Chapter 07: Analysis of Financial Statements
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RATIONALE:
EPS = Net income/common shares outstanding = $6.47
POINTS:
1
DIFFICULTY:
Difficulty: Moderate
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
False
PREFACE NAME:
Pettijohn Inc.
LEARNING OBJECTIVES:
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
KEYWORDS:
OTHER:
TYPE: Multiple Choice
DATE CREATED:
DATE MODIFIED:
1/6/2018 1:33 PM
86. 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
ANSWER:
a
RATIONALE:
POINTS:
1
DIFFICULTY:
Difficulty: Moderate
QUESTION TYPE:
HAS VARIABLES:
False
PREFACE NAME:
Pettijohn Inc.
LEARNING OBJECTIVES:
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
LOCAL STANDARDS:
TOPICS:
Calculating ratios given financial stmts
KEYWORDS:
OTHER:
DATE CREATED:
1/3/2018 11:35 AM
DATE MODIFIED:
87. Refer to the data for Pettijohn Inc. What is the firm’s book value per share?
a.
$61.73
b.
$64.98
Chapter 07: Analysis of Financial Statements
RATIONALE:
POINTS:
1
DIFFICULTY:
Difficulty: Moderate
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
False
PREFACE NAME:
Pettijohn Inc.
LEARNING OBJECTIVES:
IFMG.DAVE.19.07.06 – LO: 7-6
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
forecasting, and cash flows
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
Calculating ratios given financial stmts
KEYWORDS:
OTHER:
TYPE: Multiple Choice
DATE MODIFIED:
1/6/2018 1:33 PM
c.
$68.40
d.
$72.00
e.
$75.60
ANSWER:
d
RATIONALE:
POINTS:
1
DIFFICULTY:
Difficulty: Moderate
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
False
PREFACE NAME:
Pettijohn Inc.
LEARNING OBJECTIVES:
IFMG.DAVE.19.07.06 – LO: 7-6
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
forecasting, and cash flows
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
Calculating ratios given financial stmts
KEYWORDS:
OTHER:
TYPE: Multiple Choice
DATE CREATED:
1/3/2018 11:35 AM
DATE MODIFIED:
1/6/2018 1:33 PM
88. 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
ANSWER:
e
POINTS:
1
DIFFICULTY:
QUESTION TYPE:
True / False
False
LEARNING OBJECTIVES:
NATIONAL STANDARDS:
United States – BUSPROG: Reflective Thinking
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
KEYWORDS:
DATE MODIFIED:
1/6/2018 1:33 PM
89. 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
ANSWER:
True
POINTS:
1
DIFFICULTY:
Difficulty: Easy
QUESTION TYPE:
HAS VARIABLES:
False
LEARNING OBJECTIVES:
NATIONAL STANDARDS:
United States – BUSPROG: Reflective Thinking
forecasting, and cash flows
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
KEYWORDS:
DATE CREATED:
DATE MODIFIED:
1/6/2018 1:33 PM
90. 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
ANSWER:
False
DIFFICULTY:
Difficulty: Easy
Multiple Choice
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.07.08 – LO: 7-8
United States – BUSPROG: Analytic
United States – AK – DISC: Financial statements, anal – DISC: Financial statements, analysis,
forecasting, and cash flows
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
Effects of leverage
OTHER:
TYPE: Multiple Choice: Conceptual
91. 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
Equity/Assets + Debt/Assets = 1.00, so 0.333 + Debt/Assets = 1.0. Therefore, Debt/Assets =
1.0 − 0.333 = 0.667. Thus, the statement is true.
POINTS:
1
Difficulty: Challenging
QUESTION TYPE:
True / False
LEARNING OBJECTIVES:
IFMG.DAVE.19.07.08 – LO: 7-8
NATIONAL STANDARDS:
United States – BUSPROG: Reflective Thinking
United States – AK – DISC: Financial statements, anal – DISC: Financial statements, analysis,
forecasting, and cash flows
United States – OH – Default City – TBA
TOPICS:
Equity multiplier
KEYWORDS:
1/3/2018 11:35 AM
DATE MODIFIED:
1/6/2018 1:33 PM
92. 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.
ANSWER:
c
93. 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.
e.
Other things held constant, an increase in the debt ratio will result in an increase in the profit margin on sales.
ANSWER:
b
Old
Difficulty: Moderate
QUESTION TYPE:
Multiple Choice
LEARNING OBJECTIVES:
IFMG.DAVE.19.07.08 – LO: 7-8
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
TOPICS:
DuPont analysis
OTHER:
TYPE: Multiple Choice: Conceptual
1/3/2018 11:35 AM
1/6/2018 1:33 PM
94. 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.
ANSWER:
b
1/6/2018 1:33 PM
DIFFICULTY:
Difficulty: Moderate
QUESTION TYPE:
Multiple Choice
LEARNING OBJECTIVES:
IFMG.DAVE.19.07.08 – LO: 7-8
United States – BUSPROG: Analytic
forecasting, and cash flows
TOPICS:
DuPont analysis
95. 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.
