CHAPTER 7—ANALYSIS OF FINANCIAL STATEMENTS
TYPE: Multiple Choice: Conceptual
46. 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.
Company Heidee has a lower operating income (EBIT) than Company LD.
b.
Company Heidee has a lower total assets turnover than Company Leaudy.
c.
Company Heidee has a lower equity multiplier than Company Leaudy.
d.
Company Heidee has a higher fixed assets turnover than Company Leaudy.
e.
Company Heidee has a higher ROE than Company Leaudy.
Difficulty: Moderate
INTE.GENE.16.52 – LO: 7-8
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
DuPont analysis
TYPE: Multiple Choice: Conceptual
47. 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.
Difficulty: Moderate
INTE.GENE.16.49 – LO: 7-5
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
Financial statement analysis
CHAPTER 7—ANALYSIS OF FINANCIAL STATEMENTS
48. Which of the following statements is CORRECT?
a.
b.
c.
d.
e.
a
INTE.GENE.16.49 – LO: 7-5
United States – BUSPROG: Analytic
United States – AK – DISC: Financial statements, anal – DISC: Financial statements, analysis,
forecasting, and cash flows
United States – OH – Default City – TBA
Financial statement analysis
TYPE: Multiple Choice: Conceptual
49. 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 the higher net income as shown on the income statement.
b.
Without more information, we cannot tell if Heidee or Leaudy would have a higher or lower net income.
c.
Heidee would have the lower equity multiplier for use in the DuPont equation.
d.
Heidee would have to pay more in income taxes.
e.
Heidee would have the lower net income as shown on the income statement.
e
TYPE: Multiple Choice: Conceptual
CHAPTER 7—ANALYSIS OF FINANCIAL STATEMENTS
50. Other things held constant, which of the following alternatives would increase a company’s cash flow for the current
year?
a.
Increase the number of years over which fixed assets are depreciated for tax purposes.
b.
Pay down the accounts payables.
c.
Reduce the days’ sales outstanding (DSO) without affecting sales or operating costs.
d.
Pay workers more frequently to decrease the accrued wages balance.
e.
Reduce the inventory turnover ratio without affecting sales or operating costs.
Difficulty: Moderate
INTE.GENE.16.47 – LO: 7-3
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
Cash flows
TYPE: Multiple Choice: Conceptual
51. 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.
Company Heidee has more net income.
b.
Company Heidee pays less in taxes.
c.
Company Heidee has a lower equity multiplier.
d.
Company Heidee has a higher ROA.
Difficulty: Moderate
INTE.GENE.16.52 – LO: 7-8
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
Financial statement analysis
TYPE: Multiple Choice: Conceptual
CHAPTER 7—ANALYSIS OF FINANCIAL STATEMENTS
e.
Company Heidee has a higher times interest earned (TIE) ratio.
Difficulty: Moderate
INTE.GENE.16.52 – LO: 7-8
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
Leverage, taxes, and ratios
TYPE: Multiple Choice: Conceptual
52. 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.
Company Heidee has a lower times interest earned (TIE) ratio.
b.
Company Heidee has a lower equity multiplier.
c.
Company Heidee has more net income.
d.
Company Heidee pays more in taxes.
e.
Company Heidee has a lower ROE.
Difficulty: Moderate
INTE.GENE.16.52 – LO: 7-8
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
Leverage, taxes, and ratios
TYPE: Multiple Choice: Conceptual
53. Lincoln Industries’ current ratio is 0.5. Considered alone, which of the following actions would increase the company’s
current ratio?
a.
Use cash to reduce long-term bonds outstanding.
b.
Borrow using short-term notes payable and use the cash to increase inventories.
c.
Use cash to reduce accruals.
d.
Use cash to reduce accounts payable.
e.
Use cash to reduce short-term notes payable.
CHAPTER 7—ANALYSIS OF FINANCIAL STATEMENTS
54. Lofland’s has $20 million in current assets and $10 million in current liabilities, while Smaland‘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 each plans 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?
a.
b.
c.
d.
e.
1.0
Difficulty: Challenging
INTE.GENE.16.46 – LO: 7-2
United States – BUSPROG: Analytic
United States – AK – DISC: Financial statements, anal – DISC: Financial statements, analysis,
United States – OH – Default City – TBA
Current ratio
TYPE: Multiple Choice: Conceptual
CHAPTER 7—ANALYSIS OF FINANCIAL STATEMENTS
55. 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.
b.
c.
d.
e.
a
Difficulty: Challenging
INTE.GENE.16.49 – LO: 7-5
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
Effects of financial leverage
TYPE: Multiple Choice: Conceptual
56. Arshadi Corp.’s sales last year were $52,000, and its total assets were $22,000. What was its total assets turnover ratio
(TATO)?
a.
2.03
b.
2.13
c.
2.25
d.
2.36
e.
2.48
Difficulty: Challenging
INTE.GENE.16.46 – LO: 7-2
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
Current ratio
TYPE: Multiple Choice: Conceptual
CHAPTER 7—ANALYSIS OF FINANCIAL STATEMENTS
57. Hutchinson Corporation has zero debt⎯it is financed only with common equity. Its total assets are $410,000. The new
CFO wants to employ enough debt to bring the debt/assets ratio to 40%, using the proceeds from the borrowing to buy
back common stock at its book value. How much must the firm borrow to achieve the target debt ratio?
a.
