.
Chapter 03: Analysis of Financial Statements
98. Northwest Lumber had a profit margin of 5.25%, a total assets turnover of 1.5, and an equity multiplier of 1.8. What
was the firm’s ROE?
a. 12.79%
b. 13.47%
c. 14.18%
d. 14.88%
e. 15.63%
99. Last year Vaughn Corp. had sales of $315,000 and a net income of $17,832, and its year-end assets were $210,000.
The firm’s total-debt-to-total-assets ratio was 42.5%. Based on the DuPont equation, what was Vaughn’s ROE?
a. 14.77%
b. 15.51%
c. 16.28%
d. 17.10%
e. 17.95%
Chapter 03: Analysis of Financial Statements
100. 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?
a. 1.81%
b. 2.02%
c. 2.22%
d. 2.44%
e. 2.68%
101. Last year Mason Inc. had a total assets turnover of 1.33 and an equity multiplier of 1.75. Its sales were $195,000 and
its net income was $10,549. The CFO believes that the company could have operated more efficiently, lowered its costs,
Chapter 03: Analysis of Financial Statements
and increased its net income by $5,250 without changing its sales, assets, or capital structure. Had it cut costs and
increased its net income in this amount, by how much would the ROE have changed?
a. 5.66%
b. 5.95%
c. 6.27%
d. 6.58%
e. 6.91%
102. Last year Rosenberg Corp. had $195,000 of assets, $18,775 of net income, and a debt-to-total-assets ratio of 32%.
Now suppose the new CFO convinces the president to increase the debt ratio to 48%. Sales and total assets will not be
affected, but interest expenses would increase. However, the CFO believes that better cost controls would be sufficient to
offset the higher interest expense and thus keep net income unchanged. By how much would the change in the capital
structure improve the ROE?
a. 4.36%
b. 4.57%
c. 4.80%
d. 5.04%
e. 5.30%
Chapter 03: Analysis of Financial Statements
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.
Balance Sheet (Millions of $)
Assets 2016
Cash and securities $ 1,554.0
Accounts receivable 9,660.0
Inventories 13,440.0
Total current assets $24,654.0
Net plant and equipment 17,346.0
Total assets $42,000.0
Liabilities and Equity
Accounts payable $ 7,980.0
Notes payable 5,880.0
Accruals 4,620.0
Total current liabilities $18,480.0
Long-term bonds 10,920.0
Total liabilities $29,400.0
Common stock 3,360.0
Retained earnings 9,240.0
Total common equity $12,600.0
Total liabilities and equity $42,000.0
Income Statement (Millions of $) 2016
Net sales $58,800.0
Operating costs except depr’n $55,274.0
Depreciation $ 1,029.0
Earnings bef int and taxes (EBIT) $ 2,497.0
Less interest 1,050.0
Earnings before taxes (EBT) $ 1,447.0
Taxes $ 314.0
Net income $ 1,133.0
Chapter 03: Analysis of Financial Statements
Other 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
103. Refer to the data for Pettijohn Inc. What is the firm’s equity multiplier?
a. 3.33
b. 3.50
c. 3.68
d. 3.86
e. 4.05