ANSWER:
e
POINTS:
DIFFICULTY:
Difficulty: Moderate
Multiple Choice
HAS VARIABLES:
IFMG.DAVE.19.07.08 – LO: 7-8
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
LOCAL STANDARDS:
United States – OH – Default City – TBA
DuPont analysis
KEYWORDS:
TYPE: Multiple Choice: Conceptual
DATE CREATED:
1/3/2018 11:35 AM
DATE MODIFIED:
1/6/2018 1:33 PM
income and taxes. Thus, b is correct. All of the other statements are incorrect.
POINTS:
1
QUESTION TYPE:
Multiple Choice
96. 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.
ANSWER:
e
which rules out c. And with more interest, Heidee would have to pay less taxes, not more.
POINTS:
1
Difficulty: Moderate
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
False
IFMG.DAVE.19.07.08 – LO: 7-8
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
LOCAL STANDARDS:
United States – OH – Default City – TBA
Financial statement analysis
KEYWORDS:
TYPE: Multiple Choice: Conceptual
DATE CREATED:
1/3/2018 11:35 AM
DATE MODIFIED:
1/6/2018 1:33 PM
97. 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.
e.
Company Heidee has a higher times interest earned (TIE) ratio.
ANSWER:
b
KEYWORDS:
TYPE: Multiple Choice: Conceptual
DATE CREATED:
1/3/2018 11:35 AM
DATE MODIFIED:
1/6/2018 1:33 PM
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Page 62
98. 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.
ANSWER:
a
POINTS:
Difficulty: Moderate
QUESTION TYPE:
Multiple Choice
False
IFMG.DAVE.19.07.08 – LO: 7-8
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
forecasting, and cash flows
United States – OH – Default City – TBA
TOPICS:
Leverage, taxes, and ratios
TYPE: Multiple Choice: Conceptual
DATE CREATED:
1/3/2018 11:35 AM
1/6/2018 1:33 PM
99. 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%
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.07.08 – LO: 7-8
United States – BUSPROG: Analytic
forecasting, and cash flows
United States – OH – Default City – TBA
TOPICS:
Leverage, taxes, and ratios
TYPE: Multiple Choice: Conceptual
DATE CREATED:
1/3/2018 11:35 AM
1/6/2018 1:33 PM
Chapter 07: Analysis of Financial Statements
DIFFICULTY:
Difficulty: Moderate
Multiple Choice
HAS VARIABLES:
False
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
d.
14.88%
e.
15.63%
ANSWER:
Profit margin
TATO
Equity multiplier
POINTS:
1
DIFFICULTY:
Difficulty: Easy
Multiple Choice
HAS VARIABLES:
False
IFMG.DAVE.19.07.08 – LO: 7-8
forecasting, and cash flows
LOCAL STANDARDS:
United States – OH – Default City – TBA
DuPont equation: basic calculation
KEYWORDS:
OTHER:
TYPE: Multiple Choice: Problem
1/3/2018 11:35 AM
DATE MODIFIED:
1/6/2018 1:33 PM
100. 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%
ANSWER:
Sales
Assets
Net income
Debt ratio
Debt
Profit margin
TATO
Equity multiplier
POINTS:
1
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101. 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%
b
Sales
Original assets
New assets
TATO
Equity multiplier
Change in ROE
1
Multiple Choice
False
IFMG.DAVE.19.07.08 – LO: 7-8
DuPont eqn: effect of reducing assets on ROE
TYPE: Multiple Choice: Problem
1/3/2018 11:35 AM
102. 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,
and increased its net income by $5,250 without changing its sales, assets, or capital structure. Had it cut costs and
United States – OH – Default City – TBA
DuPont equation: basic calculation
TYPE: Multiple Choice: Problem
1/6/2018 1:33 PM
Chapter 07: Analysis of Financial Statements
Assets
Old debt
Old equity
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%
ANSWER:
c
Sales
Original net income
Increase in net income
New net income
Profit margin
TATO
Equity multiplier
Change in ROE
POINTS:
1
DIFFICULTY:
Difficulty: Moderate
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.07.08 – LO: 7-8
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
DuPont eqn: effect of reducing costs on ROE
KEYWORDS:
OTHER:
TYPE: Multiple Choice: Problem
DATE CREATED:
1/3/2018 11:35 AM
DATE MODIFIED:
1/6/2018 1:33 PM
103. 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%
ANSWER:
a
Chapter 07: Analysis of Financial Statements
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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
$54,978.0
New debt ratio
New debt
New Equity
Net income
New ROE
Old ROE
Increase in ROE
1
Difficulty: Moderate
Multiple Choice
False
IFMG.DAVE.19.07.08 – LO: 7-8
United States – BUSPROG: Analytic
forecasting, and cash flows
United States – OH – Default City – TBA
DuPont equation: changing the debt ratio
TYPE: Multiple Choice: Problem
1/3/2018 11:35 AM
1/6/2018 1:33 PM
Chapter 07: Analysis of Financial Statements
Copyright Cengage Learning. Powered by Cognero.
Page 67
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
104. 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
ANSWER:
a
POINTS:
1
DIFFICULTY:
Difficulty: Moderate
Multiple Choice
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.07.08 – LO: 7-8
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
TOPICS:
Calculating ratios given financial stmts
KEYWORDS:
TYPE: Multiple Choice
DATE CREATED:
1/3/2018 11:35 AM
1/6/2018 1:33 PM