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Ch 03 Analysis of Financial Statements
a.
The division's DSO (days' sales outstanding) is 40, whereas the average for its competitors is 30.
b.
The division's basic earning power ratio is above the average of other firms in its industry.
c.
The division's total assets turnover ratio is below the average for other firms in its industry.
d.
The division's debt ratio is above the average for other firms in the industry.
e.
The division's inventory turnover is 6, whereas the average for its competitors is 8.
56. 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.
Ch 03 Analysis of Financial Statements
57. Cordelion Communications 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 Cordelion pays, EBIT, or the tax rate. Which of
the following is likely to occur if the company goes ahead with the stock issue?
a.
The times interest earned ratio will decrease.
b.
The ROA will decline.
c.
Taxable income will decrease.
d.
The tax bill will increase.
e.
Net income will decrease.
58. Which of the following statements is CORRECT?
a.
An increase in a firm's debt ratio, with no changes in its sales or operating costs, could be expected to lower
the profit margin.
b.
The ratio of long-term debt to total capital is more likely to experience seasonal fluctuations than is either the
Ch 03 Analysis of Financial Statements
DSO or the inventory turnover ratio.
c.
If two firms have the same ROA, the firm with the most debt can be expected to have the lower ROE.
d.
An increase in the DSO, other things held constant, could be expected to increase the total assets turnover
ratio.
e.
An increase in the DSO, other things held constant, could be expected to increase the ROE.
59. 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.
Ch 03 Analysis of Financial Statements
60. Rappaport Corp.'s sales last year were $320,000, and its net income after taxes was $23,000. What was its profit
margin on sales?
a.
6.49%
b.
6.83%
c.
7.19%
d.
7.55%
e.
7.92%
Ch 03 Analysis of Financial Statements
61. Branch Corp.'s total assets at the end of last year were $315,000 and its net income after taxes was $22,750. What was
its return on total assets?
a.
7.22%
b.
7.58%
c.
7.96%
d.
8.36%
e.
8.78%
62. Chambliss Corp.'s total assets at the end of last year were $305,000 and its EBIT was 62,500. What was its basic
earning power (BEP)?
a.
18.49%
b.
19.47%
Ch 03 Analysis of Financial Statements
c.
20.49%
d.
21.52%
e.
22.59%
63. Nikko Corp.'s total common equity at the end of last year was $305,000 and its net income after taxes was $60,000.
What was its ROE?
a.
16.87%
b.
17.75%
c.
18.69%
d.
19.67%
e.
20.66%
Ch 03 Analysis of Financial Statements
64. An investor is considering starting a new business. The company would require $475,000 of assets, and it would be
financed entirely with common stock. The investor will go forward only if she thinks the firm can provide a 13.5% return
on the invested capital, which means that the firm must have an ROE of 13.5%. How much net income must be expected
to warrant starting the business?
a.
$52,230
b.
$54,979
c.
$57,873
d.
$60,919
e.
$64,125
Ch 03 Analysis of Financial Statements
65. LeCompte Corp. has $312,900 of assets, and it uses only common equity capital (zero debt). Its sales for the last year
were $620,000, and its net income after taxes was $24,655. Stockholders recently voted in a new management team that
has promised to lower costs and get the return on equity up to 15%. What profit margin would LeCompte need in order to
achieve the 15% ROE, holding everything else constant?
a.
7.57%
b.
7.95%
c.
8.35%
d.
8.76%
e.
9.20%
66. Last year Urbana Corp. had $197,500 of assets, $307,500 of sales, $19,575 of net income, and a debt-to-total-assets
ratio of 37.5%. The new CFO believes a new computer program will enable it to reduce costs and thus raise net income to
$33,000. Assets, sales, and the debt ratio would not be affected. By how much would the cost reduction improve the
ROE?
a.
9.32%
b.
9.82%
c.
10.33%
Ch 03 Analysis of Financial Statements
d.
10.88%
e.
11.42%
67. Last year Altman Corp. had $205,000 of assets, $303,500 of sales, $18,250 of net income, and a debt-to-total-assets
ratio of 41%. The new CFO believes the firm has excessive fixed assets and inventory that could be sold, enabling it to
reduce its total assets to $152,500. Sales, costs, and net income would not be affected, and the firm would maintain the
41% debt ratio. By how much would the reduction in assets improve the ROE?
a.
4.69%
b.
4.93%
c.
5.19%
d.
5.45%
e.
5.73%
Ch 03 Analysis of Financial Statements
68. Last year Swensen Corp. had sales of $303,225, operating costs of $267,500, and year-end assets of $195,000. The
debt-to-total-assets ratio was 27%, the interest rate on the debt was 8.2%, and the firm's tax rate was 37%. The new CFO
wants to see how the ROE would have been affected if the firm had used a 45% debt ratio. Assume that sales and total
assets would not be affected, and that the interest rate and tax rate would both remain constant. By how much would the
ROE change in response to the change in the capital structure?
a.
2.08%
b.
2.32%
c.
2.57%
d.
2.86%
e.
3.14%
Ch 03 Analysis of Financial Statements
69. For the coming year, Crane Inc. is considering two financial plans. Management expects sales to be $301,770,
operating costs to be $266,545, assets to be $200,000, and its tax rate to be 35%. Under Plan A it would use 25% debt and
75% common equity. The interest rate on the debt would be 8.8%, but the TIE ratio would have to be kept at 4.00 or
more. Under Plan B the maximum debt that met the TIE constraint would be employed. Assuming that sales, operating
costs, assets, the interest rate, and the tax rate would all remain constant, by how much would the ROE change in response
to the change in the capital structure?
a.
3.83%
b.
4.02%
c.
4.22%
d.
4.43%
e.
4.65%
Ch 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
Ch 03 Analysis of Financial Statements
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 debt
$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
$54,978.0
Depreciation
$ 1,029.0
Earnings bef int and taxes (EBIT)
$ 2,793.0
Less interest
1,050.0
Earnings before taxes (EBT)
$ 1,743.0
Taxes
$ 610.1
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
35%
Year-end stock price
$77.69
70. 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%
Ch 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.
6.00%
b.
6.32%
c.
6.65%
Ch 03 Analysis of Financial Statements
d.
6.98%
e.
7.33%
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%
Ch 03 Analysis of Financial Statements
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. Refer to the data for Pettijohn Inc. What is the firm's cash flow per share?
a.
$10.06
b.
$10.59
Ch 03 Analysis of Financial Statements
c.
$11.15
d.
$11.74
e.
$12.35
76. 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
Ch 03 Analysis of Financial Statements
77. 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.
78. 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.
Ch 03 Analysis of Financial Statements
79. 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.
Ch 03 Analysis of Financial Statements
80. 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.
81. 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