$155,800
b.
$164,000
c.
$172,200
d.
$180,810
e.
$189,851
58. Orono Corp.’s sales last year were $435,000, its operating costs were $362,500, and its interest charges were $12,500.
What was the firm’s times interest earned (TIE) ratio?
a.
4.72
b.
4.97
c.
5.23
d.
5.51
e.
5.80
e
CHAPTER 7—ANALYSIS OF FINANCIAL STATEMENTS
59. 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%
c
60. 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%
CHAPTER 7—ANALYSIS OF FINANCIAL STATEMENTS
61. 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%
c.
20.49%
d.
21.52%
e.
22.59%
c
62. 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%
a
CHAPTER 7—ANALYSIS OF FINANCIAL STATEMENTS
63. 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
e
64. 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
CHAPTER 7—ANALYSIS OF FINANCIAL STATEMENTS
65. 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
a
66. 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%
c
CHAPTER 7—ANALYSIS OF FINANCIAL STATEMENTS
67. Bostian, Inc. has total assets of $625,000. Its total debt outstanding is $185,000. The Board of Directors has directed
the CFO to move towards a debt–to-assets ratio of 55%. How much debt must the company add or subtract to achieve the
target debt ratio?
a.
$158,750
b.
$166,688
c.
$175,022
d.
$183,773
e.
$192,962
a
68. 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
CHAPTER 7—ANALYSIS OF FINANCIAL STATEMENTS
d.
$2.50
e.
$2.63
69. Aziz Industries has sales of $100,000 and accounts receivable of $11,500, and it gives its customers 30 days to pay.
The industry average DSO is 27 days, based on a 365-day year. If the company changes its credit and collection policy
sufficiently to cause its DSO to fall to the industry average, and if it earns 8.0% on any cash freed-up by this change, how
would that affect its net income, assuming other things are held constant?
a.
$267.34
b.
$281.41
c.
$296.22
d.
$311.81
e.
$328.22
e
CHAPTER 7—ANALYSIS OF FINANCIAL STATEMENTS
70. Heaton Corp. sells on terms that allow customers 45 days to pay for merchandise. Its sales last year were $425,000,
and its year-end receivables were $60,000. If its DSO is less than the 45-day credit period, then customers are paying on
time. Otherwise, they are paying late. By how much are customers paying early or late? Base your answer on this
equation: DSO − Credit period = days early or late, and use a 365-day year when calculating the DSO. A positive answer
indicates late payments, while a negative answer indicates early payments.
a.
6.20
b.
6.53
c.
6.86
d.
7.20
e.
7.56
71. Harper Corp.’s sales last year were $395,000, and its year-end receivables were $42,500. Harper sells on terms that
call for customers to pay 30 days after the purchase, but many 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.
a.
7.95
b.
8.37
c.
8.81
d.
9.27
e.
9.74
CHAPTER 7—ANALYSIS OF FINANCIAL STATEMENTS
72. Bonner Corp.’s sales last year were $415,000, and its year-end total assets were $355,000. The average firm in the
industry has a total assets turnover ratio (TATO) of 2.4. Bonner’s new CFO believes the firm has excess assets that can be
sold so as to bring the TATO down to the industry average without affecting sales. By how much must the assets be
reduced to bring the TATO to the industry average, holding sales constant?
a.
$164,330
b.
$172,979
c.
$182,083
d.
$191,188
e.
$200,747
c
Difficulty: Moderate
INTE.GENE.16.47 – LO: 7-3
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
Total assets turnover ratio (TATO)
TYPE: Multiple Choice: Problem
73. A new firm is developing its business plan. It will require $565,000 of assets, and it projects $452,800 of sales and
$354,300 of operating costs for the first year. Management is quite sure of these numbers because of contracts with its
customers and suppliers. It can borrow at a rate of 7.5%, but the bank requires it to have a TIE of at least 4.0, and if the
Difficulty: Moderate
INTE.GENE.16.47 – LO: 7-3
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
DSO: days of free credit
TYPE: Multiple Choice: Problem
CHAPTER 7—ANALYSIS OF FINANCIAL STATEMENTS
TIE falls below this level the bank will call in the loan and the firm will go bankrupt. What is the maximum debt-to-assets
ratio the firm can use? (Hint: Find the maximum dollars of interest, then the debt that produces that interest, and then the
related debt ratio.)
a.
47.33%
b.
49.82%
c.
52.45%
d.
55.21%
e.
58.11%
e
74. Ziebart Corp.’s EBITDA last year was $390,000 ( = EBIT + depreciation + amortization), its interest charges were
$9,500, it had to repay $26,000 of long-term debt, and it had to make a payment of $17,400 under a long-term lease. The
firm had no amortization charges. What was the EBITDA coverage ratio?
a.
7.32
b.
7.70
c.
8.09
d.
8.49
e.
8.92
CHAPTER 7—ANALYSIS OF FINANCIAL STATEMENTS
75. 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%
a
76. 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%